India-USA DTAA Article 25: Foreign tax credit mechanism and Form 67 compliance

When the same rupee — or the same dollar — of income is taxed twice, once where it is earned and again where the taxpayer is resident, the India-USA Double Taxation Avoidance Agreement (DTAA) is what stops the bleeding. The treaty has been in force since 1991, and its Article 25, titled "Relief from Double Taxation", hands the country of residence the job of erasing the double charge through a credit, not an exemption. For an Indian resident drawing US dividends, interest, or capital gains, that means India taxes the worldwide income but allows a Foreign Tax Credit (FTC) for the US federal tax already paid — strictly conditional on filing Form 67. For a US-resident NRI earning India-source income, the mirror applies: the United States grants a credit for India tax suffered.

The mechanism sounds simple, but the compliance is unforgiving. Miss the Form 67 timeline, claim credit for the wrong category of US tax, or assume your capital gains are "exempt", and the relief evaporates. This explainer walks through the statute, the treaty rates fixed in 1991, and the repatriation plumbing — the four sections below follow the order an Indian resident actually needs them.

FEMA / DTAA Position

The India-USA DTAA operates on the credit method, codified in Article 25. Unlike an exemption treaty — where the source country's income is simply left out of the residence country's tax base — the credit method requires you to first include the foreign income in your total income, compute tax on the whole, and then subtract the foreign tax already paid. India adopted this approach for the United States from the treaty's entry into force in 1991, and it has not changed since.

Domestically, the enabling power sits in Section 90 of the Income Tax Act, 1961, which lets the Government of India give effect to a treaty with another country, and Section 90A for specified associations. Because a treaty exists with the United States, Section 90 (not Section 91, the unilateral relief provision used only where no DTAA exists) is the operative section for every India-USA FTC claim. The taxpayer may choose whichever is more beneficial — the treaty rate or the domestic rate — under the long-settled rule that a DTAA cannot worsen a taxpayer's position relative to the Act. You can read the DTAA glossary entry for the foundational definition before going further.

A crucial limitation, confirmed in the treaty's own architecture, is that tax sparing is not available with the USA. Tax sparing — a deemed credit for tax that the source country waived as an incentive — appears in some of India's older treaties, but the India-USA agreement contains no such clause. So if US-source income enjoyed a US incentive exemption, India will not pretend US tax was paid; it grants credit only for tax actually borne. Equally important: US state and local taxes do not qualify for FTC under the treaty. Article 25 relief is confined to US federal income tax. A resident of California or New York who pays state income tax cannot offset that state component against Indian liability, which is a frequent and expensive misunderstanding.

On the foreign-exchange side, the relevant statute is the Foreign Exchange Management Act, 1999 (FEMA), which replaced the older FERA regime and governs how an NRI holds and moves money across the border. FEMA does not levy tax; it controls account types and repatriation, and it interacts with the DTAA only at the point where post-tax money is sent abroad. The FEMA glossary entry and the full text on indiacode.nic.in set out the 1999 framework in detail.

Tax Treatment in India

For an Indian resident with US-source income, the starting point is residential status under Section 6 of the Income Tax Act, 1961: a resident and ordinarily resident is taxed on global income, so the US dividends and gains enter the Indian return in full. (NRIs are taxed only on India-source income; the residential status glossary explains the 182-day and 60-day tests that decide this.) Once the income is in the base, India computes tax at slab or special rates, then applies the FTC.

The treaty caps the rate at which the source country may tax certain passive income. For India-USA flows the 1991 schedule fixes the following ceilings:

Note the last row carefully. India retains its taxing right over capital gains at 12.5% — the DTAA does not exempt them. Under domestic law (Budget 2024, effective 23 July 2024), long-term capital gains on listed equity are taxed at 12.5% above the Rs 1,25,000 annual exemption, and property or gold acquired on or after 23 July 2024 is taxed at 12.5% without indexation. Anyone who reads "DTAA" and assumes capital gains vanish is mis-stating the treaty; the correct position is that gains are taxed and double tax is then relieved by credit.

On top of the base rate, India levies a surcharge and a 4% health and education cess. The surcharge slabs for FY 2025-26 are 10% on total income above Rs 50 lakh, 15% above Rs 1 crore, and 25% above Rs 2 crore. The new tax regime caps the top surcharge at 25% — the old 37% rate does not apply in the new regime. The surcharge glossary breaks down each band. The cess is computed on tax-plus-surcharge, so a high-income NRI's effective marginal rate, before FTC, can exceed 39%.

The TDS mechanics matter too. Where an Indian payer remits income to a non-resident, tax is deducted at source under Section 195, and the DTAA rate can be applied at the withholding stage if the payee furnishes a Tax Residency Certificate (TRC) plus Form 10F. To model the net liability after credit, the Oquilia NRI tax calculator and the DTAA benefit calculator let you compare the treaty rate against the domestic rate side by side.

The credit itself is governed by Rule 128 of the Income-tax Rules, and the FTC is restricted to the lower of (a) the Indian tax attributable to the doubly-taxed income, or (b) the foreign tax paid. You cannot use surplus US tax to wipe out Indian tax on unrelated India-source income; the credit is computed source-by-source. The operative compliance document is Form 67, which must be filed on the income-tax portal before claiming the credit. The procedure is published on incometax.gov.in.

Tax Treatment Abroad

For the US-resident NRI with India-source income, Article 25 works in reverse: the United States grants a credit for the India tax paid on that India-source income, against the US federal liability on the same income. The US side uses its own Foreign Tax Credit machinery (Form 1116 for individuals), and the same core principle holds — the credit is capped at the US tax on the foreign income, so a higher Indian rate cannot manufacture a US refund on domestic US income.

The interaction is sequential and direction-dependent. India, as the source state, taxes India-source rent, interest, or capital gains first — for example, Section 195 TDS on a property sale, capped or relieved by the treaty. The United States, as the residence state, then taxes the same income but allows credit for the India tax. Because the credit method is symmetric under Article 25, neither country ultimately collects more than its own rate on the slice of income it is entitled to tax; the higher of the two rates is what the taxpayer effectively bears overall.

Two practical frictions recur. First, the timing mismatch: the Indian financial year runs April to March while the US tax year is the calendar year, so the foreign tax "paid" in one US year may straddle two Indian assessment years. The US system addresses this by allowing the credit when the foreign tax accrues or is paid, but careful pairing of the income and its matching tax is essential. Second, excess credit carryover: where the Indian rate exceeds the US rate on a given category, the unused US credit can generally be carried back one year and forward ten years under US rules, whereas India does not permit an equivalent carry-forward of unused FTC. This asymmetry means the direction of the income flow changes how cleanly the double tax is neutralised.

Estimating the net position across both jurisdictions is exactly what the Oquilia foreign tax credit calculator is built for — it pairs the Indian tax on the doubly-taxed income against the foreign tax paid and surfaces the lower-of cap that Rule 128 imposes.

Repatriation Mechanics

Once tax is settled, FEMA governs how the money moves. The three account types an NRI uses behave very differently for repatriation and Indian taxation, and choosing the wrong one is a costly default.

The NRE account holds foreign earnings converted to rupees; both principal and interest are fully and freely repatriable, and the interest is exempt from Indian income tax for NRIs. The NRE account glossary covers the eligibility rules. The NRO account holds India-source income such as rent or dividends; its interest is taxable in India and subject to TDS, and repatriation of the balance is capped at USD 1 million per financial year after taxes are paid and the bank receives Forms 15CA and 15CB. The NRO account glossary explains the distinction.

The FCNR(B) deposit is held in foreign currency for terms of one to five years, shielding the holder from rupee depreciation because the bank bears the conversion risk; the interest is tax-free in India for NRIs and the deposit is fully repatriable. See the FCNR deposit glossary for the maturity rules. The USD 1 million repatriation window and the documentation chain are set by the RBI under FEMA; the master directions are published on rbi.org.in. For a worked example of moving NRO funds out, the Oquilia repatriation calculator maps the tax and the USD 1 million limit onto a specific balance.

The DTAA and FEMA meet at one precise point: the Forms 15CA and 15CB that a chartered accountant certifies before any foreign remittance confirm that the correct tax — at the domestic rate or the treaty rate, whichever the taxpayer has validly chosen — has been deducted. The treaty fixes how much tax; FEMA fixes how the post-tax balance leaves the country.

FAQ

Can I claim US state income tax as a Foreign Tax Credit in India?

No. Article 25 of the India-USA DTAA relieves only US federal income tax. State and local taxes — California, New York, and others — do not qualify for FTC in India, because the treaty's relief article is confined to federal-level taxation. This is one of the most common errors among Indian residents with US salary or investment income.

What is the deadline for filing Form 67?

Form 67 must be filed before claiming the credit, on the income-tax portal. The CBDT relaxed the original timeline so that Form 67 may now be filed up to the end of the relevant assessment year — that is, by the belated-return deadline under Section 139(4) or the revised-return deadline under Section 139(5) of the Income Tax Act, 1961. Filing the income-tax return without Form 67 still risks denial of the credit, so file the form first.

Are my US capital gains exempt under the DTAA?

No — and claiming so is incorrect. Under the credit method in Article 25, both India and the United States may tax capital gains, and India retains its taxing right at 12.5% for long-term gains (Budget 2024, effective 23 July 2024). The double tax is removed by credit, not by exemption. Treating DTAA capital gains as "exempt" is a mis-statement of the treaty.

Does the India-USA DTAA offer tax sparing?

No. Tax sparing is not available under the India-USA treaty. India grants credit only for US federal tax actually paid; it will not give a deemed credit for income that a US incentive left untaxed. Some of India's older treaties contain sparing clauses, but the United States agreement does not.

How much can I repatriate from my NRO account each year?

The balance in an NRO account is repatriable up to USD 1 million per financial year, after Indian taxes are paid and the bank receives Forms 15CA and 15CB. This limit is set by the RBI under FEMA, 1999. NRE and FCNR(B) balances, by contrast, are fully repatriable without the USD 1 million cap.

Is interest on my NRE and FCNR deposits taxable in India?

No. Interest earned on NRE accounts and FCNR(B) deposits is exempt from Indian income tax for NRIs. Interest on an NRO account is taxable at slab rates with TDS under Section 195. This tax difference, alongside currency risk, is the main reason NRIs separate foreign earnings (NRE/FCNR) from India-source income (NRO).

Which section of the Income Tax Act enables the DTAA credit?

Section 90 of the Income Tax Act, 1961 enables India to give effect to a DTAA, and Section 90A covers specified associations. Because a treaty exists with the United States, Section 90 governs every India-USA FTC claim; Section 91 (unilateral relief) applies only where no treaty exists. The mechanics of the credit are set out in Rule 128 of the Income-tax Rules, with Form 67 as the compliance document.