India-US DTAA: how the treaty actually works for founders

The India-US tax treaty signed in 1989 governs how income earned across the two jurisdictions is taxed and where credit can be claimed. For Indian founders with US operations (or US residents earning from India), the treaty determines withholding on dividends, royalties, interest and fees for technical services, and the conditions under which a permanent establishment is triggered. The articles you will use most often are Article 5 (PE), Article 7 (business profits), Article 10 (dividends), Article 11 (interest), Article 12 (royalties and FTS) and Article 25 (foreign tax credit).

Article 10 caps the withholding tax on dividends at 15% if the beneficial owner is a company holding at least 10% of voting stock, otherwise 25%. Article 11 caps interest at 15% (10% in limited cases for banks/financial institutions). Article 12, the most-litigated article in Indian courts, caps royalties and fees for included services at 15%. Compare these to India's domestic withholding under Section 195 (often 20% plus surcharge and cess on royalties/FTS) and the treaty rate frequently wins. To claim the treaty rate, the Indian payer needs a Tax Residency Certificate (Form 10F for non-resident) and a no-PE declaration from the US payee.

Article 5 defines PE in three flavours: a fixed place of business, a dependent agent who habitually concludes contracts, and a service PE (employees present in the other country for more than 90 days in any 12-month period, or 30 days for related parties). The service-PE clause catches Indian founders frequently. If your US C-Corp sends engineers to an Indian customer site for a long engagement, the US entity may become taxable in India on the attributable profits. Conversely, a Bangalore back-office of a US parent can constitute a fixed-place PE if it does more than preparatory/auxiliary work.

Article 25 obliges each country to give credit for tax paid in the other, subject to its domestic limits. In India, the credit mechanism sits in Section 90 read with Rule 128 (Form 67 must be filed before the return due date). In the US, the foreign tax credit lives at Section 901/904 and is computed per-basket. The treaty does not eliminate double taxation by itself; it allocates taxing rights and provides credit, but you still have to file the right forms in the right order. Sequencing matters: if Indian withholding is final, claim it in your US return; if it is a credit, claim it in India first.

Three things go wrong in practice. First, founders forget that the US treaty does not contain a most-favoured-nation clause, so the lower rates that India offers under treaties with Netherlands or France do not flow through. Second, the limitation-of-benefits article (Article 24, added by protocol) blocks treaty benefits for entities that do not pass a substance or active-business test. Third, the Indian Assessing Officer will demand the US TRC, Form 10F, beneficial ownership confirmation and no-PE declaration before allowing the treaty rate at the withholding stage. Build a quarterly process to refresh these documents.

Do Indian founders with a US C-Corp get treaty benefits automatically?
No. Treaty benefits must be claimed; they are not granted by default. The Indian payer needs your US Tax Residency Certificate, Form 10F and a no-PE declaration before applying the lower rate under Section 195.

What is the withholding rate on software royalties paid from India to a US company?
Article 12 caps royalties and fees for included services at 15%. The Indian Income Tax Act default is 10% to 20% depending on the nature of payment, so in many cases the domestic rate is lower and you should use that.

Does the India-US treaty have a most-favoured-nation clause?
No. Unlike India's treaties with the Netherlands, France or Switzerland, the India-US treaty has no MFN clause, so lower rates negotiated with other OECD members do not flow through automatically.

How is the 183-day rule applied for individuals?
Article 16 exempts short-term employment income if the employee spends fewer than 183 days in the source country in any 12-month period, the employer is not a resident of that country, and the cost is not borne by a PE there. All three conditions must be met.

Can I claim foreign tax credit in India for US federal and state taxes?
Federal tax is creditable under Article 25 and Section 90. State income tax is treated as a cost in many readings because the treaty applies to federal tax only; some practitioners argue it is still creditable under Section 91. Document the position before filing.

Does the GILTI regime override the treaty?
GILTI applies to US shareholders of controlled foreign corporations and is a unilateral US measure. The treaty does not shield Indian subsidiaries of US C-Corps from GILTI, but the 50% deduction and FTC at the US level usually reduce the bite.