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The tax treaty between the United States and India is designed to prevent double taxation and provide fair tax treatment for Indian nationals who temporarily reside in the U.S. for purposes such as education, research, or training. If you are a nonresident alien from India in the United States on an F-1 or J-1 visa, this treaty can significantly reduce your U.S. tax liability provided it is properly applied.

This article explores the core treaty provisions relevant to Indian nationals, focusing on benefits available to students, exchange visitors, interns, teachers, and researchers. In particular, it discusses Articles 21 and 22 of the treaty, which provide for the standard deduction and exemptions from tax under specific conditions. Understanding how to take advantage of these provisions is essential for maximizing tax savings and maintaining compliance with U.S. tax law.

The Purpose and Scope of the US-India Tax Treaty

The income tax treaty between the United States and India was established to define how each country taxes income earned by residents of the other. The treaty ensures that individuals are not taxed twice on the same income, facilitates fair treatment for workers and students, and establishes guidelines for how income should be reported and taxed.

For Indian nationals who qualify as nonresident aliens in the U.S., the treaty outlines which types of income may be taxed, which deductions can be claimed, and when exemptions apply. The key treaty articles relevant to nonresident Indian nationals include those addressing income from personal services, business profits, education and training, teaching and research, and capital gains.

Because U.S. tax laws treat nonresident aliens differently from resident aliens and citizens, the tax treaty acts as an exception in certain circumstances. In general, nonresidents have limited access to tax benefits like the standard deduction. However, under the U.S.-India tax treaty, Indian students and trainees are permitted to claim the standard deduction, which is otherwise unavailable to nonresidents from most countries.

Tax Residency and the Substantial Presence Test

Before determining eligibility for treaty benefits, it is important to establish your tax residency status. The Internal Revenue Service (IRS) classifies individuals in the United States as either nonresident aliens or resident aliens for tax purposes. This classification depends on your visa type and the number of days spent in the U.S. over a three-year period.

Most students and exchange visitors in the U.S. on F-1 or J-1 visas are considered nonresident aliens for a specific number of years. F-1 students are typically treated as nonresidents for the first five calendar years, while J-1 scholars such as interns and trainees are nonresidents for up to two years. During this period, these individuals can file Form 1040-NR and potentially claim benefits under the U.S.-India tax treaty.

After exceeding the nonresident period, individuals are evaluated under the substantial presence test. This test counts the number of days you were present in the U.S. in the current year, plus one-third of the days from the prior year, and one-sixth of the days from two years ago. If the total equals or exceeds 183 days, you may be considered a resident alien and subject to different tax rules.

Article 21(2): A Unique Provision for Indian Students and Trainees

Article 21(2) of the U.S.-India tax treaty is particularly beneficial for Indian nationals in the U.S. for study or training purposes. This article allows Indian students and trainees who are in the United States temporarily and are classified as nonresident aliens to claim the same deductions for expenses that U.S. citizens are allowed.

The most significant feature of this article is that it permits the standard deduction to be claimed on the nonresident tax return. For tax year 2024, the standard deduction for single filers is $13,850. This means that Indian students and trainees can subtract this amount from their total income before calculating their tax liability, thereby reducing the amount of tax owed.

This treaty benefit is exclusive to Indian nationals and does not extend to nonresidents from other countries. Without this provision, nonresident aliens are typically only allowed to claim itemized deductions related to state and local taxes, charitable donations, or certain business expenses.

To take advantage of Article 21(2), individuals must attach a treaty-based return position disclosure statement to Form 1040-NR when filing their taxes. This statement should clearly cite Article 21(2) and explain the basis for the deduction claim.

Additional Deductions Available to Indian Students

While the standard deduction provides a substantial tax benefit, Indian students and trainees may also be eligible to claim other deductions permitted under U.S. tax law. These include:

• State and local income taxes paid during the tax year

• Charitable contributions to qualified U.S. nonprofit organizations

• Certain job-related expenses (though these may be limited)

All deductions should be supported by documentation, such as pay stubs, donation receipts, and tax statements. Keep in mind that personal exemptions, which were previously available under U.S. law, were eliminated beginning in tax year 2018 and cannot be claimed even if the treaty once allowed them.

J-1 Interns and Trainees: Also Covered Under Article 21(2)

J-1 visa holders participating in internships or training programs may also qualify for the standard deduction under Article 21(2), provided they are nonresident aliens. As with F-1 students, these individuals must be present in the U.S. primarily for education or training purposes and must not be considered resident aliens for tax purposes.

J-1 interns and trainees are generally allowed to claim this benefit for the first two calendar years of their stay. After that, if they remain in the U.S., they may become resident aliens and lose access to the treaty provision. Therefore, it is essential to evaluate your visa status and tax residency each year to determine ongoing eligibility.

When filing taxes, J-1 interns and trainees must include a statement referencing Article 21(2) and include any required attachments or supporting documents. This may include a copy of the DS-2019 form, visa stamp, or employer verification letter outlining the nature and duration of the training program.

J-1 Teachers and Researchers: Article 22 Exemption

Article 22 of the U.S.-India tax treaty provides an income tax exemption for Indian nationals in the U.S. on a J-1 visa who are engaged in teaching or research. This article states that income earned for teaching or research is exempt from U.S. federal income tax for a maximum of two years, provided certain conditions are met.

To be eligible for this exemption under Article 22:

• The individual must be a resident of India immediately prior to entering the U.S.

• The purpose of entry must be teaching or research at a recognized institution

• The stay must not exceed two years

If the J-1 teacher or researcher remains in the U.S. beyond the two-year period, the exemption becomes void retroactively. This means the IRS may require taxes to be paid not only for the current year but also for the prior years when the treaty exemption was claimed.

To claim this exemption, the individual must submit Form 8233 to their U.S. employer along with a written statement that outlines their eligibility under Article 22. The employer may use this form to reduce or eliminate federal tax withholding from the individual’s paycheck. If taxes have already been withheld, the individual may request a refund when filing their annual return.

The Retroactive Clause and Its Consequences

One of the most critical aspects of Article 22 is its retroactive clause. If an individual overstays the two-year exemption period, even by a single day, the entire exemption is forfeited. This can result in a substantial tax bill, especially if the person was earning a salary during the exempt years and had not been paying taxes under the assumption of exemption.

To avoid this consequence, it is essential to track your entry and exit dates and plan accordingly. Some J-1 researchers or professors choose to leave the U.S. before the two-year period ends in order to preserve the exemption. Others may choose to pay taxes voluntarily once they anticipate exceeding the limit to avoid a larger retroactive liability later.

Practical Filing Tips for Students and Exchange Visitors

To correctly claim benefits under the U.S.-India tax treaty, Indian students and J-1 visitors should:

• Verify nonresident alien status each tax year

• Attach a statement referencing Article 21(2) or Article 22, as applicable

• Use Form 1040-NR to file the tax return as a nonresident alien

• Retain copies of all supporting documents including visa records and school or employer letters

• Use Form 8233 if claiming exemption under Article 22 for teaching or research income

Understanding and applying these treaty provisions can result in substantial tax savings. However, claiming treaty benefits requires careful documentation, attention to detail, and awareness of residency rules.

How the Treaty Applies to H-1B Visa Holders and Short-Term Visitors

The tax relationship between the United States and India, as defined under the U.S.-India income tax treaty, offers several provisions to reduce or eliminate tax for certain categories of individuals. While the treaty is often associated with student and exchange visitor visa holders, it can also provide limited benefits to Indian nationals holding H-1B visas or those who are temporarily present in the United States for professional services.

We explored the treaty articles relevant to Indian professionals on H-1B visas and outlines conditions under which short-term services can be exempt from taxation. Additionally, it examines the substantial presence test and its impact on the ability to claim treaty benefits. Understanding these provisions can help nonresident professionals avoid excessive taxation and ensure compliance with U.S. tax rules.

Overview of H-1B Status and Tax Residency

The H-1B visa is granted to foreign nationals working in specialty occupations that require at least a bachelor’s degree or equivalent experience. While the H-1B is a non-immigrant visa, individuals on this visa typically remain in the United States long enough to become resident aliens under the substantial presence test. This has important tax consequences.

The substantial presence test determines U.S. residency based on the number of days an individual has spent in the country over a three-year period. If an H-1B holder is present in the U.S. for 183 days or more during a calendar year, or meets the weighted average criteria over three years, they are considered a resident for tax purposes and must file Form 1040. Once classified as a resident alien, most treaty benefits for nonresident aliens no longer apply.

Despite this, there are scenarios in which H-1B holders may still be treated as nonresident aliens and may qualify for treaty exemptions, particularly if their presence in the United States is brief or their income is paid by a foreign employer. These cases fall under the treaty articles on independent personal services and dependent personal services.

Treaty Benefits Under Independent Personal Services

Article 15 of the U.S.-India tax treaty addresses income from independent personal services. This refers to income earned through personal efforts such as consulting or freelance work, rather than as an employee of a U.S. firm. The article allows an exemption from U.S. taxation under the following conditions:

• The individual is present in the United States for fewer than 90 days during the tax year, and

• The compensation earned in the United States does not exceed $3,000, and

• The individual is self-employed and not conducting business through a fixed base in the U.S.

If all these conditions are met, the income earned for independent services is not subject to U.S. taxation under the treaty. This provision is useful for Indian nationals providing brief services in the U.S. on an H-1B or B-1 visa but who remain tax residents of India.

However, the exemption is not automatic. To claim it, the taxpayer must disclose the treaty claim on the appropriate tax form and provide documentation verifying the duration of their stay and the source of income. Employers or clients who are withholding agents must also be notified in advance, typically through a tax form that certifies foreign status and claims treaty relief.

Dependent Personal Services: Income From Employment

Article 16 of the treaty addresses dependent personal services, which refers to wages earned as an employee. Under this article, employment income is exempt from U.S. taxation if:

• The individual is present in the United States for fewer than 183 days during the calendar year,

• The compensation is paid by an employer who is not a resident of the United States, and

• The compensation is not borne by a permanent establishment or fixed base of the employer in the United States.

These conditions are designed to protect Indian nationals working in the U.S. for short durations on behalf of foreign companies. For example, an Indian engineer who travels to the United States for four months to work on a project for an Indian employer may be exempt from U.S. tax on that income, provided the Indian employer does not have a fixed base in the U.S.

Again, this exemption is contingent on proper documentation and disclosure. Taxpayers must demonstrate that the employer is based in India and that the services provided do not exceed the allowable time frame. This treaty article does not apply if the compensation is paid by a U.S.-based company or if the individual has established a residence or long-term employment arrangement in the United States.

Claiming Treaty Exemptions as an H-1B Holder

H-1B visa holders may find it difficult to qualify for nonresident treaty exemptions after the first year of presence in the United States due to the substantial presence test. However, certain individuals may qualify for treaty benefits during the early part of their stay or if they leave the United States before reaching the residency threshold.

For example, an H-1B visa holder who enters the U.S. in August and stays for fewer than 183 days during that calendar year may still be treated as a nonresident and claim treaty benefits for income earned during that year. Additionally, H-1B holders with foreign-based employers or short-term contracts may qualify for tax exemption under Article 16.

To claim treaty benefits, the taxpayer must file the appropriate documentation with the IRS and inform their employer or withholding agent. This usually includes submitting Form 8233 for personal services income or Form W-8BEN for passive income such as interest or dividends. These forms allow the withholding agent to apply reduced withholding rates or exempt income from withholding altogether.

Passive Income and the Role of Form W-8BEN

While H-1B visa holders typically earn income through employment, they may also receive passive income from U.S. sources. This includes interest, dividends, royalties, or rental income. The default U.S. withholding rate for such income paid to nonresidents is 30 percent. However, the U.S.-India tax treaty provides reduced withholding rates for certain types of income.

To take advantage of these lower rates, the recipient must submit Form W-8BEN to the withholding agent. This form certifies foreign status and references the applicable treaty provision. For example, under the treaty, interest income may be exempt from withholding entirely, while dividends may be subject to reduced rates depending on the circumstances.

It is important to submit Form W-8BEN before the income is paid. Failure to do so will result in the application of the full 30 percent withholding rate, which may be difficult to recover later. In cases where the full rate has already been applied, the taxpayer can request a refund when filing their annual tax return.

Exceptions and Limitations on Treaty Benefits

The U.S.-India tax treaty contains several limitations on benefits that taxpayers should be aware of. These limitations prevent abuse of the treaty provisions and ensure that only legitimate tax residents of India qualify. For instance, individuals who are considered residents of both countries under domestic laws may need to apply tie-breaker rules under the treaty to determine their tax residency.

The treaty also restricts certain benefits based on the nature of the income or the length of stay in the United States. For example, capital gains are not specifically exempted under the treaty, meaning Indian nonresidents are subject to standard U.S. tax treatment for gains realized on the sale of assets. In addition, the retroactive clause in Article 22 for J-1 teachers and researchers imposes strict limitations on eligibility if the two-year period is exceeded.

To navigate these complexities, taxpayers should maintain clear records of their entry and exit dates, employment details, and visa status. Documentation is essential when claiming treaty benefits, as the IRS may request proof of eligibility before granting exemptions or refunds.

Avoiding Dual Taxation Through Foreign Tax Credits

In situations where income is taxed both in the United States and in India, the U.S.-India treaty provides mechanisms to avoid double taxation. This is usually achieved through the foreign tax credit system, where one country allows a credit for taxes paid to the other. For example, if an H-1B holder pays U.S. tax on wages earned in the United States and reports the same income on their Indian tax return, India may provide a tax credit to offset the U.S. tax already paid.

This credit prevents the same income from being taxed twice and ensures equitable tax treatment. However, the availability and calculation of the foreign tax credit depend on the domestic laws of each country. Taxpayers should consult the treaty provisions and domestic tax regulations to determine how credits are applied and which country offers relief in their specific case.

Documentation and Compliance Requirements

To successfully claim treaty benefits, taxpayers must be diligent in maintaining and submitting the proper forms and documentation. This includes:

• Verifying nonresident alien status for the year in question

• Filing Form 1040-NR if nonresident status applies

• Submitting Form 8233 for personal services income

• Completing Form W-8BEN for passive income such as interest or dividends

• Attaching a treaty-based position statement, where required

• Keeping visa records, employment contracts, and proof of residency

Incorrect or incomplete filings may result in delayed refunds, denial of treaty benefits, or penalties for underpayment of taxes. To avoid issues, all forms should be submitted on time and accurately reflect your treaty position.

Capital Gains Under the U.S.-India Tax Treaty

Capital gains often create confusion for Indian nationals filing U.S. taxes, especially when selling stocks, real estate, or other assets. In general, the United States taxes nonresident aliens only on U.S.-sourced capital gains that are effectively connected with a U.S. trade or business or derived from the sale of U.S. real property.

However, the U.S.-India tax treaty offers limited relief for capital gains. According to Article 13 of the treaty:

• Capital gains from the sale of personal property (such as stocks and securities) by a resident of India are taxable only in India, unless those gains are attributable to a permanent establishment in the United States.

• Gains from the sale of immovable property located in the United States remain taxable in the U.S.

This means that an Indian resident who sells U.S. stocks through a brokerage account may not owe capital gains tax in the United States, provided they remain a nonresident alien for tax purposes and do not have a permanent establishment in the U.S. However, if they become U.S. residents for tax purposes, they are subject to the same capital gains rules as any U.S. citizen or resident alien.

To benefit from the treaty exemption, the individual must maintain their nonresident status, track their days of presence, and file a nonresident return using Form 1040-NR. They may also need to submit a treaty position statement explaining their eligibility for tax relief under Article 13.

U.S. Real Property and the FIRPTA Exception

One major exception to the treaty’s capital gains exemption involves the sale of U.S. real estate. Under the Foreign Investment in Real Property Tax Act (FIRPTA), nonresident aliens must pay U.S. tax on gains from the sale of U.S. real property interests, regardless of treaty status.

This provision overrides most treaty protections, including those under the U.S.-India treaty. Therefore, an Indian national who sells a residential property or rental unit in the U.S. will be subject to U.S. tax on the capital gains and a withholding tax—typically 15 percent of the gross sale price—at the time of the transaction. The seller must report the gain on Form 1040-NR and may apply for a refund of any excess withholding.

While FIRPTA may seem burdensome, the tax can be reduced through proper planning. Keeping records of improvements, depreciation, and other basis adjustments can lower the taxable gain and potentially increase the refund due when filing a return.

Dual Residency and Tie-Breaker Rules

One of the most complex issues facing Indian nationals in the U.S. is dual residency. This occurs when a person qualifies as a tax resident under the domestic laws of both the United States and India. For instance, an Indian professional on an H-1B visa who has lived in the U.S. for more than 183 days in a year may be treated as a resident alien under the substantial presence test, while still remaining a resident of India under Indian tax laws.

The U.S.-India tax treaty includes tie-breaker rules to resolve such conflicts. These rules appear in Article 4 of the treaty and help determine which country has the primary right to tax worldwide income. The hierarchy used to determine tax residency is as follows:

• Permanent home: If the individual has a permanent home available to them in only one country, they are deemed a resident of that country.

• Center of vital interests: If a home exists in both countries, residency is determined by where the person’s personal and economic ties are stronger.

• Habitual abode: If the center of interests is unclear, the person is considered a resident where they spend more time.

• Nationality: If a habitual abode exists in both places, residency is determined based on nationality.

• Mutual agreement: If all else fails, the competent authorities of both countries must resolve the issue through mutual agreement.

To claim treaty benefits as a resident of India under the tie-breaker provisions, the taxpayer must attach a treaty-based return position disclosure under section 6114 of the Internal Revenue Code. This generally requires filing Form 8833 with Form 1040-NR.

Treaty Limitations for Long-Term Residents

Treaty benefits generally apply to nonresident aliens. Once a person becomes a U.S. tax resident under the substantial presence test or by obtaining a green card, they lose eligibility for most nonresident treaty exemptions. For example, the tax exemption on wages under Article 16 or the exemption for capital gains under Article 13 no longer apply.

However, resident aliens may still benefit from certain treaty provisions that apply to residents of both countries, such as foreign tax credits or tax credits for students under domestic law. The key is to evaluate each article and its specific application based on the taxpayer’s residency status.

In addition, individuals who transition from nonresident to resident status within the same year must consider the dual-status tax year. In such cases, income earned before becoming a resident is taxed under nonresident rules, while income earned afterward is subject to full U.S. taxation. Careful allocation and proper reporting on Forms 1040 and 1040-NR are essential to avoid errors.

Using Foreign Tax Credits to Avoid Double Taxation

Another major benefit of the U.S.-India tax treaty is the ability to avoid double taxation through foreign tax credits. Article 23 allows both countries to provide relief by granting credits for taxes paid to the other country.

For Indian nationals who are U.S. tax residents and earn income from India, the United States allows a foreign tax credit for Indian taxes paid on that income. This prevents double taxation and is reported using Form 1116. Similarly, Indian tax law allows a credit for U.S. tax paid on U.S.-sourced income, provided the taxpayer reports that income on their Indian tax return and meets eligibility criteria.

Foreign tax credits are not automatic and must be carefully calculated. The IRS imposes limits based on the type of income, the amount of foreign tax paid, and the proportion of worldwide income. It is essential to maintain copies of foreign tax returns, tax payment receipts, and exchange rate documentation when applying for the credit.

In some cases, taxpayers may choose to use the foreign earned income exclusion instead of claiming the foreign tax credit. However, this option is typically more relevant to U.S. citizens and long-term residents living abroad, rather than Indian nationals in the United States.

Documentation Requirements for Treaty Claims

Claiming tax treaty benefits involves strict documentation and disclosure requirements. The IRS may request evidence supporting your eligibility for any exemption, reduced rate, or credit. Failing to properly file the correct forms or maintain supporting documents may result in denial of treaty benefits, penalties, or additional tax assessments.

The primary forms used for treaty-based claims include:

• Form 8233: For income from independent or dependent personal services

• Form W-8BEN: For claiming reduced withholding on passive income

• Form 8833: For disclosing treaty-based return positions under section 6114

• Form 1040-NR: Annual tax return for nonresident aliens

• Form 1116: For claiming foreign tax credits

In addition to tax forms, it is crucial to retain records of your visa status, entry and exit dates, employment contracts, home ownership, and any correspondence with foreign tax authorities. These documents support your claim that you are eligible for treaty relief and may be required during audits or refund requests.

Withholding Tax Relief Through Treaties

The U.S.-India tax treaty provides reduced withholding rates on many types of U.S.-sourced income paid to Indian residents. For example:

• Dividends: May be taxed at a reduced rate of 15 percent

• Interest: Often exempt or taxed at reduced rates, depending on the type

• Royalties: Subject to reduced rates under treaty provisions

To take advantage of these reduced rates, the recipient must submit Form W-8BEN to the withholding agent (such as a bank, broker, or employer). The form must be submitted before payment is made; otherwise, the standard 30 percent withholding rate will apply.

If too much tax has already been withheld, the taxpayer may request a refund by filing Form 1040-NR along with the necessary treaty documentation. Timely filing and correct classification of the income are critical in ensuring the IRS processes the refund accurately.

Practical Strategies for Treaty Compliance

Effectively using the U.S.-India tax treaty requires more than just theoretical knowledge. Here are some practical strategies Indian nationals can adopt:

• Maintain a travel log: Keep accurate records of entry and exit dates to track your residency status under the substantial presence test.

• Classify your income: Understand which income is active (wages, consulting), passive (interest, dividends), or capital gains.

• Determine your tax residency each year: Use treaty tie-breaker rules if needed to clarify residency when dual status applies.

• Submit the right forms: Use Form 8233, W-8BEN, or 8833 depending on your income type and treaty article.

• Plan asset sales strategically: Sell U.S. securities while still a nonresident to avoid capital gains tax.

• Avoid treaty overclaims: Use treaty articles that match your current visa and residency status, and update your status annually.

• File both U.S. and Indian tax returns when required: Coordinate reporting with foreign tax credits or exemptions to prevent mismatches.

• Seek help if needed: Mistakes in treaty claims can be costly. Consult a professional with experience in international taxation if your situation is complex.

Conclusion

The U.S.-India Tax Treaty offers substantial opportunities for Indian nationals in the United States to reduce tax liabilities, avoid double taxation, and clarify complex residency and income classifications. Across this guide, we have explored the critical provisions that apply to students, researchers, and professionals, as well as individuals earning passive income or capital gains.

We addressed the key treaty articles that affect Indian students and scholars under F-1 and J-1 visa categories. These include exemptions on scholarships and fellowship grants, limited tax exemptions for income from personal services, and special provisions that extend certain benefits beyond the usual time frames allowed by other U.S. treaties. Indian students, in particular, benefit from Article 21(2), which allows them to claim the standard deduction — an opportunity not granted to most other nonresident aliens.

Focus shifted to Indian professionals working in the U.S. under H-1B visas or OPT/CPT arrangements. It examined treaty exemptions on income from independent and dependent personal services, rules on pensions and social security contributions, and the coordination of tax responsibilities when a person earns income in both countries. We also explained how to determine residency using the substantial presence test, and how to claim treaty benefits properly by filing the correct forms, such as Form 8233 or Form W-8BEN.

Expanded the discussion to more advanced topics including the treatment of capital gains, FIRPTA rules on U.S. real property, and the application of tie-breaker rules for individuals with dual residency. It also covered how to claim foreign tax credits under Article 23 and how to maintain compliance when transitioning from nonresident to resident alien status. Additionally, we discussed practical strategies for maximizing treaty benefits while remaining compliant with IRS documentation and disclosure requirements.

Understanding the tax treaty between the United States and India requires careful attention to visa status, income type, residency duration, and international reporting obligations. Treaties are not applied automatically, you must actively claim benefits and document your eligibility each tax year. By doing so correctly, Indian nationals can avoid double taxation, lower their U.S. tax burden, and remain in good standing with both the IRS and Indian tax authorities.

For those studying, working, or investing in the U.S., this treaty is not just a legal agreement, it’s a financial planning tool. When used strategically and responsibly, it can protect your income, support your immigration goals, and ensure long-term tax efficiency.