DTAA Between India and USA: What It Means for Property Owners

The India-USA Double Taxation Avoidance Agreement does not stop India from taxing your Indian property. Article 6 gives India the first right to tax rental income from Indian real estate, and Article 13 lets each country tax capital gains under its own domestic law. What the treaty does is prevent the same income from being taxed twice: the US grants a foreign tax credit for Indian tax paid, claimed on Form 1116. For property, the DTAA is a credit mechanism, not a discount.

This guide covers the property angle only: rent and sale gains. Interest, dividends, and pensions follow other articles with their own rates.

The two articles that matter

Article 6, income from immovable property. Income from real estate "may be taxed" in the country where the property sits. Your Bangalore flat's rent is taxable in India first, at India's normal rates. The US, taxing citizens and residents on worldwide income, taxes the same rent again, then credits the Indian tax.

Article 13, capital gains. The India-US treaty takes an unusual position: each country may tax capital gains under its own domestic law. There is no treaty rate cap for property gains. India taxes your gain at 12.5% plus surcharge and cess. The US taxes the same gain under its capital gains rules. The credit, not the treaty article, is what saves you from paying twice.

The takeaway: a US-based NRI gets no rate reduction from the DTAA on Indian property income. Anyone promising a "DTAA rate" on rent or sale gains is selling confusion.

Rental income: the double filing

  1. India side: rent is taxable in India. The tenant of an NRI landlord must deduct TDS under section 195 (now section 393(2) of the Income-tax Act, 2025) at rates plus surcharge and cess. You file an Indian return, claim the standard deduction on house property income, municipal taxes, and home loan interest, and settle the true liability.
  2. US side: report the same rent on Schedule E. The US allows its own deductions, including depreciation on the building, which India does not mirror. Net rental income joins your US taxable income.
  3. Credit: file Form 1116 (Foreign Tax Credit) with your US return for the Indian tax paid on that rent. The credit is capped at the US tax attributable to the same income, computed per the foreign tax credit basket rules.

Because Indian and US deductions differ, the two taxable numbers differ, and the credit seldom cancels the US tax to zero. Expect a residual on one side in many years.

Capital gains on sale: how the credit works

  1. India taxes the gain: 12.5% plus surcharge and cess on long-term gains, computed in rupees with Indian cost rules. TDS at 13 to 14.95% of the sale price applies unless a lower-TDS certificate caps it. See TDS on sale of property by NRI.
  2. The US taxes the gain too: reported on Form 8949 and Schedule D, computed in dollars using the exchange rates on purchase and sale dates. A weak rupee era can make the dollar gain smaller than the rupee gain, or even negative while India shows a profit.
  3. Form 1116 claims the credit for the Indian tax against the US tax on that gain.
  4. Timing matters. The Indian tax year ends 31 March; the US year ends 31 December. Align which year's US return carries the credit, and use the accrued or paid method with consistency. A sale in February lands in different fiscal years on each side.

Two honest warnings. First, US state income tax is outside the treaty: most states tax the gain and give no foreign tax credit, so California or New York tax on an Indian property gain is a real, unrecoverable cost for many sellers. Second, an Indian exemption under section 54 or 54EC reduces Indian tax, which reduces the credit, which can raise your US bill. An exemption that helps a Dubai NRI can be near-worthless to a California one. Model both returns together.

Form 67 and Form 1116: who files what

Form Filed where Filed by Purpose
Form 1116 US, with Form 1040 US-resident owner Credit in the US for Indian tax on Indian property income
Form 67 India, e-filing portal India-resident taxpayer Credit in India for foreign tax; relevant after you return to India
Form 10F + TRC India Non-resident claiming treaty benefit in India Establishes treaty eligibility

For a US-based NRI with Indian property, Form 1116 does the heavy lifting. Form 67 enters the picture when you move back to India and become an Indian resident with US income: it must be filed on the Indian portal before the return deadline to secure the credit in India.

The TRC requirement

To claim any India-US treaty benefit on the India side, Indian law requires a Tax Residency Certificate from the IRS plus Form 10F filed on the Indian e-filing portal. The US TRC is Form 6166, obtained by filing Form 8802 with the IRS, with a processing fee and a wait that can run six to eight weeks or more. For property income the treaty gives no rate cut, so most US NRIs need the TRC less often than they think. Where it matters: bank interest, certain other income articles, and any case where a deductor wants treaty proof before applying a lower rate.

Where this goes wrong

FAQ

Does the India-USA DTAA reduce tax on my Indian rental income? No. India taxes the rent under Article 6 at its normal rates. The treaty's value is the US foreign tax credit, which prevents double taxation.

Where do I pay capital gains tax if I sell Indian property while living in the US? Both countries tax the gain under Article 13. India collects first, through TDS and your return. The US taxes it too and credits the Indian tax via Form 1116.

Can the DTAA reduce the TDS when I sell? No. The treaty does not cap Indian tax on property gains. The route to lower TDS is a certificate under section 197 (now section 395), not the treaty.

What is Form 67 for? Claiming foreign tax credit in India. It matters when you are an Indian resident with foreign tax paid, for example after returning to India. File it before the Indian return deadline.

Do I need a TRC to sell property in India? Not for the sale itself. A TRC plus Form 10F is needed when you claim a treaty benefit in India, which property gains do not offer.

Will my US state give credit for Indian tax? Most states do not. Treat state tax as an extra cost when modelling a sale.

Is the gain computed the same way in both countries? No. India computes in rupees without indexation; the US computes in dollars with its own basis and depreciation rules. The two gains differ, sometimes by a wide margin.

One transaction, two tax systems, one team

66 MG Road runs the India side end to end: lower-TDS certificate, sale execution, Forms 145/146, repatriation, and the Indian return, with documentation packaged for your US CPA's Form 1116. Teams in Mumbai, Pune, Bangalore, Hyderabad, Chennai, and Gurgaon. Itemized billing. See tax and repatriation services.

Saurabh Garg, founder, 66 MG Road

Sources