US-India Tax Treaty: 7 Costly Mistakes NRIs Make

If you earned interest on your NRO account last year, your Indian bank most likely deducted TDS at 30% plus surcharge and cess. The US-India tax treaty (also called the DTAA, or Double Taxation Avoidance Agreement) caps Indian tax on most interest at 15%. The difference is real money, but it comes back from India, not from the IRS. You either stop the over-deduction upfront with a Tax Residency Certificate and Form 10F, or claim it as a refund in your Indian income tax return. On your US return, you can only take a foreign tax credit for the tax India was entitled to charge under the treaty. Most NRIs know the treaty exists. Far fewer know which country handles which step. Here are the 7 mistakes that most often cost NRIs money or lead to notices from the IRS or the Indian tax department.

What Is the US-India Tax Treaty and Who Can Claim It?

Yes, the US and India have a tax treaty. The US-India Double Taxation Avoidance Agreement (DTAA) was signed in 1989 and has been in force since 1990. Its purpose is to prevent the same income from being taxed twice, once in India and once in the US. It lowers or eliminates Indian withholding on certain types of income paid to US taxpayers, and gives US taxpayers a mechanism to credit Indian taxes against their US liability. There is no single fixed "exemption amount" under the treaty. Instead, it caps or removes tax on specific income types (for example, dividends at 15% or 25% depending on ownership), and Article 21(2) lets Indian students and business apprentices in the US claim the standard deduction.

You can claim India-US tax treaty benefits if you are a US tax resident (including H-1B holders who pass the Substantial Presence Test), a US citizen, or a green card holder. The treaty applies to NRO interest, dividends, royalties, and certain employment income earned in India. For a full explanation, see our guide on how to avoid paying tax twice.

1. Getting Form 8833 Wrong

Form 8833 is the Treaty-Based Return Position Disclosure. You attach it to your US return when you take a treaty position that overrides or modifies a provision of the Internal Revenue Code (IRC) and reduces, or might reduce, your tax.

Many NRIs assume every DTAA claim needs it. It does not. The IRS waives the disclosure for the most common NRI claims, including:

• A reduced treaty rate of withholding on interest, dividends or royalties
• Treaty benefits for dependent personal services, pensions, annuities and social security
• Treaty benefits for students, trainees and teachers
• Positions where the payments involved total $10,000 or less

The case NRIs most often miss is the dual-resident one. Say you are a US resident under US rules, for example an H-1B holder who passes the Substantial Presence Test, but you are also a tax resident of India. If you use the treaty's tie-breaker rule (Article 4) to be treated as a resident of India, the IRS requires Form 8833 when your payments or income items total more than $100,000. Taking that position also changes how you file, because you are then treated as a nonresident for US tax, so get advice before you do it.

For example, Ananya is on an H-1B but spent most of the year on a long assignment in India and is an Indian tax resident too. Her income is $140,000. If she claims treaty residence in India under Article 4, she must attach Form 8833.

If you are required to attach Form 8833 and do not, the penalty is $1,000 per failure. Check the Form 8833 instructions on the IRS website before deciding either way.

2. Putting All India Income in One Basket on Form 1116

Form 1116 is the form you use to claim the Foreign Tax Credit (FTC) in the US for taxes already paid in India. Many NRIs file one Form 1116 and dump all their India income into it. That is the mistake.

The IRS categorizes foreign income into separate "baskets." Passive income (NRO fixed deposit interest, dividends, rental income from an Indian property) goes in one basket. General income (salary from an Indian employer, freelance fees, consulting income) goes in a separate basket. You need a separate Form 1116 for each basket.

If you mix them, the credit calculation is wrong. The IRS flags it, holds the refund while issuing a notice, and in some cases disallows part of the credit entirely.

Here is a real scenario. Priya earns Rs 3 lakh in NRO fixed deposit interest (passive income) and Rs 8 lakh in freelance income from an Indian tech firm (general income). India withheld TDS on both. She filed one Form 1116 combining all the income. The IRS corrected her return 4 months later, reduced her refund, and charged interest on the balance she owed for the miscalculation.

The fix is straightforward: file two separate Form 1116 forms, one for passive income and one for general income. Our full guide on Form 1116 walks through each income basket with examples.

3. Assuming NRE Account Interest Is Tax-Free in the US

This mistake costs NRIs thousands of dollars in IRS penalties every year.

NRE account interest is tax-free in India under the Income Tax Act. There is no TDS deducted on NRE interest. But the DTAA does not create a US tax exemption for NRE interest. India's domestic law exempts it from Indian tax. That is completely separate from what the US does with it.

If you are a US tax resident, US citizen, or green card holder, you must report NRE account interest as taxable income on your US return. Because no Indian TDS was withheld, you cannot claim a Foreign Tax Credit for this income. You simply owe US tax on it in full.

Many NRIs skip it, reasoning that since it was "not taxed in India" it does not need to be reported. That reasoning is wrong. Indian banks report NRE and NRO account data to the IRS via FATCA (Foreign Account Tax Compliance Act). If you leave NRE interest off your return, you risk an IRS notice proposing additional tax, a 20% accuracy-related penalty and interest.

Report NRE interest on Schedule B of your Form 1040. It is taxable. There is no treaty exemption for it.

4. Using Form 67 in the Wrong Country (or Forgetting It After You Return)

Form 67 is India's form for claiming a credit for tax paid abroad. It is only for people who are tax residents of India. If you live in the US and earn income from India, Form 67 is not your tool. India taxes the Indian income first, and the US gives you the credit for that Indian tax on Form 1116.

Form 67 matters after you move back. Once you become an Indian tax resident, and especially once you are ROR and India taxes your worldwide income, income the US also taxes can be taxed twice. Examples are US dividends, US rental income or a 401(k) payout. To claim credit in India for the US tax, you file Form 67 with your Indian return.

Under Rule 128(9), Form 67 can be filed up to the end of the relevant assessment year, as long as your return is filed within the time allowed. If you never file it, the credit is not allowed.

For example, Amit moved back to India and is now ROR. He receives $10,000 of US dividends, and $2,500 is withheld in the US at the treaty rate of 25%. India taxes the dividends at his slab rate. By filing Form 67, he claims a credit for the $2,500 (converted to rupees) against the Indian tax on the same income, so he does not pay twice.

Most tax advisers who handle only US returns will not mention it. Our step-by-step Form 67 filing guide covers the full India-side process.

5. Not Claiming the Reduced Withholding Rate at Source

The common approach is reactive: let India deduct TDS at 30% and sort it out later. But the excess can only be recovered from India, by filing an Indian income tax return. The smarter approach is proactive: get India to withhold at the treaty rate from the start.

Before your Indian bank or deductor pays you interest, dividends, or royalties, you can submit Form 10F (Form 41 from tax year 2026-27) and a Tax Residency Certificate (TRC) issued by the IRS. Once accepted, the deductor withholds at the lower treaty rate instead of the default 30%. You never overpay in the first place, so you never need to file for a refund.

The same logic applies in the other direction. If you are an Indian resident holding a US brokerage account, the US broker withholds 30% on US dividends unless you file Form W-8BEN and answer yes to "Is the account holder claiming a reduced rate of withholding under a tax treaty?", naming India as the treaty country. Our Form W-8BEN guide walks through that section.

The rates you are entitled to under the US-India treaty are:

Data based on the US-India Tax Convention. Rates are subject to change. Verify with the official IRS source before filing.

The process involves requesting a TRC (Form 6166) from the IRS, which takes 6 to 8 weeks. Submit Form 10F along with your TRC to your Indian bank or deductor before the first payment date of the year. Once set up, the correct rate applies automatically.

If you skipped this and India already deducted 30%, claim the excess back by filing an Indian income tax return at the treaty rate. On your US return, you can claim a foreign tax credit only for the tax India was entitled to under the treaty, which is 15% on most interest. The extra amount is not creditable in the US because it is refundable from India. Getting the rate right upfront avoids all of this.

6. Missing FBAR Filing for Indian Bank Accounts

FBAR (FinCEN Form 114) is a separate filing from your IRS tax return. If the aggregate balance across all your foreign financial accounts exceeded $10,000 at any point during the calendar year, you must file FBAR by April 15. An automatic extension to October 15 is available if you miss that date.

FBAR is filed through FinCEN's BSA E-Filing System. It has nothing to do with the IRS tax return portal. Many NRIs who diligently file their 1040 or 1040-NR forget FBAR entirely.

Here is why it matters even when your treaty claims are correct: under FATCA, Indian banks report your accounts to the IRS, so unreported accounts are easier to spot. An FBAR gap can turn an otherwise routine return into a wider compliance review.

The penalties for missing FBAR are severe. A non-willful violation can cost up to $16,536 per FBAR report (2026 figure). Since the Supreme Court's 2023 decision in Bittner v. United States, this penalty applies per report filed late or incorrectly, not per account. Willful violations carry even higher penalties. Our FBAR filing guide for NRIs covers the full process, thresholds, and what to do if you missed prior years.

Does the IRS catch all mistakes? With FATCA data flowing from Indian banks to the IRS automatically, the answer is increasingly yes.

7. Trying to Reclaim Indian TDS From the IRS (and Missing India's Refund Deadline)

Excess Indian TDS is refunded by India, not by the IRS. If your Indian bank deducted 30% on NRO interest that the treaty caps at 15%, the only way to get the difference back is an Indian income tax return claiming the treaty rate, backed by your TRC and Form 10F.

Filing a US return, whether Form 1040 or Form 1040-NR, does not recover it. And if you are a nonresident alien, such as an F-1 student, the US does not tax your Indian interest at all.

India's window is short. For most individuals, the return for a financial year is due by July 31 of the following year, and a belated return can be filed until December 31. An updated return cannot be used to claim a refund. After the belated deadline, the only route is a condonation request to the tax department, which it may or may not accept.

For example, Neha had NRO fixed deposits in FY 2022-23. Her bank deducted TDS at 30% on Rs 8 lakh of interest, Rs 2.4 lakh in total, instead of Rs 1.2 lakh at the 15% treaty rate. She realised this in 2026. The belated deadline of December 31, 2023 has passed, so her only option is to apply for condonation of delay, with no guarantee. Had she filed her return for FY 2022-23 on time, the Rs 1.2 lakh excess would have been refunded.

The US deadline matters too, but it is longer. If you are a US resident and claimed too little foreign tax credit, you generally have 10 years from the return's due date to amend for it, not the usual 3.

Conclusion

The India-US tax treaty benefits are real, but each country handles its own part. Excess Indian TDS comes back from India through your Indian return, so get the treaty rate upfront with a TRC and Form 10F, or file on time to claim the refund. On the US side, file Form 8833 only when it is required, keep income categories separate on Form 1116, report NRE interest in full, and file FBAR. If you move back to India, use Form 67 to claim credit for US tax. If you want an InvestMates advisor to review your treaty claim before you file, book a free consultation at investmates.io.