7 US-India Tax Treaty Mistakes that delay NRIs IRS Refund

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

The US-India Double Taxation Avoidance Agreement (DTAA) 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.

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. Not Filing Form 8833 When It Is Required

Form 8833 is the Treaty-Based Return Position Disclosure form. You attach it to your US tax return when you are claiming a treaty position that overrides an Internal Revenue Code (IRC) provision.

Many NRIs assume this form is always required for any DTAA claim. That is not true. You do not need Form 8833 to claim a simple reduced withholding rate on NRO interest or dividends under the standard treaty articles. However, two specific situations make it mandatory:

1. Your treaty claim modifies or overrides a standard IRC provision, AND
2. Your income items in that category total more than $100,000

For example, Rahul is a software engineer in the US on an H-1B visa. He also earns income from delivering technical training sessions in India (covered under Article 15, dependent personal services). His US salary is $135,000 and his India training income is $22,000. Because his total income exceeds $100,000 and his treaty claim modifies his India income's treatment under the IRC, he must attach Form 8833.

If you are required to attach Form 8833 and do not, the IRS imposes a penalty of $1,000 per failure. The return gets flagged, processing stalls, and your refund is held until the omission is resolved. In some cases, the IRS simply rejects the treaty claim entirely.

Check the Form 8833 instructions on the IRS website before assuming you do not need it.

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). When you do not report NRE interest, you receive a CP2000 notice proposing additional tax plus a 20% accuracy-related penalty.

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

4. Skipping Form 67 on the India Side

Most NRIs focus only on the US side of their DTAA claim. They file Form 1116 in the US, claim the Foreign Tax Credit for TDS paid in India, and consider the job done. They ignore the India side entirely.

The DTAA works in both directions. If you paid US federal tax on income that India also wants to tax, you can claim a credit for those US taxes in your Indian ITR. The Indian mechanism is Form 67, which you must file before your India ITR deadline.

If you do not file Form 67 before the ITR deadline, the credit is permanently lost. You cannot amend later to add it.

Here is what that costs in practice. Amit is an NRI software consultant who does project work for Indian companies. He paid $8,000 in US federal tax on that income. His India ITR shows Rs 22 lakh in income from those projects, taxed at the Indian rate. Had he filed Form 67 before his July 31 India ITR deadline, he could have claimed roughly Rs 6.4 lakh as a credit against his India tax liability. He did not file it. That money is gone.

This is a completely separate form from anything you file in the US. Most tax advisors 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 standard approach is reactive: let India withhold at 30%, then file a US return to claim a refund of the excess. 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 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 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 withheld at 30%, you will need to file Form 1040-NR (or claim the FTC on your resident return) to recover the excess. The refund process is slower and more cumbersome than getting the rate right upfront.

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 for your treaty refund: FATCA means the IRS already has data on your Indian accounts. When you file a treaty-based refund claim on a 1040-NR and the IRS runs a routine check, they cross-reference FBAR filings. If they find Indian accounts that were not reported on FBAR, your refund claim triggers a deeper compliance review. That can delay your refund by months.

The penalties for missing FBAR are severe. A non-willful violation can cost up to $12,921 per account per year (2026 figure). 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. Waiting Too Long to File Form 1040-NR for a Refund

If you are a nonresident alien (on an F-1 visa, for example) and your Indian bank withheld 30% TDS on interest that is subject to only 15% under the treaty, you need to file Form 1040-NR to claim that refund. The clock on that claim starts ticking from the original due date of the return.

You have 3 years from the original due date to file a refund claim. After that, the IRS will not issue the refund, no matter how clear the overpayment is.

Many NRIs discover the overpayment late, often when switching tax advisors or when a colleague mentions the treaty. By then, the window may have closed.

Here is what that looks like. Neha had NRO fixed deposits throughout FY 2022-23. India withheld TDS at 30% on Rs 8 lakh in interest. The treaty rate is 15%, so she overpaid roughly Rs 2.4 lakh (approximately $2,900 at the time). She realized this in early 2026, four years after the overpayment. The 3-year window had closed. The IRS cannot issue that refund. That money is permanently gone.

The other timing question NRIs ask: how long does the IRS take to process a treaty-based refund? An e-filed Form 1040-NR with a treaty claim typically processes in 3 to 4 months. A paper-filed 1040-NR can take 6 to 8 months. Filing electronically and filing early both reduce your wait.

Conclusion

The india us tax treaty benefits are real, but recovering overpaid TDS requires exact paperwork filed in the right sequence. Overpaying at 30% when the treaty caps your rate at 15% is only recoverable within the 3-year refund window. File Form 8833 when required, keep income categories separate on Form 1116, report NRE interest in full, and file Form 67 in India before your ITR deadline. If you want an InvestMates advisor to review your treaty claim before you file, book a free consultation at investmates.io.