India-USA Taxes: A Comprehensive Guide to Understanding Taxation Betwe

When it comes to cross-border taxation, understanding the tax laws of both India and the United States can be complex, especially for individuals and businesses with ties to both countries. Taxpayers with income in both nations need to be aware of how their income is taxed in each jurisdiction, and how to minimize the risk of double taxation. The tax systems in India and the USA have their own nuances, but fortunately, the two countries have a Double Taxation Avoidance Agreement (DTAA) that helps alleviate the challenges of double taxation.

In this guide, we’ll explore the tax systems in both India and the USA, the provisions under the DTAA, and practical insights for individuals and businesses managing taxes in both countries.

Understanding the Indian Tax System

India follows a progressive tax system, where individual income tax rates increase with income. The country has a comprehensive taxation system that includes income tax, corporate tax, capital gains tax, and Goods and Services Tax (GST), among others. Here are some key aspects of the India USA taxes:

1. Income Tax in India

India taxes residents on their global income, meaning that Indian residents are required to pay tax on income earned both within and outside of India. Non-residents, however, are taxed only on income that is sourced from India.

The income tax rates for individual taxpayers in India for the financial year 2023-24 are as follows:

• Up to ₹2.5 lakh: No tax
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

2. Corporate Tax in India

Indian companies are taxed on their global income. The corporate tax rate in India ranges from 25% to 30%, depending on the size of the company and the nature of its income.

3. Capital Gains Tax

India taxes capital gains based on the holding period of the asset. Short-term capital gains (STCG) on assets held for less than three years are taxed at 15%, while long-term capital gains (LTCG) on assets held for over three years are taxed at 10% for equity shares or mutual funds, provided the gain exceeds ₹1 lakh in a financial year.

Understanding the U.S. Tax System

The United States has a tax system where citizens and residents are taxed on their worldwide income. U.S. tax laws can be complex, and the tax system includes various types of taxes such as federal income tax, state income tax, corporate tax, and estate tax.

1. Income Tax in the U.S.

U.S. tax rates are progressive, and the federal income tax rates for individual taxpayers are:

• Up to $11,000: 10%
• $11,001 to $44,725: 12%
• $44,726 to $95,375: 22%
• $95,376 to $182,100: 24%
• $182,101 to $231,250: 32%
• $231,251 to $578,100: 35%
• Above $578,100: 37%

In addition to federal tax, each state in the U.S. has its own tax rates.

2. Corporate Tax in the U.S.

The U.S. imposes a corporate tax rate of 21% on the income of domestic and foreign corporations operating in the U.S. The corporate tax rate can vary depending on deductions and credits available to the business.

3. Capital Gains Tax

Similar to India, the U.S. taxes capital gains based on the holding period. Short-term capital gains (for assets held for less than one year) are taxed as ordinary income, while long-term capital gains (for assets held for more than one year) are taxed at rates ranging from 0% to 20%, depending on the taxpayer’s income.

Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement (DTAA) between India and the USA was signed to avoid double taxation on income and to provide relief to taxpayers who are residents of one country but earning income in the other. This agreement ensures that income earned in one country is taxed only once, either in India or the USA, depending on specific conditions.

The DTAA provides various methods for relief from double taxation:

1. Tax Credits

The DTAA allows taxpayers to claim a foreign tax credit in their country of residence for taxes paid in the other country. For example, if an Indian taxpayer pays taxes in the U.S. on income earned there, they can claim a credit for these taxes when filing their tax returns in India.

2. Exemption Methods

Certain types of income, such as pensions or interest, may be exempt from tax in one of the countries under the DTAA, based on the residency status of the taxpayer.

3. Tax Rate Reductions

The DTAA provides reduced tax rates for certain types of income, such as dividends, interest, and royalties. For example, dividends paid by an Indian company to a U.S. resident may be subject to a reduced tax rate of 15% under the DTAA.

Taxation for NRIs (Non-Resident Indians) in the U.S. and India

1. Taxation of NRIs in India

Non-Resident Indians (NRIs) are taxed only on income that is sourced within India. This includes income from Indian property, business, or investments. However, NRIs are eligible for various exemptions and deductions under Indian tax laws, including deductions for investments in specified financial products.

2. Taxation of NRIs in the U.S.

NRIs in the U.S. are generally subject to U.S. income tax on their worldwide income. However, the U.S. allows a Foreign Tax Credit (FTC) for taxes paid in India, which helps reduce the chances of double taxation. Additionally, NRIs may be able to use the provisions under the DTAA to further minimize their tax liabilities.

Conclusion

Understanding the taxation system in both India and the U.S. is crucial for individuals and businesses operating in both countries. While both countries have their own tax laws and regulations, the Double Taxation Avoidance Agreement (DTAA) plays a key role in reducing the financial burden of double taxation. It is essential for taxpayers with ties to both India and the U.S. to seek professional tax advisory services to navigate these complex rules and ensure compliance.

If you need assistance with tax planning and advisory services for your India-USA tax obligations, reach out to Dinesh Aarjav & Associates for expert guidance.