A Double taxation avoidance agreement or DTAA is a government level agreement, where taxation in one country is recognized by the other country. Thus, tax paid in one country is taken into account for the tax liability in the other country.To give relief to the tax payers, the governments of the U.S. and India entered into a double taxation avoidance agreement. India and the United States of America signed a comprehensive DTAA in the year 1989, and the provisions went into effect for residents of India and the U.S. on December 18, 1990. Over the years, new provisions have been added such as the FATCA notification.
The taxes that are applicable under the DTAA are the Federal Income Tax as imposed by the Internal Revenue Code and in India, the income tax as imposed by Income Tax Act of 1961.
The DTAA can come into affect in the following ways:
As per the Indian Income tax laws a resident is a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before the particular financial year.
Under the tax laws of the U.S. the residency status is described in Internal Revenue Code § 7701(b). If a person is not a citizen, a person is considered non resident alien, unless he satisfies one of the two tests, to qualify as a resident alien:
There can be scenarios where one person used to be a resident of U.S., but has income generated in India or similarly, a person is resident in India and generates their income from the U.S. In both scenarios, the taxes are payable in both U.S. and India, due to the residency laws and the taxation.