Foreign tax credit, the India-US treaty and filing a return in India

Tax is due on the same income in two countries unless something prevents it. For a US resident with Indian income, the prevention is the foreign tax credit on the US side and the treaty on both.

The credit in outline

You can claim a dollar-for-dollar credit on Form 1116 for income tax paid or accrued to India, or deduct it, but not both for the same year. The credit is normally better.

• It is limited to the US tax on that income. You cannot use it to reduce tax on US income.
• Income is divided into "baskets". Most NRI items are passive (interest, dividends, rent, capital gains); Indian wages are in the general basket. A separate form per basket.
• Unused credit can go back one year and forward ten.
• Indian tax is converted to dollars at the rate on the date paid, or the average rate for an accrual-basis election.
• Only tax actually due counts. If you could have reduced it through the treaty or by claiming a refund, the amount you could have saved is not creditable.
• If India later refunds the tax, the credit is reduced and you may need to amend.

A foreign tax credit cannot be used for the 3.8% net investment income tax. And if the Indian tax is on income the US does not tax in the same year, such as a gain excluded under the home sale rule, there is nothing to offset.

Treaty rates

The treaty limits India's tax on non-residents. In short:

To use treaty rates you give the payer a Tax Residency Certificate (the IRS Form 6166, applied for with Form 8802), your PAN, and Form 10F (Form No. 41 under the 2026 Rules; the 2025 Act makes the residence certificate a condition in section 159(8)). Without them, the payer deducts at the domestic rate.

The treaty also contains a re-sourcing rule. Where the US sources income as US-source but India taxes it, the treaty allows it to be treated as foreign so that a credit is available. Claiming this involves Form 8833 and expert help.

Do you also need an Indian return?

Often yes, even if you are an NRI with nothing "to pay".

• To recover excess TDS, which is common on NRO interest, rent and property sales, a return is the only route.
• Where Indian income is above the basic exemption, a return is required.
• To claim the treaty rate, a return supports the position.
• It creates the record that supports your foreign tax credit.

NRIs generally file ITR-2 (or ITR-3 with business income), usually by 31 July (31 August for ITR-3 filers without an audit) unless extended. You need a PAN, bank details, the Form 16A, Form 26AS and AIS, and sale documents. Schedule FA (foreign asset reporting) applies only to ordinarily resident individuals, not to NRIs or RNORs.

Being an NRI: the day counts

India treats you as a non-resident if you are in India for less than 182 days in the year, with some exceptions. If you visit often, check the other test: 60 days in the year and 365 days in the four years before. For an Indian citizen visiting from abroad it is 182 days, and 120 days if Indian income is over Rs 15 lakh. Staying too long changes your Indian status and brings your worldwide income into the Indian net. The Income-tax Act 2025 applies from 1 April 2026 and uses the "tax year" and new section numbers, so confirm current thresholds.

A working method

1. Collect Indian tax paid, with certificates, by income type.
2. Prepare the Indian return first, since it fixes the Indian tax.
3. Prepare the US return, with Form 1116 per basket.
4. Track carryovers year by year.
5. If a refund comes from India later, tell your preparer.