1. Background & Typical Timeline
Imagine you spent April – July 2024 on an H-1B assignment with a US employer, earned a salary there, and—because your US payroll team insisted—filed Form 1040 and paid federal (and perhaps state) income tax by April 2025. You then relocated permanently to India, joined an Indian company in August 2024, and continued to live here through 31 March 2025.
From an Indian tax-law perspective, you are now a “resident and ordinarily resident” (ROR) for FY 2024-25 because:
- You were in India ≥ 60 days in FY 2024-25 and
- ≥ 365 days in the 4 preceding F.Y.s (Sec 6 (1)(c), read with Explanation 1).
(If your stay in India during earlier years was < 730 days, you might instead be “resident but not ordinarily resident” (RNOR); see Section 6 (6). The FTC mechanics discussed below remain largely identical, but only Indian-sourced income is taxable for an RNOR.)
2. Scope of Total Income
| Residential status | What is taxed in India (Sec 5) |
|---|---|
| ROR | Global income—salary earned in the US and India, interest, dividends, capital gains, etc. |
| RNOR | Income received or deemed to accrue/arise in India; foreign income only if derived from a business controlled or profession set up in India. |
| Non-resident | Only Indian-sourced income. |
Because you are an ROR, your four months of US salary—although earned overseas—must be reported in your Indian return.
3. Why Double Taxation Arises
- US source rules: Under US Code § 861 and § 871, compensation for services rendered in the United States is US-sourced and taxable there.
- Indian residence-based rules: Section 5(1)(c) taxes an ROR on worldwide income, regardless of where it is earned or received.
Result: the same salary is exposed to tax in both jurisdictions.
4. Relief Mechanism—India-US DTAA & Section 90
4.1 Article 15 – Dependent Personal Services
The employment income is primarily taxable in the country where the services are performed (US), unless the employee is present < 183 days and certain employer-presence conditions are met. In our case, stay exceeded 183 days in the calendar year 2024, so taxation in the US is valid.
4.2 Article 25 – Relief from Double Taxation
India uses the credit method: it allows a credit for US federal (and eligible state) income tax against Indian tax on the same income, restricted to the Indian tax attributable to that income. ClearTaxDinesh Aarjav Associates
Section 90(2) then lets the taxpayer rely on the treaty provisions where they are more beneficial than the domestic law credit in Section 91.
5. Foreign Tax Credit (FTC) Under Rule 128
| Key provision | Practical takeaway |
|---|---|
| Rule 128(1) | Credit allowed in the year the income is offered to tax in India. |
| Rule 128(4) | Credit limited to “lower of”: (i) tax payable in India on such foreign income or (ii) foreign tax actually paid. |
| Rule 128(8) | Documents required: Form 67 + proof of tax payment + TRC/10F. |
| Rule 128(9) (as amended) | Timeline—Form 67 must be filed on or before the due date of the return u/s 139(1) or, at the latest, by 31 March 2026 for AY 2025-26, provided the original/belated return is on time. Updated returns u/s 139(8A) may submit Form 67 up to the date of that updated return. Income Tax DepartmentIncome Tax Departmenthttps://www.taxmann.com |
6. Step-by-Step Compliance Workflow (AY 2025-26)
| Sequence | Action | Tips & common pitfalls |
|---|---|---|
| 1 | Gather documents: W-2 / final US salary slip, IRS transcript, state tax slip (if any). | Social Security & Medicare do not qualify for FTC—they are social contributions, not income tax. |
| 2 | Obtain a Tax Residency Certificate (TRC) from IRS + fill Form 10F. | The treaty explicitly requires TRC to claim benefits. |
| 3 | Convert foreign income & tax into INR using SBI TT buying rate on the last day of the month preceding the month of receipt (Rule 115). | |
| 4 | Log in to income-tax portal ⇒ e-File → Income-tax Forms → Form 67. Attach: – statement of income & tax, – proof of payment (IRS receipt, transcript), – TRC. | |
| 5 | Prepare ITR-2/3: • Report US salary under “Schedule Salary (F-1) – income outside India” • Fill Schedule TR to compute FTC. | |
| 6 | Verify that FTC claimed ≤ Indian tax on that US income. Any unutilised credit cannot be carried forward (unlike the US system). | |
| 7 | File the return by 31 July 2025 (non-audit case). | Filing late forfeits interest on refund and could jeopardise FTC. |
7. Illustrative Numerical Example
| Particulars | USD | INR (₹)** | Note |
|---|---|---|---|
| Gross US salary (Apr-Jul 2024) | 30,000 | 24,90,000 | USD = ₹83.00 |
| US federal income tax withheld | 4,500 | 3,73,500 | Eligible for FTC |
| State income tax (California) | 1,200 | 99,600 | Also eligible (Art 25) |
| Medicare & Social Security | 2,295 | Not creditable | Non-income tax |
| Tax on same income in India (slab + surcharge + H&EC) | — | 4,00,000 | Assuming 30% slab ≈ ₹4 lakh |
| Maximum FTC | — | ₹4,00,000 | Lower of ₹4,73,100 vs ₹4,00,000 |
Result: Indian tax on foreign salary becomes zero after credit utilisation, but ₹73,100 of US tax remains uncredited—no carry-back/forward in India.
8. Treatment of Indian Salary & Other Income
- Indian salary (Aug 2024 – Mar 2025) is taxed normally with TDS.
- Bank interest, dividends, capital gains etc. are also included.
- FTC interacts only with tax attributable to the specific foreign income; it cannot be set off against Indian tax on local income.
9. US Side Considerations
- You may be eligible for a partial refund when you file your 2024 US return, thanks to the foreign earned income exclusion (FEIE) or FTC for Indian taxes. Run both scenarios on Form 2555 vs 1116.
- The saving clause in Article 1(4) allows the US to tax its citizens even if they become Indian residents; but for non-citizen residents (e.g., Indian passport holders on H-1B), normal treaty relief applies.
- State tax residency rules differ—usually based on domicile; ensure you file a part-year resident or non-resident state return to avoid double withholding.
10. Recent Updates & Judicial Trends
| Update / Ruling | Impact |
|---|---|
| CBDT Notif. GSR 456(E) (Aug 2023) amended Rule 128(9) | Clarified that Form 67 can be furnished up to 31 March of the AY if the original/belated return is on time; offers welcome flexibility. https://www.taxmann.com |
| Delhi ITAT in Ravinder Singh (2024) | Held that belated Form 67 filed before completion of assessment qualifies for FTC, echoing earlier ITAT Mumbai view; still risky—file on time. |
| US Career Workers Tax Relief Bill (2025) (proposed) | Seeks to increase standard deduction for non-resident workers; if enacted, could lower initial US withholding in 2026‐27. |
11. Special Situations & FAQs
| Scenario | Tax treatment |
|---|---|
| Worked ≤ 182 days in US calendar year | If employer was not a US resident and remuneration not borne by US PE, Article 15 shifts exclusive taxation to India—US refund may be due; no FTC needed. |
| RNOR status (returning after > 9 years abroad) | Foreign salary may be exempt in India if received outside India; FTC question doesn’t arise, but consider Section 10(15)(iv)(fa) interest exemptions etc. |
| Double social-security contributions | Currently no India-US Totalisation Agreement. US FICA contributions are not creditable nor deductible in India; they may, however, count towards future US Social Security benefits. |
| Equity compensation earned in US but vested in India | Taxed on vest/ESPP purchase in India; prorate the foreign component, match with Form W-2 Box 12 Code V, claim FTC on the portion taxed abroad. |
12. Practical Tips to Avoid Notices
- Currency Conversion: Use Rule 115 rates—don’t apply average Re/US$ rates from XE.com.
- Form 67 completeness: Upload scanned IRS transcripts showing payment, not just filing.
- Schedule TR maths: Match “Foreign Tax” column with INR amount in Form 67 to avoid CPC mismatch.
- Claim credit only for “income-tax-like” levies—exclude penalties, interest, FICA, state disability insurance.
- Retain records for 8 years—FTC claims are a scrutiny trigger.
13. Conclusion
For returning Indians, global income taxation kicks in immediately upon attaining ROR status. The India-US DTAA, read with Rule 128 and Form 67 mechanics, ensures that double taxation pain is neutralised—but only if you meet every procedural nuance. Early collation of US tax documents, on-time filing of Form 67, and precise currency conversion will keep both the IRS and the CBDT satisfied, letting you focus on your new Indian career without surprise tax bills.
Disclaimer: This article is for informational purposes only. Consult a professional adviser for transaction-specific guidance.
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