Can the US-India DTAA rules be simplified?

Is it possible to simplify the US-India DTAA rules? Also, please help me with the following queries? Which rule of DTAA is applicable for salary earned in the US under the F1 visa? How much tax paid in the US will be exempt in India if I’m a resident here? Will the income get exempted? Also, do I need to pay tax on Indian income in the US too (I’m a non-resident alien there)?

—Name withheld on request

Assuming you qualify as a ‘resident and ordinarily resident’ of India and ‘non-resident’ of the US, you would qualify as ‘resident’ of India under the double taxation avoidance agreement (DTAA) between India and the US.

Under this, the total salary income including salary earned and received in the US will be taxable in India. However, as per Article 25(2) of the DTAA between India and the US, you may claim foreign tax credit in India for taxes paid in the US. To claim foreign tax credit in India, you will also need to file Form 67 electronically before the due date to file income tax return. Form 67 needs to be supported by a certificate or statement specifying the nature of income and the amount of tax deducted or paid in the US.

Alternatively, under the Income Tax Act, 1961, scholarship granted for cost of meeting education is exempt from income tax. Judicial precedents also support that stipend received in the course of pursuing an educational course or research project is exempt from income tax. Hence, if you earn salary income from the US, which is in nature of stipend earned during internship or business trainee and such training is necessary to qualify to pursue a profession, you may explore claiming such exemption under the Income Tax Act. If US scholarship income is claimed exempt from income tax in India, no foreign tax credit can be claimed for taxes paid in the US on such income.

Under Article 21(2) of the India-US DTAA, an Indian student or business apprentice is entitled to the same exemptions, reliefs or reductions from US tax that are available to US residents on similar payments for the period required to complete the education/training. Hence, you may explore the benefit of exemption from US tax if similar exemption is available to US residents, in which case since no tax is payable in US, question of claiming foreign tax credit in India will not arise.

Sonu Iyer is tax partner and people advisory services leader, EY India.