DTAA India-US for RSU holders: which income gets relief and how

Indian RSU holders sit at the intersection of two tax systems. The US taxes some of the same income that India taxes. Without the DTAA, you'd pay twice. With it, you pay once — but claiming the relief requires knowing which article covers which income type and filing the right paperwork.

The India-US Double Taxation Avoidance Agreement

The DTAA between India and the United States has been in force since 1990. For RSU holders, three articles matter:

Article 15: Employment income — RSU perquisite

The RSU perquisite (FMV at vest × shares released, in INR) is employment income. Under Article 15, employment income is taxable in the country where the work is performed. Since you perform your work in India, the perquisite is taxable in India at slab rates.

The US does not separately tax the RSU perquisite for Indian-resident employees. There is no US tax credit to claim on perquisite income, and the DTAA provides no reduction — India has sole taxing rights and exercises them fully.

The perquisite appears in your Form 16 Part B and is reported in Schedule S of ITR-2.

Article 13: Capital gains — RSU share sales

Under Article 13(4) of the India-US DTAA, gains from the alienation of property (including shares) are taxable only in the contracting state of which the alienor is a resident — which is India.

This means: when you sell RSU shares, the US has no taxing rights on the capital gain. The full gain is taxable only in India (STCG at slab rate if held < 24 months; LTCG at 12.5% if held ≥ 24 months).

What to watch for: Some US brokers may misclassify Indian residents and withhold tax on share sale proceeds. If you see a US withholding on capital gains in your 1099-B or broker statement, you should not have been withheld — file a W-8BEN with your broker to correct future transactions, and potentially file a Form 1040-NR to reclaim the erroneously withheld amount.

For correctly classified Indian residents (W-8BEN on file), there should be zero US withholding on RSU share sales.

Article 10: Dividends — the one where DTAA relief matters most

US companies pay dividends on shares held in brokerage accounts, including RSU shares after vesting. This is where the DTAA's practical impact is greatest for RSU holders.

Default US withholding on dividends

Without a W-8BEN, US brokers withhold 30% on dividends paid to non-US persons (the US domestic NRA withholding rate).

With a W-8BEN certifying Indian residency and DTAA treaty benefit, the rate drops to 15% under Article 10 of the India-US DTAA (for beneficial owners holding less than 10% of the voting stock — which always applies to RSU holders).

Indian tax on the same dividend

In India, dividends from foreign companies are taxable as Income from Other Sources at your applicable slab rate. For someone in the 30% bracket, Indian tax on ₹1 lakh of US dividend income = ₹30,000 + surcharge + cess.

The foreign tax credit mechanism

The DTAA relief is delivered through the foreign tax credit (FTC) mechanism. The sequence:

1. US broker pays dividend, withholds 15% US tax
2. You report the gross dividend in India:
   • Schedule OS: gross dividend as Income from Other Sources
   • Schedule FSI: gross dividend as foreign-source income
3. India computes tax on the gross dividend at your slab rate
4. You claim a credit for the 15% US withholding via Form 44
5. Net Indian tax = Indian slab tax − 15% US withholding credit

Important limit: The FTC credit cannot exceed the Indian tax computed on the same income. If US withholding (15%) is greater than Indian tax on that dividend (possible for small dividend amounts in lower tax brackets), the excess US tax is not refundable — it's lost. There is no carry-forward of excess FTC.

Example:

• US dividend: $500 (₹41,500 at ₹83 TTBR)
• US withholding at 15%: $75 (₹6,225)
• Indian tax at 30% slab: ₹41,500 × 30% = ₹12,450 + cess ≈ ₹12,948
• FTC claimed: ₹6,225 (15% US tax, converted at TTBR on dividend payment date)
• Net Indian tax payable: ₹12,948 − ₹6,225 = ₹6,723

Total effective tax on ₹41,500: ₹6,225 (US) + ₹6,723 (India) = ₹12,948 = ~31.2%. No double taxation.

Form 44: the mechanics of claiming FTC

Form 44 is filed on the ITD compliance portal (not in the ITR-2 itself). The source document is your 1042-S, which your US broker sends annually (typically February–March) showing. For a full box-by-box breakdown of the 1042-S and how each field maps to Form 44 and ITR-2, see the 1042-S guide for Indian RSU holders.

• Gross income paid (Box 2)
• US federal tax withheld (Box 7)
• Country code and treaty article (Box 13)

Filing sequence:

1. Download 1042-S from your broker portal (Morgan Stanley Equity Edge, Fidelity NetBenefits, E*Trade, Schwab)
2. File Form 44 on incometax.gov.in → Compliance → Form 44 → New Filing
3. File (or e-verify) your ITR-2 on the same day as Form 44 — Form 44 filed after the ITR-2 submission may result in FTC being disallowed

In ITR-2:

• Schedule FSI: Enter the country (USA), income type (dividend), gross income in INR, tax paid in the source country (US withholding in INR)
• Schedule TR: The credit flows here automatically from Schedule FSI
• The ITR-2 computation then nets out the credit from Indian tax payable

W-8BEN: make sure yours is current

For step-by-step instructions on filing W-8BEN with each broker and what to do when it lapses, see the W-8BEN guide for Indian RSU holders.

W-8BEN expires after 3 calendar years. A W-8BEN filed in 2022 expired at end of 2025. If yours has lapsed, your broker will revert to 30% withholding on dividends.

To check and update:

• Morgan Stanley Equity Edge: Stock Plan → Tax Information → W-8 Status
• Fidelity NetBenefits: Profile → Tax Withholding → W-8BEN
• E*Trade: Accounts → Account Settings → Tax Withholding
• Schwab Equity Awards: Profile → Tax Forms → W-8BEN

The form asks for your country of residence (India), tax identification number (Indian PAN), and treaty article invoked (Article 10, 15%). Most broker portals have a guided workflow.

What the DTAA does not cover

Indian surcharge and cess

The DTAA limits US tax. It does not limit Indian surcharge (10–37% on Indian tax) or the 4% health and education cess. Indian surtaxes apply fully regardless of treaty position.

Indian TDS on salary

Your employer's TDS on salary (including the RSU perquisite) is unaffected by the DTAA. The DTAA simply confirms India's right to tax — which your employer exercises by deducting TDS.

LTCG and STCG tax rates in India

The DTAA doesn't change the Indian LTCG rate (12.5%) or the STCG rate (slab). Article 13 gives India the right to tax — it says nothing about what rate India must use.

Black Money Act disclosures

The DTAA is a tax-reduction treaty, not a disclosure exemption. Schedule FA filing obligations exist regardless of whether income is doubly taxed or treaty-reduced. Filing Schedule FA is mandatory for every Indian resident with foreign assets.

Common mistakes

Claiming FTC without filing Form 44: The FTC requires Form 44. Reporting the credit only in Schedule FSI/TR without filing Form 44 will result in the credit being disallowed in 143(1) processing.

Using 30% withholding rate when W-8BEN should give 15%: If your broker didn't have a W-8BEN on file and withheld 30%, you can claim a credit for the full 30% withheld — but you overpaid the US by 15%. File a US non-resident return (Form 1040-NR) to reclaim the excess US withholding, or update your W-8BEN for future dividends.

FTC in the wrong currency conversion date: The US withholding on the 1042-S is in USD. Convert to INR using the SBI TTBR on the dividend payment date (not the year-end rate) for Form 44.

Claiming FTC on capital gains withholding (which shouldn't exist): If a US broker withheld on share sale proceeds and you claim it as FTC, verify first whether the withholding was correct. It usually isn't for Indian residents with a W-8BEN. The right fix is reclaiming the US withholding, not claiming it as FTC.

Summary

Article 10 mechanics: how the 25% treaty rate actually works

The default US withholding rate on dividends paid to non-resident aliens is 30% under Section 871 of the US Internal Revenue Code. Article 10 of the India-US DTAA overrides this - but only when the Indian resident has a valid W-8BEN on file claiming the treaty benefit.

1. No W-8BEN on file: Broker withholds 30% from every dividend. You receive 70% of the gross dividend.
2. W-8BEN on file, Article 10 claimed: Broker withholds 25% (Article 10(2)(b) for individual investors). You receive 75% of the gross dividend.
3. W-8BEN filed but incorrect Part II: The broker may apply 30% or reject the claim. Ensure Part II cites Article 10, rate 25%, income type Dividends.

Without a current W-8BEN, the broker is legally required to revert to 30%. Filing W-8BEN restores the treaty rate prospectively - the next dividend payment after processing. Excess withholding from past payments requires a US Form 1040-NR refund claim.

What the DTAA does NOT cover: capital gains on US stocks

The India-US DTAA does not need to reduce US capital gains tax, because the US does not tax capital gains on US securities sold by Indian residents. Under Article 13(4) of the India-US DTAA, gains from the alienation of shares are taxable only in the country of residence of the seller - India.

This means:

• India has sole taxing rights on capital gains from RSU share sales by Indian residents
• The US has no taxing rights on those gains
• Zero US withholding on capital gains for Indian residents with W-8BEN on file
• India taxes the gain as STCG (slab rate, held less than 24 months) or LTCG (12.5%, held 24 months or more)

If you see US withholding on a share sale in your brokerage statement, it is a broker classification error. Contact your broker - capital gains for Indian residents with W-8BEN on file should be withheld at 0%.

Article 11: interest income and the 15% treaty rate

Article 11 of the India-US DTAA covers interest income. US withholding on interest paid to Indian residents is capped at 15%, versus the default 30% for NRAs without a treaty claim. The W-8BEN carries this claim as well, relevant for brokerage money market account interest.

The 1042-S: the document that proves your WHT for Form 44

Form 1042-S (Foreign Person's US Source Income Subject to Withholding) is the US tax document your broker issues to NRA account holders each year:

• Box 2: Gross income paid (dividends, before withholding)
• Box 7: US federal tax withheld
• Box 13a: Country of recipient (India)
• Box 13b: Treaty article cited (10 for dividends)

The 1042-S is issued by March 15 of the following year, available in your broker's Tax Documents section. It is the required supporting document for Form 44.

Worked example with rupee amounts

Situation: Indian resident, 30% slab, received $800 in US dividends during 2025. W-8BEN on file (25% withholding).

No double taxation. The combined tax equals what India charges at the effective slab rate.

Form 44 claim process for dividend WHT: step by step

1. Download your 1042-S from your broker portal by March 15 (Fidelity NetBenefits: Documents; E*Trade/MSAW: Stock Plan -> Documents -> Tax Documents; Schwab: Documents tab).

2. File Form 44 on incometax.gov.in before or simultaneously with ITR-2:

   • Go to e-File -> Income Tax Forms -> Form 44 (Foreign Tax Credit)
   • Country: United States (code 2); Income type: Dividend
   • Gross income in INR at SBI TTBR on dividend payment date (not year-end rate)
   • Tax withheld in INR at same TTBR date

3. File ITR-2 on the same date as Form 44. Filing ITR-2 first without Form 44 risks the FTC being disallowed at 143(1) processing.

4. Schedule FSI and TR in ITR-2 reflect the FTC automatically once Form 44 is linked. Verify the tax relief in Schedule TR matches your Form 44 entry.