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Question: DTAA – Double Tax Avoidance Act between USA and India – How to avoid paying doble tax for USD income in India?

I onw an LLC in New Jersey and am a USA citizen. I am providing consulting services to a client in India. The client is an Indian company owned by an Indian citizen. Cliend wires me payment for my services in USD. he also deducts an income tax of 10.5% at the source and sends the same to Government of India (in short Income tax on my earning gets paid to Indian Government). In USA, how will I be able to avoid paying any tax under the lawas of DTAA (Double tax Avoidance Act) treaty between India and USA. Can anyone help or point me to an expert who has great deal of knowledge in this field?
thanks.

Answer: The 10.5% Indian tax is creditable against any U.S. income taxes paid on the same income under section 901 of the U.S. Internal Revenue Code. This means that generally you can subtract the same amount from your U.S. taxes that the Indian payor paid to India with respect to the payments for your services.

The tax credit is subject to certain limits. To find out whether you get the entire amount of the Indian tax as a credit, you would fill out Form 1116, available on the IRS web site. You would submit Form 1116 with your individual U.S. tax return, not the LLC’s information return because when it comes to LLCs (presumably a partnership for US tax purposes), the credit is taken by the individual(s) owners, not the LLC itself.

If you don’t qualify for the US tax credit on the full amount of the Indian withholding tax, you can still take the remainder as a deduction (under section 164 of the US Internal Revenue Code). But definitely you want to try claiming the Indian tax first as a credit, becuase you would likely be able to claim the full amount of the Indian tax directly against your US taxes.

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