Tax Treaty Changes Could Lead to Higher Taxes for Indians Returning from the US

Indians returning from the US, including retirees and professionals, may soon face increased tax liabilities due to a shift in how the US interprets tax residence under its treaty with India.  

The change could affect those classified as 'resident but not ordinary resident' (RNOR) under Indian tax laws, potentially ending benefits like reduced US withholding tax rates. 

RNOR Classification May No Longer Offer Treaty Shield 

The India-US tax treaty allows tax benefits to individuals considered residents of either country. However, Indian returnees qualifying as RNOR enjoy a limited taxation regime in India—they are not taxed on their global income for 2 to 3 years.  

Previously, the US accepted RNORs as Indian tax residents under the treaty, allowing reduced withholding tax rates, such as 15% on dividends or interest. 

Now, the US has clarified via the OECD Tax Convention that persons taxed on a limited basis cannot be treated as tax residents of that country.  

This change could result in a withholding tax of up to 30% on US earnings, including dividends, royalties, interest, annuities, and technical service fees. 

Impact on Dividends, Interest, and Royalties 

This shift affects income like dividends from US stocks and mutual funds, which may now be taxed at 30% instead of 15% to 25%. Interest from fixed deposits with US banks may also attract a 30% tax rate.  

Additionally, royalties from US-based platforms such as YouTube, Spotify, or book and app revenues would be taxed at higher rates, impacting NRIs returning to India, especially those monetising content or offering services remotely. 

Read More: Lok Sabha Clears Central Excise Amendments to Sustain Tax on Tobacco and Pan Masala! 

RNOR Period and Resident Criteria 

To remain classified as an RNOR, individuals must meet one of these conditions: spend 120 to 182 days in India with ₹15 lakh Indian income and presence of 365 days in 4 financial years, or qualify based on 9 out of 10 years or 729-day rules.  

After 2 to 3 years, they become ordinary residents and are taxed on global income in India, benefiting again from treaty provisions. 

Conclusion 

This development may result in increased US taxes for RNOR Indians, given the changed interpretation of tax residency. Returning Indians may need to reassess their return timing and financial structures accordingly. 

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