Before understanding taxation of USA Sourced Income in India, we have to understand taxability of that income in USA first.
Please be apprised that a basic knowledge is being provided herein. Should you have any particular situation in hand, feel free to contact us by filling the form at the end. We shall be happy to respond.
There are 2 types of income taxes:
- Federal income taxes- Federal income taxes are levied based on multiple factors. Incomes are of 2 types -ECI (Effectively connected income) and FDAP (Fixed, Determinable, Annual and Periodic income). ECI generally refers to the income generated by a business, whereas FDAP usually refers to passive incomes like rents, dividends, interest, royalty etc. (detailed info)
When it comes to calculating federal income tax, IRS treats ECI and FDAP differently. ECI incomes are generally taxed at different tiers ranging from 10% to 37%. FDAP incomes are generally taxed at 30%.
However, tax rates vary based on the tax treaty between US and India.
According to the tax treaty, ECI incomes are exempt from US federal taxes if a permanent establishment is situated in India and FDAP incomes are taxed at 15% (Interest), 25% (Dividends) and 20% (Royalties).
For more details on permanent establishment Click Here
- State income taxes- For non-residents alien, Income Tax Rates range between 0% to 6.6%.
Taxation in India after considering DTAA (Double Taxation Avoidance Agreement) between USA & India
In case of LLC
LLC is taxed as a pass-through entity by default in USA. This means that the profits of the business are “passed through” to the members. Profits and losses are reported on the individual tax returns for the owners, and not at the business level. Business income equals personal income, so the owner pays the tax on his or her personal return, and it is taxed at the individual rate. Since only the members pay tax, there is a single level of taxation.
In case you make any profit from the LLC, then you need to show it in the Income Tax Return filed by you in India. You can claim the Input Tax credit of the Taxes Paid in USA as may be permitted under the Double Tax Avoidance Agreement (DTAA) signed between India & USA.
In case of C-Corporation
In case of C-Corporation, Indian resident can earn income from US in the form of salary if he is a director and dividend if he is a shareholder. Since, global income of an Indian resident is taxable in India so income earned from C-Corporation by an Indian resident will be taxable in India and any tax withheld in USA will be available as tax credit while filing Indian Income tax return.
If a resident in India earns an income that is taxed in the USA, the taxpayer can claim a deduction of an amount equal to income tax paid in the USA. However, such deduction should not exceed income tax in India on such foreign income. Thus, the resident earning foreign income can claim relief of the tax paid on foreign income.
Resident in India earning a foreign income should report such income and foreign assets in the Income Tax Return.
You will also be required to submit Form 67 that is a statement of foreign income and foreign taxes paid, which is filed and verified online via an e-filing Income Tax account, along with the proof of tax payment. The due date to furnish this form is on or before the due date for furnishing the original return.
Taxation of LLC in US formed by Indian Residents – Click Here
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