7 US-India Tax Treaty Mistakes that Delay NRIs IRS Refund

Many Indian NRIs living in the US unknowingly make serious mistakes on their US tax returns, often because of cross-border tax issues. From missed credits, interest reporting, to double taxation, these errors cost thousands of dollars to them. For instance, if you hold an NRO account and have earned interest on it, your Indian banks are likely to deduct 30% TDS on it. This interest is also taxable in the US. However, under the US-India tax treaty, you can reduce the withholding to 15% for most interest income.

You can reduce your TDS rate only if you file the correct form in the right order. Considering this a small error, or a single missing form, can freeze your refund for 6 to 8 months. To help you out here, 7 US-India tax treaty mistakes often made by NRIs that further delay their IRS refund. Read the blog and gather all the information.

What is the US-India Tax Treaty and Who Can Claim It?

Since 1990, the US-India Double Taxation Avoidance Agreement (DTAA) has been in force. The purpose of introducing the US-India is to prevent the same income from being taxed twice, i.e., in India and once in the US. The agreement reduces or eliminates Indian withholding on specific income types paid to US taxpayers and gives them a mechanism to credit Indian taxes against their US tax obligations.

Further, you can claim benefits under the India-US tax treaty if you are a US tax resident or an NRI (including H-1B visa holders who pass the Substantial Presence Test), a green card holder, or a US citizen. The India-US tax treaty is available to NRO interest, royalties, dividends, and certain employment income earned in India.

This was all about the US-India tax treaty and who can claim it. Moving ahead, let's know the common US-India tax treaty mistakes that delay the IRS refund of NRIs.

Common US-India Tax Treaty Mistakes that Delay an NRI's IRS Refund

The common US-India tax treaty mistakes that delay an NRI's IRS refund are as follows:

Not Filing Form 8833 When It Is Needed

Form 8833 is the Treaty-Based Return Position Disclosure form in India. You attach this form to your US tax return when you claim a treaty position that controls an Internal Revenue Code (IRS) provision. Many NRIs think that they always need this form when they claim DTAA. However, it is not true.

Considering this, this form is not required to claim a reduced withholding rate on dividends or NRO interest under the standard tax treaty articles. You need this form in two specific situations:

• Your treaty claim overrides or modifies a standard IRS provision
• In that category, the total of your income exceeds $100,000

Reporting All India Income on Form 1116

Form 1116 is the form used to claim the Foreign Tax Credit (FTC) in the US for taxes you paid already in India. Many NRIs often report all their income in this form. This is one of the common US-India tax treaty mistakes made by them.

It is because the IRS categorizes foreign income into different forms. For passive income, i.e., NRO fixed deposit interest, rental income from Indian property, and dividends, they need to fill out Form 1116. Additionally, for general income like freelance fees, salary from an Indian employer, or consulting income, you need to fill out a separate Form 1116.

If you mention all the income in one form, the credit calculation gets wrong. This further results in the IRS flagging the form, holding the refund, and issuing an IRS notice. In some scenarios, the IRS also disallows the entire credit part.

For instance, Priya is an NRI living in the US. She earns INR 8,00,000 in freelance income (general income) from an Indian tech firm and INR 3,00,000 from NRO fixed deposit interest (passive income). On both incomes, she is liable to pay taxes in India. To claim the foreign tax credit in the US, she filed only one Form 1116 and reported all the income generated from India on that. Four months later, the IRS corrected her return. Additionally, for miscalculation, the IRS reduced her refund and charged interest on the balance she owed.

Fixing this error is straightforward. For general and passive income, file two different Forms 1116.

Assuming NRE Account Interest is Tax-Free in the US

For most NRIs, this mistake costs thousands of dollars in IRS penalties every year. Well, under the Income Tax Act, NRE account interest is tax-exempt in India. Considering this, as it is not taxable in one of the two countries, the DTAA does not create a tax exemption for NRE interest in the US. The tax treatment of India and the US is completely different for NRE account interest.

Considering this, if you are a US tax resident and hold an NRE account, you are liable to report the interest generated by it on your US tax return. As India does not tax this income, you cannot claim FTC; you simply owe this tax in the US.

Many NRIs do not consider it since "it was not taxable in India" and do not report it in the US return. It is not right. Indian banks report data on NRE and NRO accounts to the IRS via FATCA (Foreign Account Tax Compliance Act). So, your account information is already held with the IRS. When you do not report NRE interest, you get a CP2000 notice imposing additional tax plus a 20% accuracy-related penalty. You can avoid this error by reporting your NRE interest on Schedule B of your Form 1040 and paying tax on it.

Skipping Form 67 on the India Side

Most NRIs living in the US focus on claiming DTAA in the US. For this, they file Form 1116 in the US, claim the FTC for paid TDS in India, and consider their work is done. They entirely ignore the Indian side. Know that the DTAA works in both countries. If you have federal tax on the income in the US, that is also taxable in India, you can claim credit on those US taxes when filing your ITR in India. To claim DTAA in India, you need to fill out Form 67. If you fail to fill the form by the ITR deadline, you will lose the credit permanently.

For instance, Amit is an NRI living in the USA, and he is a software consultant. He also does consulting work for Indian companies. He paid $8000 as US federal tax on the income he generated from India. Additionally, his Indian ITR shows INR 22,00,000 income generated from those projects, and that is taxable at the Indian rate. To avoid the double taxation on the same income, he filed Form 67 before July 31 in India (ITR deadline). Through this, he claimed around INR 6,04,000 as a tax credit against his Indian tax obligation. If he failed to fill out the form, he was liable to pay tax on his complete INR 22,00,000.

Not Claiming the Reduced Withholding Rate at Source

The common way to handle taxes is to have a 30% tax withheld in India and then file a US return to get that additional amount. However, a smarter way is to take early action: from the start, India withholds taxes at the treaty rate.

Considering this, before your Indian bank or TDS deductor pays you dividends, interest, or royalties, you can submit Form 10F along with your Tax Residency Certificate (TRC) issued by the IRS. Once accepted, the deductor, instead of the default 30%, deducts a lower TDS. So you never overpay in the first place and do not need to file for a refund. Further, the tax rates you are entitled to under the US-India treaty are as follows:

The data mentioned in the above table is based on the US-India Tax Convention. The tax rates are subject to change, so before filing, verify them from the official IRS source.

The process includes requesting a TRC, i.e., Form 6166, from the IRS. It generally takes 6 to 8 weeks. Once you receive the TRC, submit it along with Form 10F to your Indian bank or TDS deductor before the first payment date of the year. Once set up, the correct tax rate automatically applies.

In case you skip this step and paid 30% TDS in India, you need to fill out Form 1040-NR (or claim the tax credit on your US tax return) to recover the excess TDS amount.

Missing FBAR Filing for Indian Bank Accounts

From your IRS tax returns, FBAR (FinCEN Form 114) is a separate filing requirement. If the total balance of all your foreign financial accounts is more than $10,000 at any point during the financial year, then you need to file an FBAR by April 15. In case you miss the date, an automatic extension date, October 15, is also available. You can fill out the FBAR through the BSA E-Filing System of FinCEN. Many NROs who fill out Form 1040 IR or 1040-NR tax returns forget to submit their FBAR.

FBAR reporting is important because the IRS, through FATCA (Foreign Account Tax Compliance Act), already has information about your Indian bank accounts. So when you submit a treaty-based refund, first the IRS checks your FBAR filings. If they find out that you do not report your Indian bank accounts, it will lead to a review of your US tax return and delay your IRS refund for several months.

Apart from this, penalties for not filing FBAR can be hefty. A non-willful violation can result in penalties up to $12,921 per account every year, and willful violations result in even higher penalties.

Waiting Too Long to Fill Out Form 1040-NR

If you are a non-resident alien, for instance, on an F-1, and your Indian bank withheld 30% TDS on interest, that is under the treaty subject to only 15%. In this scenario, to claim the refund, you need to file Form 1040-NR. The clock starts ticking for claiming a refund from the original due date of your tax return. You get three years from the date to file for a refund; after that, you will no longer be able to claim a refund regardless of how obvious the overpayment is.

Many NRIs realize late that they have overpaid their taxes, often when switching tax advisors or reading about the tax treaty of someone else. By that time, the window for claiming a tax refund might be closed.

For instance, Neha is an NRI who, throughout FY 2022-23, had NRO fixed deposits. On INR 8,00,000 interest generated from it, India withheld TDS at 30%. Under the India-US tax treaty, the tax rate is 15%. Considering this, she roughly overpaid INR 2,04,000 (approx. $2900 at the time). After four years of the overpayment, she realised it in early 2026. The 3-year window for closing the refund has closed. Now, she cannot get the tax refund for her overpaid taxes, which means her money is gone permanently.

These are the common US-India tax treaty mistakes that delay NRIs' refunds.

Final Thoughts

Lastly, the US-India tax treaty benefits are real, but recovering overpaid TDS needs proper documentation filed in the correct sequence. Try to avoid the above-mentioned US-India tax treaty mistakes when claiming the refund. File Form 8833 when needed, on Form 1116 keep each income category separate, report NRE interest in the US, and file Form 67 before the ITR deadline in India.

Furthermore, if you need any assistance in reviewing your treaty claim or filing an ITR, connect with Savetaxs. We have a team of financial experts with years of experience in cross-border taxation. They can help you claim your tax refund on time.