I am a US citizen. One year back I have taken up an employment with an Indian
Company in Mumbai India. I am receiving my salaries in India in Indian currency and taxes are withheld in India by my employers. I understand that I am liable to pay tax on my worldwide income in USA. However at the same time I understand that I am liable to pay tax only once. How does this work?

You will file a U.S. tax return and either file Form 2555 to exclude your India-sourced income or file Form 1116 to claim the Foreign Tax Credit for the taxes you paid to India.

The Form 2555 is probably the best way to go if you can qualify.

You will file a U.S. tax return and either file Form 2555 to exclude your India-sourced income or file Form 1116 to claim the Foreign Tax Credit for the taxes you paid to India.

The Form 2555 is probably the best way to go if you can qualify.

I don't qualify for form 2555 as I am not meeting physical presence test of 330 days. However, I believe that there is a third option, i.e. India-US tax convention. Article 16 of this convention mentions that, remuneration derived by a resident of contracting state (in my case USA - under IRS guidelines of residency), shall be taxed in that state unless employment is excercised in other contracting state(in my case India). If employment is excercised in other contracting state, then such remunerations shall be taxable in other contracting state. When I mentioned this to IRS representative, I was told that since I am US citizen, this convention is not applicable to me. However, convention doesn't say anywhere that it is not applicable to US citizen. I am giving a link to IRS publication for this convention for your reference:

http://www.irs.gov/pub/irs-trty/india.pdf

Can you look at this option and give me your opinion on the same?

Sorry; this is detailed research, and I currently have virtually no time to answer questions off the cuff.

If you want me to analyze your case, you will have to compensate me. If interested, PM me.