I am an independent contractor working in Chennai, India. I am working with an American company based in Philadelphia, providing software services from my home office in Chennai. My client says they have to withhold US taxes for me. Is this true that I have to pay US income tax even if I work from India as a contractor? If yes, and they DO have to withhold taxes in the USA, what is the percentage that they will be withholding? If my hourly rate is $40, what is the percentage that they would be cutting? Also, if the USA do withhold taxes, then can I claim a Foreign Tax Credit in India under the Indo-US Double Taxation Avoidance Agreement?

Assuming you are not a U.S. citizen or resident, your income is not taxable in the U.S. Employer should not withhold any taxes.

Your income is taxable in India. You can not claim any tax credit in India as it is not income earned in a foreign country.

I agree with MukatA!

If you are located in India and are working as an independent contractor, you have NO U.S. tax liability.

Your U.S. clients should know this. If not, a simple phone call to the IRS International Tax Hotline (215-516-2000) will set them straight.

You may need to provide some paperwork to clarify your status as an out-of-country contractor, but NO taxes should be withheld.

As indicated above, you should owe no U.S. tax. Some U.S. employers don't understand this. If they do withhold, you can file a Form 1040NR and claim a refund.