I was employed in US by a US organization for 5 months from Aug'05 to Dec'05 on H1B visa. I had file US returns with IRS in the month of April '06 with filing status as 'Other Single Non-resident alien', as I did not satisfy the substantial presence test of 183 days in US.


Now, while I am filing IT return in India as I have Indian income for March'05 to Jul'05 and Jan'06 to Mar'06, I am not sure if I have tax liability on US income in India u/s 90. I checked the DTAA comprehensive agreement between India and US, and as I interpret Article-16 of this agreement, I understand that of the 3 necessary conditions of paragraph-2 /ARTICLE-16, I do not meet 2(b) which states that

"the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State ; "

Is my interpretation correct? I was employed with US organization in US who is US resident and not with Indian employer.

To provide additional information, I haven't remitted any money yet from my US bank account in the financial year 2005-2006.

Questions:

a) Is my interpretation of 2(b) of ARTICLE-16 correct?

b) Am I liable to pay taxes in India on the foreign-income earned?

Please find the excerpt from the India/US DTAA ARTICLE-16


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Article 16 - Dependent personal services - 1. Subject to the provisions of Articles 17 (Directors Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State, if :

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year ;

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State ; and

(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.

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If you filed as a non-resident alien with the IRS, then the income you earned while in any other country is NOT taxable by the United States.

As for whether you must pay Indian Income Tax on the U.S.-based income, that is beyond my expertise. However, as a matter of general tax principle, it is likely that if India does tax you, they will give you a dollar-for-dollar tax credit for the U.S. income taxes paid.

What the article is really saying is that if you are a Resident of India and if you worked in the US (the other State) and satisfied all those conditions, then the income would be taxable only in India (not in the US). So even if you met the conditions (and it appears that you don't), it would be the US giving way not India.

Good luck.

I disagree with the article. Much depends on the visa status. Those holding H, L and H-1B visas must pay income, Social Security and Medicare taxes, while those on F-1 visa are normally exempt from the Social Security and Medicare taxes, but must still pay income taxes. Holders of J-1 visa are also normally exempt from Social Security and Medicare taxes, but may also be exempt from income taxes, depending on the nature of their "work" while under the visa.

It is all very complicated, and you need to thoroughly investigate and research your position before deciding.

OK, It's not that there's anything wrong with the Treaty Article, it's just that it does not apply in this case.

The Treaty Article would provide an exemption from US tax if the stated conditions were met (in this case they are not met).

The Treaty Article definitely does not exempt the OP from any tax in India. That is not the intent of that Article.

taxsearcher