DTAA provisions on dividend income from US equities tax liability

You’ve raised a very important and debated issue in international taxation — the interplay between the India–USA DTAA, surcharge/cess in Indian law, and the scope of foreign tax credit. Let me break this down for you clearly:

1. What DTAA Article 10 Says (Dividends)

• Article 10(2) of the India–USA DTAA provides that dividend income may be taxed in the USA, but such tax shall not exceed 25% of the gross amount of dividends.

• This clause only limits the source country’s right (USA) to tax the dividend. It does not restrict India’s right to tax the dividend as the country of residence.

• In practice, the US withholds 25% (as per treaty). This is correctly reflected in your 1042-S / broker statements.

2. Indian Tax Treatment

• As a resident in India, your global income is taxable in India under the Income Tax Act.

• Dividend income from US equities is classified as “Income from Other Sources” and taxed at slab rates (i.e., 30% + surcharge + cess for someone in the highest bracket).

• Section 90(2) allows you to apply the DTAA if it is more beneficial. But here, CPC’s view (and settled CBDT position) is:

  • DTAA does not restrict India’s right to tax the dividend at slab rates.

  • The 25% cap applies only to tax withheld in the USA (source country).

  • In India, you must offer the dividend to tax as per the Act, but you get Foreign Tax Credit (FTC) for the US tax withheld.

3. Surcharge & Cess Dispute

• Your argument is: since Article 2(b) defines “Indian tax” as including surcharge, the treaty rate should be all-inclusive and surcharge/cess should not apply.

• Tribunal rulings (like DIC Asia Pacific Pte Ltd and Sunil Motiani) have indeed held in certain contexts that DTAA rates are final and surcharge/cess cannot be added when the treaty prescribes a rate cap.

• But here is the nuance:

  • Article 10 does not prescribe a rate at which India must tax residents — it only restricts US taxation.

  • Since there is no DTAA cap on India’s resident taxation, Indian law prevails, i.e., slab rate + surcharge + cess.

• Therefore, CPC is correct legally in demanding the differential.

4. Section 90(2) – “More Beneficial” Clause

• This helps when DTAA prescribes a lower rate than Indian law (e.g., royalties, interest).

• But for dividends, since India is not restricted by DTAA on resident taxation, slab rate applies.

• The “more beneficial” rule doesn’t override this, because the treaty doesn’t provide a beneficial resident rate — it only limits source taxation.

5. Foreign Tax Credit (Form 67)

• By filing Form 67, you are entitled to FTC under Rule 128.

• FTC is limited to the Indian tax payable on that foreign income.

• If your Indian tax liability (incl. surcharge + cess) on the US dividend is higher than the 25% US tax withheld, you must pay the balance in India.

6. Non-Discrimination Clause Argument

• Article 24 (Non-discrimination) says nationals/residents of one state cannot be taxed more burdensomely than residents of the other state in similar circumstances.

• But this has been interpreted narrowly — surcharge/cess applied to all Indian residents uniformly is not considered discriminatory. So CPC won’t allow this.

7. Judicial Precedents

• You cited DIC Asia Pacific, M. Far Hotels, and Sunil Motiani — these cases relate to applicability of surcharge/cess when the treaty prescribes a capped rate (e.g., interest, fees, royalties).

• In dividends, since no India cap exists, those rulings are distinguishable.

• Higher courts (and CBDT circulars) consistently hold that surcharge/cess applies unless treaty explicitly says otherwise.

Conclusion (Practical Position):

• Dividend from US equities is taxable in India at your slab rate (30% + surcharge + cess).

• You get credit of the US tax (25%) under Form 67.

• The balance liability in India must be paid — surcharge/cess included.

• Your grievance has logical force, but legally CPC is correct as per current law and jurisprudence.

My suggestion:

• You can continue pressing the case in appeal relying on tribunal precedents (though success odds are moderate).

• Alternatively, plan investments via US ETFs listed in India or Indian ETFs tracking US markets, which avoid this double-layered tax issue.

Would you like me to draft a structured reply/appeal note to the CPC/ITAT citing the jurisprudence, highlighting the surcharge inclusion argument — so that you have a professional written submission ready if you decide to escalate?

If yes, feel free to connect !

CA Damini Agarwal

Your reasoning is correct under the India–US DTAA, but Indian tax authorities currently disagree.

DTAA Provisions:

• Article 10(2)(b) of India–US DTAA: Tax on US dividends paid to Indian residents shall not exceed 25% of the gross dividend amount.

• Section 90(2), Income Tax Act: If DTAA is more beneficial, it overrides domestic law for that taxpayer.

• Article 2 (tax covered): “Tax” includes surcharge and cess—so the 25% treaty rate is on “gross,” with no additional surcharge/cess for dividends.

Case Law (Tribunals):

• Cited cases (DIC Asia Pacific, M Far Hotels, Sunil Motiani) held that DTAA rates cap total Indian tax on such income, including surcharge and cess.

Practical Reality:

• Indian Tax Department's CPC still demands regular slab tax, surcharge and cess.

• Their argument is that the DTAA rate is only a “cap” for withholding by source country (US), and dividend income remains taxable at Indian slab rates for residents.

• Current practice: Most Indian taxpayers are required to pay tax on US dividends at slab rates, with credit for US tax paid, plus surcharge and cess.

• Only the tax credit/relief method is accepted in practice—DTAA rate is not applied as a full cap in assessment, except in rare Tribunal-accepted cases.

What You Can Do:

• Continue to claim foreign tax credit for US taxes paid via Form 67.

• Challenge the CPC demand: You can rely on the cited Tribunal decisions and the treaty wording; however, success will depend on the stance of your Assessing Officer or whether you pursue it in appeal/Tribunal. There is currently no Supreme Court ruling clarifying this dispute.

• Most advisors recommend paying the balance (surcharge and cess) under protest while pursuing grievance/appeal, as the Income Tax Department is unlikely to relent at CPC/grievance level.