Dividends are a great way to earn passive income from your investments in U.S. companies. However, as an Indian resident, understanding how these dividends are taxed—both in the U.S. and in India—can save you a significant amount of money. The U.S.-India tax treaty, specifically Article 10, provides reduced tax rates on U.S. dividends, allowing you to retain more of your investment income. Here’s how you can take advantage of these benefits.

📜 Key Provisions of Article 10: Dividends

1. Taxation in India:
   Dividends received by an Indian resident from a U.S. company are taxable in India, which is your country of residence. You’ll need to report this income when you file your Indian tax returns. 📊

2. Withholding Tax in the U.S.:
   The U.S. will withhold taxes on dividends from U.S. companies, but the rates are reduced under the U.S.-India tax treaty:

   • 15% withholding rate if the beneficial owner is a company that holds at least 10% of the voting stock in the U.S. company paying the dividends (Article 10(2)(a)).
   • 25% withholding rate in all other cases, which applies to most individual investors or companies not meeting the 10% ownership threshold (Article 10(2)(b)). 📉

3. Special Considerations for RICs and REITs:
   If the dividends are paid by a U.S. Regulated Investment Company (RIC), such as a mutual fund, or by a Real Estate Investment Trust (REIT), the 25% withholding rate under Article 10(2)(b) generally applies. However, there are certain restrictions for REIT dividends based on ownership.

📝 How to Apply These Rules to the W-8BEN Form

To benefit from these reduced tax rates, Indian residents must fill out the W-8BEN form and submit it to their U.S. financial institution (such as your U.S. brokerage). Here’s a step-by-step guide on how to fill out this form to ensure the correct withholding rate is applied to your dividends:

1. Part II: Claim of Tax Treaty Benefits
   This is where you claim the benefits under the U.S.-India tax treaty. You’ll need to specifically reference Article 10 for dividends.

   • On Line 9b, for individual investors or companies not owning 10% of voting stock, cite Article 10(2)(b) and claim the 25% withholding rate.
   • If you’re a company that owns more than 10% of the U.S. company’s voting stock, cite Article 10(2)(a) and claim the 15% withholding rate.

2. Part I: Enter Your Information

   • On Line 9a, enter “India” as your country of residence for tax purposes.

3. Special Notes for RICs and REITs
   If your dividends are paid by a U.S. mutual fund (RIC) or REIT, make sure to apply the correct withholding rate of 25%, as outlined in Article 10(2)(b).

🔍 Special Considerations

The U.S.-India tax treaty offers several other benefits that might apply based on the type of income you receive. For dividend income, Article 10 is your key reference point, but if you have other types of income (such as interest or capital gains), different articles in the treaty apply:

1. Interest (Article 11):
   If you’re earning interest from U.S. bank accounts or financial institutions, Article 11 allows for reduced withholding rates:

   • 10% for interest paid by a U.S. bank or financial institution (e.g., savings accounts).
   • 15% for other types of interest (e.g., idle cash in brokerage accounts).

2. Capital Gains (Article 13):
   Capital gains from the sale of U.S. stocks or securities are typically not taxed by the U.S. Instead, these gains are taxed in India, which is your country of residence. So, no withholding tax needs to be applied on capital gains.

📈 Summary of W-8BEN Filing Steps

By ensuring you fill out the W-8BEN form correctly, you can take full advantage of the U.S.-India tax treaty and ensure that the correct reduced withholding rates are applied to your income. Here’s a quick recap:

1. Interest: Claim benefits under Article 11 with a 10% or 15% withholding rate, depending on the source.
2. Dividends: Claim the 15% or 25% withholding rate under Article 10, based on your ownership of voting stock.
3. Capital Gains: No U.S. withholding tax applies, but capital gains are taxable in India.

By correctly applying these treaty benefits, you can avoid overpaying taxes on your U.S. dividend income and maximize your investment returns!

This guide helps you navigate the U.S.-India tax treaty provisions related to dividend income, ensuring that you comply with both U.S. and Indian tax laws while optimizing your tax obligations.

Feel free to contact Gleez for more guidance on international tax issues and optimizing your global investments!