In this video, Abhinav is sharing finer details of India-US DTAA provisions on 401k/Traditional IRA distributions
Video transcript below (kindly note auto-transcription can contain errors):
Hello, and welcome. This is Abhinav. In the previous videos, I have, made one video on 4 one k taxation in US, then I have made video on 4 one k taxation in India. Right? So both these those videos, they pertain to the individual country’s tax law.
Right? Now there is a double taxation avoidance agreement. Right? That agreement is between the two countries in the like, India and US have a DTAA. Now that DTAA overrides the internal provisions of the tax codes of both the countries.
Right? So if you are eligible for a DTAA benefit, then you can claim the DTAA benefit. Now in this video, I’m talking about the India US DTAA provisions on 401 k or IRA type investments if you have. Then if you take a distribution, basically, withdrawal. Right?
So in US, it is called distribution. So if you if you take a distribution, then what is there any beneficial provision under the India US DTAA that you can claim? So let us discuss some points. I’ll make a broad video on all the beneficial, kind of provisions on the India US DTAA. A dedicated video I’ll make, but this is basic basically specifically for 401 k IRA, Roth, traditional IRA type distributions.
Right? So let us have a look. Okay. So, see, Indian US have a DTAA in place to avoid double taxation. Now the relevant Articles of DTAA for 401 k or IRA type distributions are there are 2 Articles.
One Article is Article 20, which talks about private pension, and then there is a Article 23, which is the other income Article. That means, so basically, in in the DTAA, there are separate, Articles for separate incomes like capital gain. There is one Article. Then, business profits. There’s another Article.
So 20 pertains to private pensions and 23 pertains to if the income cannot be categorized anywhere else, then it pertains to Article 23. Right? Now understand one thing. DTAAA benefit, you can avail only if you qualify as a resident of India. Right?
So, basically, if you are a if see how what the situation becomes is that the income is taxable in US when you withdraw. So US is taxing the income, right, because of the asset and you withdraw, but India will also tax that income because of your residential status as a ROR. So only and only if you qualify as a ROR, which basically means that you are getting tax in both the countries, then only you can claim a DTAA. Otherwise, you cannot. Right?
So that you need to keep in mind. Okay. Now the DTAA benefit, whether you can get a benefit or not, depends on the type of payment that you are getting. See, basically, there are two payments you can get the distributions that you can get. 1 is a periodic payment in very limited I’ll come to what is periodic payment.
There are 2 payments. 1 is periodic payment if you get, as per the IRS rules. And then there is another payment other payment. Other payment is means any payment. That means if you have $10,000, you take $2,000 out or you take $10,000 out or you take $500 out, all will be other payments, right, which will all qualify as lump sum payments.
Now there is no DTAA benefit on these other payments. Only the DTAA benefit pertains to periodic payments if you take periodic payments. Now what is periodic payment? That means if I have $10,000 and if I take $1,000 if I withdraw $1,000 every year, would that qualify as periodic payment? No.
Periodic payment actually is qualified by there are 3 methods given by the IRS, which is basically based on the life expectancy. So there are so it’s a bit complex. There are 3 methods. Once is one is give you get a fixed, amount every year, then other is you get on a kind of a sliding scale. There are basically 3 methods which you can select, which involves the use of the IRS life expectancy tables.
And if use it is called substantial periodic substantial periodic payments. That’s the actual word that is being used. If you take that payment, if you elect for taking that payment, that may qualify as a periodic payment for the, DTAA purposes. Other payments cannot. Right?
Okay. So what is periodic payment? So what if you take periodic payment? Then if you take periodic payment, then it can fall in Article 20(1). Right?
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That Article 20 sub clause 1 basically gives this kind of an exemption to any private pension. Right? And it says that if a person receives a private pension, it will be taxable only in India and not in the US. So you are receiving this as a pension private pension. Right?
Being in India, being an Indian resident, so the DPA gives you that advantage that you it will be only taxable to you in India and not in the US. Now understand this very, very important thing. I should have put that thing, at the top. Right? This benefit or any benefit of the DTAA, you don’t get that benefit if you are US if you are a US citizen or a resident.
That means if you are a US citizen, green card holder, or a resident, if you qualify any of those, due to Article 2 savings clause, you may not get the benefit. Right? So you have to actually check-in the Article 2 whether this particular, provision you can get the benefit or not. Right? If you can get, then fine.
But, generally, because of the savings clause, if you are a US citizen, green card holder, or a resident, you don’t get the benefit of many clauses in the DTE. Right? So US has kind of taken that thing, out for its citizens and residents that no matter if there are these kind of beneficial provisions, but if you’re as our citizen or resident, you will not get. Right? So that’s US for you.
Right? Okay. So if it’s a so if you closely look at Article 20 subclass 1, it excludes periodic payment from being taxed in the US, but only the it excludes pensions, but the pension meaning of the pension is in Article 22, which clearly says that it has to be periodic payment. So lump sum payment, for example, you have $10,000 and you decide that I will take $1,000 every year, that doesn’t qualify as a periodic payment. It has to be like a pension, Then you can claim the benefit.
Right? Otherwise, not. Now if there is an other payment, other payment is basically you withdraw yourself. Right? You decide that you’ll withdraw.
It falls in Article 23 other income. Right? Now there is no DTAA benefit on that. There is no DTAA benefit. It will be taxed in India.
Refer to my earlier videos, how it will be taxed in India, how it will be taxed in US. The country’s internal tax codes will apply, and it’ll be taxed. Now when it is taxed in US, if you are an allergen alien, withholding rate of 30% will apply, flat 30% withholding rate. Even if you provide w eight, Ben, still, it will withhold 30% tax rate. Right?
Even if you state some Article 21, for even a lump sum kind of a payment, still, they will if you are lucky, then they may apply a reduced rate. I don’t know. But there is no lower treaty rate. So, basically, if you the withholding is basically generally 30% or a lower treaty rate. But in India, US, if you are talking about other payments, there is no lower treaty rate.
So you get 30% withholding. Right? So the administrator will deduct 30% withholding and, basically so it’s in US, also, it’ll be taxable. Taxability is different from withholding, but it will be taxable in US. It will be taxable in India as for the applicable provisions.
There is no DTAAA benefit. Now, basically, if you want to claim a, treaty benefit, then you file w eight ben. Always suggest always to file a w eight ben where you are saying that you are a beneficial owner residing in a different country, and you can make the correct Article number. You can mention the Article number. For periodic payment, you can mention it.
Article is 21. I’ll do a separate video on how to file a w eight, Ben, and you can do it in the in the Article section, which Article you’re claiming a benefit, you can write 21. And you can, like, say that it is taxable only in India and not in the US. So if they accept the administrator accepts, then they may not withhold anything from your, 41 k, and you may not you’re gonna have to file a return in US for that 401 k because it is not taxable in the US. It is taxable only in India.
Right? Okay. If the withholding is done at 30%, then you’ll need to file a 1040 NR. Right? Now, generally, if the withholding is done at 30%, it is not taxable at 30% because the contribution portion in the withdrawal is taxed at graduated rates only the income portion from dividend and the capital gains is taxable at 30%.
So so basically what happens is that you need to file 1040 NR in that case, to claim a refund of the excess tax that is paid. That means the actual tax liability versus what is the withholding the difference that you’ve paid in the US, you need to do, file a 1040NR because in that case, even filing a w eight, then you will be, like, levied a 30% tax. So you can file a 1040 n r and claim the refund of the excess withholding that has been done. Right? So this is it.
This is some of the India US DTAA provisions on 401 k IRA distributions. Do share your thoughts, your queries in the comment section, and I’ll help you. Thank you so much for watching this video. Thank you so much.