I am a US citizen and have been residing there for over 25 years. I am now retired and have returned to India in May 2024. I will start receiving social security benefits from the next calendar year. Should I include this income in my Indian income tax return?
—Name withheld on request
Once you become an Indian tax resident, your global income will be taxed in India. Also, as a US citizen, your worldwide income will also be taxed by the US. To avoid double taxation, India and the US have signed a Double Taxation Avoidance Agreement (DTAA).
However, the US reserves the right to tax its citizens under the “safeguard clause” of the India-US DTAA. The safeguard clause allows the US to tax its citizens on their worldwide income assuming that the DTAA has not come into full force. Despite this, there are certain exceptions to the safeguard clause, such as taxation of social security benefits.
Taxation of social security benefits is governed by Article 20(2) of the DTAA between India and the US, which provides for taxation of social security benefits only in the country which pays such benefits to the individual.
Under this paragraph, US social security benefits paid to an Indian resident or a US citizen are taxable only in the US. In this case, “residence” means residence as defined in Section 4 of the DTAA between India and the US.
Due to the safe harbor clause, you become a dual tax resident, i.e., a tax resident of both India and the US. Applying the tiebreaker test, I assume that the tie will be resolved in favour of India and you would qualify as an Indian resident.
Therefore, in both cases (being a resident of India and being a citizen of the United States, as per paragraph 2 of Article 20), only the United States can tax your social security benefits. These incomes will not be taxable in India.
While your social security benefits are not taxable in India, it is advisable to declare this income in your Indian income tax return as exempt income to ensure due compliance.
Harshal Bhuta is a partner at the chartered accounting firm PR Bhuta & Co.
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