Every year, thousands of Indian IT professionals get sent on short-term US assignments — a few months here, a few months there — under H-1B or L-1 visas, only to return to Indian payroll in between. On paper, this looks simple. In practice, it creates a dual-country tax filing obligation that most employees (and even some accountants) get wrong. Here's a real-world pattern we see repeatedly, walked through step by step.
The Fact Pattern
An Indian IT professional is deputed to the US by his employer for a short assignment — a few months in the middle of the financial year
He returns to India and continues on Indian payroll for the rest of the year.
US federal tax, Social Security, Medicare, and California state tax are all withheld at source on his US wages, as per standard US payroll practice He spends well over 183 days in India for the financial year
The question: How is this taxed in each country, and how do the two returns fit together?
This is a deceptively layered problem — it touches US residency rules, DTAA treaty mechanics, Indian residency and global income taxation, and the Foreign Tax Credit computation. Getting any one piece wrong either leaves money on the table or creates a compliance gap.
Step 1: Determine US Tax Residency — the Substantial Presence Test
The starting point is always the Substantial Presence Test (SPT):
Resident if (days in current year) + (1/3 × days in prior year) + (1/6 × days two years prior) ≥ 183, and at least 31 days in the current year.
For a professional on a single short US stint of a few months, the day count typically falls well short of 183, making him a Non-Resident Alien (NRA) for US tax purposes for that year — even though he was physically present and drawing a US paycheck.
Common misconception: People assume that because they were paid on a US W-2, they must be a "US taxpayer" in the full sense. NRA status changes almost everything about how that income is taxed and what can be claimed back.
Step 2: Does the DTAA "Dependent Personal Services" Exemption Apply?
Article 16(2) of the India-US DTAA offers a short-stay exemption from US tax on employment income — but it has three cumulative conditions, and the one that trips people up most often is this:
- The remuneration must be paid by, or on behalf of, an employer who is not a resident of the US.
If the assignment is run through a US entity of the employer (a common structure for global IT services companies with US subsidiaries), this condition fails — meaning the income is fully taxable in the US regardless of the short duration. Many employees assume the treaty automatically exempts short stays; it doesn't, once a US-resident entity is the paymaster.
Step 3: File the US Non-Resident Return (Form 1040-NR)
As an NRA:
- Only US-source wages are taxable (straightforward here, since the assignment income was entirely US-sourced)
- No standard deduction is available to an NRA employee under this treaty (that concession is reserved for students/apprentices under Article 21(2))
- Tax is computed at regular graduated NRA rates, not a flat rate
Because withholding is typically calculated assuming a full year of US wages, NRAs are very often over-withheld relative to actual liability — this is the single biggest reason a refund shows up
On FICA (Social Security + Medicare): This is the part that surprises people most. India has no Totalization Agreement with the US, so FICA tax applies to NRA employees exactly as it does to residents (barring F-1/J-1 exempt visa categories, which don't apply to typical H-1B/L-1 deputations). FICA withheld is not refundable through the tax return — it's a genuine, sunk cost of the assignment.
On state tax: A parallel nonresident state return (e.g., California Form 540NR) is typically also required, taxing only state-source income, often producing a partial refund of over-withheld state tax as well.
Step 4: Indian Taxation — Global Income for Residents
Back in India, with well over 182 days of physical presence, residency under Section 6(1) is settled — he's an Indian Resident. The next question is Resident and Ordinarily Resident (ROR) vs. RNOR, which depends on presence in India over the preceding several years. For someone who has spent most years on Indian payroll (barring this one short deputation), ROR status is the typical outcome.
As ROR, global income is taxable in India — meaning the US-sourced salary must be added to the Indian-payroll salary and reported in the Indian ITR, converted to INR using the prescribed exchange rate mechanism (generally the SBI TT buying rate applicable to the period of accrual).
This is the step most commonly missed. Employees often believe that because tax was already withheld in the US, that income is "done" and doesn't need to be reported in India. It does — India taxes worldwide income for residents, and non-disclosure of foreign income/assets carries serious consequences under the Black Money Act, separate from ordinary Income Tax Act penalties.
Step 5: Claim Foreign Tax Credit — But Know the Limits
Once the US-sourced income is included in the Indian return, Foreign Tax Credit (FTC) under Section 90 read with Rule 128 prevents double taxation — but with important nuances:
- FTC is available on actual final US federal and state tax liability — not the amount withheld. If withholding exceeded final liability (common, as above), only the final liability figure is creditable.
- FICA is not eligible for FTC — it isn't an "income tax" for treaty purposes.
- FTC is capped at the lower of actual foreign tax paid or Indian tax payable on that same income slice — computed proportionately against his total global income and applicable slab. If the US effective tax rate exceeds the Indian marginal rate on that income, the excess is permanently lost — it cannot be carried forward or refunded in India.
- Form 67 must be filed before the due date of the Indian return — this is a hard procedural prerequisite for claiming FTC, and the US return should ideally be finalized first, since Form 67 requires evidence of foreign tax paid.
The Bigger Picture
This single fact pattern — a short US deputation sandwiched between Indian payroll stints — routinely involves:
- A US Non-Resident federal return (Form 1040-NR)
- A US state nonresident return
- An Indian resident return reporting global income
- A Foreign Tax Credit claim with its own procedural filing (Form 67)
- Careful sequencing — the US return effectively needs to be computed before the Indian FTC claim can be finalized
Missing any single piece — misjudging DTAA Article 16(2) applicability, assuming FICA is refundable, forgetting to report US income in India, or missing the Form 67 deadline — either costs the client real money or creates compliance exposure that surfaces years later.
How We Help
Cases like this are exactly what we specialize in at India for NRI — professionals with overlapping US and India tax years, short-term deputations, and the exact sequencing of US and Indian filings needed to make sure every rupee (and dollar) of credit is claimed correctly, on time.
If you've had a US assignment this year — even a short one — and you're not sure how it interacts with your Indian tax return, talk to us before you file either return. Sequencing and documentation matter more than most people realize, and it's far easier to get right the first time than to fix later.