Do I need to pay taxes in India on US social security benefits?

I am a US citizen and have stayed there for more than 25 years. I have now retired and returned to India in May 2024. I will start receiving social security benefits from the next calendar year. Do I need to 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 taxable in India. Additionally, as a US citizen, the US will also tax your worldwide income. To prevent double taxation, India and the US have entered into a Double Tax Avoidance Agreement (DTAA). 

Also Read: Why are health plans sold by Paytm and PhonePe cheaper?

However, the US reserves the right to tax its citizens under the ‘savings clause’ of India-US DTAA. Savings clause enables the US to tax its citizens on their worldwide income by hypothesizing that the DTAA has not come into effect altogether. Despite this, there are certain exceptions to the savings clause such as for taxation of social security benefits.

The taxability of social security benefits is governed by paragraph 2 of Article 20 of the India-USA DTAA, which provides for the taxation of social security benefits only in the country that pays such benefits to the individual. 

Also Read: Intestate succession: Oral will not legally binding in India

According to this paragraph, the US social security benefits paid either to an Indian resident or a US citizen are taxable only in the US. Here, ‘residence’ means residence as defined under Article 4 of India-USA DTAA. 

Due to the savings clause, you become a dual tax resident, that is, tax resident of both India as well as the US. By applying the tie-breaker test, I assume that tie will break in favour of India and that you would qualify as an Indian resident. 

Thus, on both counts—being an Indian resident as well as being a US Citizen, as per paragraph 2 of Article 20—only the US can tax your social security benefits. This income will not be taxable in India.

Also Read: Key financial considerations for aspiring full-time content creators

Even though your social security benefits are not liable to tax in India, it is advisable to report this income in your Indian income tax return as exempt income to ensure due compliance.

Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta & Co.