TN 11 (11-97)
GN 05010.165 Tax Treaty With India
The tax treaty with India was effective January 1, 1991. It exempted the Social Security benefits paid to certain beneficiaries residing in India from the nonresident alien withholding tax.
Because of the very limited applicability of the tax treaty provisions, no action was taken to identify beneficiaries who might be affected.
The Social Security benefits paid to beneficiaries who are citizens and residents of India are exempt from tax withholding to the extent that the benefits are based on Federal, State or local government employment.
Due to systems limitations, SSA cannot withhold tax at a variable rate (i.e., a tax rate based on the circumstances of an individual case). Thus, SSA is able to stop tax withholding only if the qualified beneficiary's benefit is based entirely on Federal, State or local government employment. Where SSA is unable to stop tax withholding, it advises the beneficiary of the percentage of the benefit which is tax exempt and that he/she must file with the Internal Revenue Service for a tax refund at the end of each tax year.
In computing the percent of benefits based on Federal, State or local employment, SSA rounds fractions up to the next highest percent.
1. Claims for Benefits
Secure an earnings record showing the individual yearly earnings and employers when a claim is received from a citizen and resident of India. If all of the earnings used in the computation are from employment with Federal, State or local government authorities, code the beneficiary as a resident of a tax treaty county (i.e., AWSC “2”).
If some of the earnings used in the computation are from employment with Federal, State or local authorities, compute the percentage of earnings used in the computation which are from such employment. Provide the beneficiary with a written notice showing that:
The tax treaty with India exempts that portion of his/her benefit which is based on employment by Federal, State or local authorities from Federal income tax.
SSA's records show that (amount) percent of his/her benefit is based on such employment. Advise him/her that unless SSA advises otherwise, the percentage remains the same but the actual dollar amount will change as the benefit amount changes.
NOTE: The actual dollar amount of the monthly benefit based on this employment is computed by applying the percentage to the monthly benefit amount. Generally, to avoid any confusion that the exempt amount is always this fixed dollar amount, the notice will not contain the actual dollar amount.
He/she should file with the U.S. Internal Revenue Service (IRS) at the end of each tax year for a refund of the tax withheld on that portion of his/her benefit. Information on filing with IRS can be obtained from the nearest U.S. Embassy or consulate. He/she should include a copy of SSA's notice with the tax return to establish the tax exempt percentage.
2. Post-Entitlement Actions
Assume, absent information to the contrary, that the benefits of a citizen of India who is moving to that country are not based on Federal, State or local government employment.
Undertake development as explained in GN 05010.165C.1. if a beneficiary asks whether his/her benefits are exempt from tax withholding under the tax treaty with India.
A is entitled to a monthly payment of $750.00. His benefit was computed based on earnings of $117,850; $43,600 was from employment by the New York State Government and $74,250 is from private sector employment.
The portion of his benefit which is based on State employment is computed by dividing the amount earned from State employment ($43,600) by the total amount used to compute his benefit ($117.850) The result is 0.3699 or 37 percent.
A is advised that 37 percent of his benefit is exempt from Federal income tax. He will have to file with IRS for a tax refund at the end of the tax year.
NOTE: If his benefit has been based entirely on employment with the New York State Government, he would have been given an AWSC of “2” (no withholding, resident of tax treaty country).