@samartur , Namaste ji
Article 19 you referred to uses "SHALL be ...ONLY.." with respect to whom can tax this income. This is the general principle in OECD model, the US model treaty . Most US-Other country treaty follows this. I quote below the ref'd treaty and the TE on that.
Article 19:
(a) Any pension paid by, or out of funds created by, a Contracting State or a political
subdivision or a local authority thereof to an individual in respect of services rendered to that
state or subdivision or authority shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the
individual is a resident of, and a national of, that State.
Article 19 TE
Paragraph 2 deals with the taxation of a pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority. Subparagraph (a) provides that such a pension shall be taxable only in that State. Subparagraph (b) provides an exception under which such a pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and military employees of a government of either Contracting State are intended to be covered under paragraph 2. Social security and similar benefits paid by a Contracting.
The issue here you are facing is not that US expects to tax this income/pension where the distributor is a US govt. functionality with funds from public sector, but whether India will observe this condition. You are correct in that "saving clause " can be applied by either / both country in specific cases but in general I would counter absent an overwhelming need neither party is likely to ignore the treaty i.e. assert the "saving clause". Therefore my position is you file as per the treaty i.e. for your Indian ITR you show the income and assert treaty condition per "US-India Tax Treaty Article 19 para 2, 3" and thereby exclude the income from India taxation. While I have not seen an India ITR form in some time but my assumption is there is also a "perjury jurat" and thus you just show all your world income.
Does this answer your query ? Is there more I can do for you ? You can post here or for privacy reasons you can PM me ( just NO PII -- Personally Identifiable Information)
Namaste ji
pk
