Expat US Citizen living in India and receiving pension with respect to government services

[samartur]

My wife (Expat US citizen and now resident of India) draws government pension from the City and County of San Francisco. Article 19 - 2(a) and 2(b) of US - India tax treaty says her pension should be taxable ONLY by US. Is this Article excluded from the Saving clause? Haven't found a definitive answer to this question yet. From what I read, Saving clause in the treaty can completely negate the Articles listed in the treaty (unless it is specifically excluded, such as Article 20 on Social Security). 

[pk]

@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

[samartur]

Thank you for your response. It so happens we have already filed the Indian tax return for AY 2025 - 2026. We have paid tax on her government pension from US in both US and India, as it is normally handled on other investment income in US. I accidentally discovered this Article 19 - 2(a) and 2(b) and its implication on government pension very recently and asked our CA in India to examine it for a possible refund from Indian tax department before Dec 31st, 2025. Our CA in India is yet to come back to us on this.

[pk]

@samartur , while your CA tries  to get a positive response from Indian IT, it is a reasonable possibility that India would argue that article 19 does not apply here . The treaty is between  US federal  taxing authority and Indian taxing authority.  Thus  the State of CA and its govt. instrumentalities are NOT a cognizant party for p[urposes of article 19 of the tax treaty.   Therefore I would suggest that you be ready to file an amended US federal return claiming "foreign tax credit" under the  "avoidance of double taxation" article.

Also I want to make sure that  you recognized this CA state pension as a 1099-R  ( pension ) and not  "other investment income" mentioned in your reply.

Is there more I can do for you ?

Namaste ji

pk

[samartur]

The Article 19 - 2(a) and 2(b) clearly states that the pensions are created by the CONTRACTING STATE or a POLITICAL SUBDIVISION or a LOCAL AUTHORITY thereof. This means the public pension can come from any of the government sources viz., federal, state and local.  My wife's pension happens to come from a local government.

[samartur]

This year's Indian tax has treated my wife's 1099 -R pension income similar to a 1099 - INT or 1099 - DIV. This is what I meant when I said it was like an investment income earlier. 

[samartur]

By the way, we are still at the stage of convincing our CA here that a case can be made on the pension issue based on Article 19 or US - India tax treaty. He is taking time to digest it all. This years tax filing was done in the month of Sept 18th (India had extended the tax deadline this year from traditional July 31st to Sept 18th). I discovered this public pension DTAA possibility the day we filed the returns (regrettably, it should have come from him). That is why an amendment claiming a refund is all we can do right now.

[samartur]

On the question of if "Saving Class" could circumvent the Article 19 content :

Article 1 (general scope), paragraph 4(b) seems to hint that it may not have the reach to alter it. Please let me know if my understanding is correct.

[pk]

@samartur , Namaste ji.

The point I was trying to make is that  for US purposes, the  " saving clause" ( i.e. ignoring the articles of the tax treaty in favor of existing/in-force US tax laws) and/or asserting the  tax treaty article 19  both achieve the same thing for the US -- tax the pension as US sourced income.  The TE from the US side also suggests the same interpretation.   The issue here is  whether India interprets the  article 19  to include  US State and local pension as "public sourced" , considering that US States in general are not party to a tax agreement  and do not recognize the treaties between US-Fed and a foreign country.  Thus US states do not provide Foreign Tax Credit ( except for states like MI and NY that have individual  tax agreements with Canada).

I do not have access to India's version of Technical explanation nor any case law in Indian courts.  Therefore , my concern and suggestion to be prepared  for amending the US return under double taxation clause.

I hope this has clarified the situation.

Namaste ji

pk

[samartur]

Thanks again for your very helpful response. Yes, we are not sure how Indian Tax system will respond to Article 19. Interestingly, our CA here proposed for the first time in all the past five years the US - India DTAA to claim tax exclusion of social security from Indian taxation using Article 20 (2) for AY 2025 - 2026. In the earlier years we had not claimed the DTAA tax relief from India on social security income. It is another challenge now how to recover the excess tax paid on social security in the years past from Indian tax system. 

[pk]

@samartur , Namaste ji.  You are up early ---  about 7 am your time.

I was going to ask you about Social Security -- because  almost all  treaties, the distributing country ONLY retains the right to tax  SSA benefits.  I recognize that  SSA probably only applies to you since most of Calif  govt  employees do not participate in SSA contribution   ( they use CalPers ). 

You only option here is to get credit from India. However I don't know how many years back you can go.  US will  collect for as many years as it can get ( at least six ) but refund is limited to three years.

Is there anything more I can do for you ?

May I suggest ( since this now is getting more specific to your case only ) that you use  PM  ( the contents  are not visible to general user , just NO PII -- Personally Identifiable Information ) hereafter.  That way you can freely discuss.  I am in California -- PDT.

[samartur]

On the DTAA relief for public pension, I was motivated also from an article in The Economic Times where a case is made for an Indian expat living in US getting public pension from India (reverse of my wife's case). Here is the link -

https://economictimes.indiatimes.com/nri/nri-tax/us-residents-with-indian-pension-to-file-india-tax-...

[samartur]

Both are getting Social security benefits. Hers started in 2023 and mine a few years earlier. Over taxing of SS to India (now we know India cannot tax on SS) is primarily from my benefits (three years earlier to 2022). Her public pension is from SFERS, a retirement system for the employees of City and County of San Francisco. 

[samartur]

Will use the PM from now on.

[pk]

@samartur  Namaste ji

I wish more of the Indians whom are tax residents  of USA, put their questions here in the community.  While we are all volunteers, have no financial or other interest in Intuit / TurboTax etc.,  most of us are  ex-tax professionals or extremely familiar with TurboTax.  One does not have to be a user of TurboTax to put questions on this board.  If one of us do not know the answer to your question, we will indeed reach out to another and/or   research the subject.  We are here to help others.

Namaste ji

pk