IRS Allows Late US-India Treaty Foreign Tax Credit Elections

Key Takeaways

• US taxpayers selling shares in Indian companies for a gain could be subject to double taxation under sourcing rules
• The US-India Tax Treaty contains a provision that permits treating the gain as foreign-sourced gain, but an election must be made under IRC Sec. 865(h) to be valid
• Two recent IRS Private Letter Rulings allowed taxpayers to make late IRC Sec. 865(h) elections and file amended returns
• Taxpayers who missed the election may wish to request a PLR allowing a late election

US taxpayers selling shares in Indian companies for a gain are often concerned about the possibility of double taxation. Under US sourcing rules, this gain can be characterized as US-sourced and therefore not eligible for the foreign tax credit, potentially making these taxpayers subject to both Indian and US tax. 

What Is the US-India Tax Treaty’s Approach to Double Taxation on Stock Gains?

The US -India Tax Treaty has a provision that permits the gain to be treated as foreign-sourced. To some extent, the US tax rules facilitate this treatment, but only if an election is filed with the original tax return of the US taxpayer under IRS Sec. 865(h). This election is made at the partner level.

Why Has the Treaty’s Sourcing Rule Created Uncertainty?

In addition to the election requirement, there are some technical aspects of the treaty sourcing rule that have created uncertainty, as they might be interpreted to prevent the more preferential treatment.  While there are arguments in support of treating the gain as foreign-sourced, there has not been clear guidance by the IRS.

What Did the 2026 IRS Private Letter Rulings Decide?

In March of 2026, the IRS issued two private letter rulings (PLRs), PLR 202613004 and PLR 20261104. These PLRs allowed the taxpayers to make a late election under IRC Sec. 865(h) and file amended returns. The issuance of these letter rulings, although not binding on other taxpayers, appears to evidence a favorable attitude by the IRS acknowledging the resourcing provision of the treaty to avoid double taxation.

What Should Taxpayers Do Now?

In light of this taxpayer-favorable development, taxpayers who did not file the election with their original return should consider requesting a similar private letter ruling. A ruling in their favor would permit them to file the election with an amended return and claim foreign tax credits that would otherwise be lost. Care should be taken to ensure the statute of limitations does not expire.

In addition, taxpayers who currently have the opportunity to make the election with their original return may choose to do so. Taxpayers should consult with their tax advisors to also consider the various levels of authority that govern disclosure on their return.

The taxpayers that will be impacted by this development include, but are not limited to, partners in partnerships, whether individuals or corporations. In the context of fund of funds, there will need to be a look-through to the ultimate taxable partners, individuals, and companies that directly own stock in Indian companies.

Contact us below if you have questions about how this could impact you.