If you are a nonresident alien, the United States taxes you on far less than it taxes a resident, but the rules split your US income into two buckets: FDAP and ECI. FDAP is passive US-source income such as dividends and rent; ECI is income connected with a US trade or business, including US wages. The buckets are taxed differently, withheld differently and reported differently. This guide is for Indian and Canadian investors, visitors, and absentee owners of US property who need to understand which bucket their income falls in and how to claim treaty relief.
What are FDAP and ECI income?
FDAP covers US-source interest (other than portfolio interest), dividends, rents, premiums, annuities, royalties, salaries and similar income, plus 85% of US Social Security benefits paid to a nonresident. It is taxed on the gross amount, with no deductions, at 30% unless a treaty lowers the rate. The payer, called the withholding agent, normally withholds and reports it to you on Form 1042-S.
ECI is income from a US trade or business. If you perform personal services in the United States you are usually treated as engaged in a US trade or business, so US wages, consulting fees earned while you work here and US business profits are ECI. ECI is taxed on net income after allowable deductions at graduated rates, and you file Form 1040-NR.
Gains on US real property interests are treated as ECI, and you can elect to treat rental income as ECI. Trading stocks through a US broker for your own account is not by itself a US trade or business.
Which US income is exempt from the 30% tax?
- Bank deposit interest: interest on deposits with banks, credit unions and similar institutions is excluded when not connected with a US business.
- Portfolio interest: interest on certain registered obligations issued after July 18, 1984 is excluded; contingent interest is not.
- Capital gains: capital gains from US sources are exempt if you were present in the United States fewer than 183 days in the year and the gains are not ECI. At 183 days or more, net gain is taxed at 30% or the treaty rate.
- Some mutual fund dividends: interest-related dividends and certain short-term capital gain dividends from a regulated investment company, with the 183-day caveat.
- Dividends from a foreign corporation that are treated as US-source under the dividend sourcing rules.
Treaty rates for India and Canada
IRS Table 1 (Rev. May 2023) lists these rates for common FDAP. Check the current table and the treaty text before relying on them.
| Income | India | Canada |
|---|---|---|
| Interest (non-exempt) | 15% | 0% on non-contingent interest |
| Dividends | 25% for individuals, including mutual fund dividends; 15% only to a company owning 10% or more of the voting stock | 15% general; 5% to a company owning 10% or more |
| Pensions and annuities | 0% (not lump sums) | 15% on periodic payments (not lump sums) |
| US Social Security | 30% | 0% |
| Royalties | 15% for most types | Rates vary by type; see Table 1 |
A Canadian resident's US employment income of no more than $10,000 for the year is exempt under the treaty, and an Indian resident's US wages are exempt if present 183 days or less, paid by a non-US employer and not borne by a US permanent establishment, according to Publication 901.
How to claim treaty rates and file, step by step
- Confirm you are a nonresident using the residency tests. A resident gives the payer Form W-9 and is taxed on worldwide income.
- Provide Form W-8BEN to each payer (brokerage, bank, property manager). Claim your country of residence and the treaty article. To claim most treaty benefits you must give a US taxpayer ID (SSN or ITIN) or the tax identifier issued by your home country; see our SSN and ITIN guide.
- Use Form W-8ECI instead if the income is effectively connected, and Form 8233 for treaty-exempt personal services.
- Keep each Form 1042-S you receive. It shows income, rate and tax withheld.
- File Form 1040-NR when required: if you were engaged in a US trade or business, or if tax was not fully satisfied by withholding. Report ECI on the main form and FDAP on Schedule NEC.
- Claim a refund of over-withheld tax by filing Form 1040-NR and attaching the 1042-S.
- Plan the sale of US real estate. The buyer must generally withhold 15% of the amount realized (10% if the buyer uses it as a residence and the price is $1 million or less) and pay it to the IRS within 20 days with Form 8288. A withholding certificate can reduce or eliminate it.
Documents you need
- Passport, visa and day-count records for each year
- Form W-8BEN or W-8ECI copies and the SSN, ITIN or home-country taxpayer ID
- Forms 1042-S, 1099 and brokerage year-end statements
- Lease, expense receipts and depreciation schedule for US rental property
- Closing statement and Form 8288-A for a US property sale
Deadlines and penalties
Form 1040-NR for 2025 was due April 15, 2026 if you had wages subject to withholding and June 15, 2026 otherwise (extendable by Form 4868 to October 15 or December 15, 2026). To claim deductions or credits, a nonresident must file within 16 months of the due date. If you think you may have no ECI, a protective Form 1040-NR can preserve deductions. Failure-to-file and failure-to-pay penalties and the $50 missing-ID penalty are explained in our first-year return guide.
Country and Illinois notes
A nonresident who earns Illinois-source income, such as rent from a Naperville condo or wages for work done in Illinois, generally files an Illinois return and must attach a copy of the federal Form 1040-NR. See our Illinois income tax guide. Your Indian CA or Canadian CPA reports the same income at home and claims treaty credit for US tax. US estate tax can reach US real estate and stock held by non-US persons; see Canadian-owned US real estate and US-India estate planning.
Worked examples
Meenal, Pune, owns a Naperville condo. Rent is $24,000 for the year. If the manager withholds 30% of gross rent, $7,200 is withheld. With the ECI election, she deducts interest, property tax, repairs, management fees, insurance and depreciation totaling $21,420, leaving $2,580 net. Tax on that small amount at graduated rates is a few hundred dollars, so she files Form 1040-NR and claims the balance of the $7,200 back. Her Illinois return follows.
Priya, Mississauga, holds US stock. She earns $300 of dividends and sells shares for a gain while visiting 40 days. With a Form W-8BEN on file, the broker withholds 15% on dividends ($45) instead of 30% ($90), and the gain is exempt because she was in the United States fewer than 183 days.
Mistakes to avoid
- Letting a W-8BEN expire, which can double withholding.
- Assuming treaty rates apply automatically without Form W-8BEN.
- Treating US consulting income earned during a visit as FDAP instead of ECI.
- Selling US property without planning for the 15% withholding.
- Skipping the 1040-NR when over-withholding makes a refund available.
How we can help
Our firm, based in the Aurora and Fox Valley area, helps nonresident owners of US securities and property with Form W-8BEN reviews, 1040-NR returns, rental elections and refund claims, and coordinates with your Canadian CPA or Indian CA. We do not prepare Canadian or Indian returns. See our real estate investor tax and cross-border tax services.
Frequently asked questions
Do I pay US tax on interest from a US bank account?
Not if you are a nonresident and the interest is not connected with a US business. Bank deposit interest is excluded, but banks may still report it.
How long is a Form W-8BEN valid?
Generally until the last day of the third calendar year after the year you sign it, unless your circumstances change.
Must I file Form 1040-NR if tax was withheld?
Not always. If you have no ECI and the full tax was withheld at source, you may not need to file, unless you want a refund.
What changes if I become a US resident?
You switch to Form W-9, and your worldwide income becomes taxable. See our first-year return guide.
Official sources
- IRS: Publication 519, U.S. Tax Guide for Aliens (2025)
- IRS: Tax treaty table 1, rates on income other than personal services (Rev. May 2023)
- IRS: Instructions for Form W-8BEN
- IRS: Instructions for Form 1040-NR (2025)
This page summarizes public guidance in plain language. If anything here differs from the official source, the official source controls.
General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.