What the NIIT is, and why it hits your Indian income
The Net Investment Income Tax, under Section 1411 of the US Internal Revenue Code, is an extra 3.8% on net investment income, things like interest, dividends, rent and capital gains, once your modified adjusted gross income crosses 200,000 dollars for a single filer, 250,000 for a married couple filing jointly, or 125,000 if married filing separately. These thresholds are fixed in the law and have not been raised since 2013, so more people cross them each year.
It applies to US citizens and resident aliens on their worldwide investment income, which is exactly your position as a US person with Indian assets. Your Indian interest, rent and capital gains all count as net investment income, so they feed the 3.8% just as US income would.
Why your foreign tax credit does not touch it
The foreign tax credit you claim on Form 1116 offsets US income tax. The NIIT is not income tax, it sits in a different part of the Code, and the Treasury regulation says plainly that credits allowed against income tax, including the foreign tax credit, cannot be set against the NIIT.
The result is a guaranteed slice of double tax. Your regular US tax on an Indian gain may be wiped out by the credit for the Indian tax you paid, but the 3.8% NIIT on that same gain stands on its own, with the Indian tax giving no relief against it. On a large Indian capital gain, that is 3.8% you pay to the US that you cannot recover anywhere.
The treaty cases, and why India cannot rely on them
Two US Court of Federal Claims decisions, Christensen and Bruyea, allowed a taxpayer to credit foreign tax against the NIIT, one under the France treaty and one under the Canada treaty, using specific wording in those treaties. They are genuinely helpful for those two countries, but two cautions matter for you. Both are under appeal, argued together in early 2026 with no decision yet, so even for France and Canada the position is not settled. And both turned on treaty language the US-India treaty does not share. The India treaty's relief article uses the ordinary credit method, subject to US law limits, which is the very limit that keeps the NIIT out of reach. So an India-corridor reader should plan on the NIIT applying, and treat the litigation as something to watch, not to rely on.
A worked example
Neha, a US citizen in New Jersey, sells Indian shares and books a gain that, with her salary, puts her income well over the 250,000 dollar joint threshold. She pays Indian tax on the gain, and on her US return the foreign tax credit offsets almost all of her regular US tax on it.
But the 3.8% NIIT on the gain is separate. The credit does not reach it, so she pays that 3.8% to the US on top of the Indian tax, with nothing to set against it. Knowing this in advance, she can plan the timing of the sale and her income so the NIIT bites on as little as possible.