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What is Double Tax Avoidance Agreement (DTAA)?

Updated on: 29 Feb, 2024 02:50 PM

When it comes to money, everyone wants to earn as much as possible, right? That is why you look for different investment avenues and wealth-generation ideas both in India as well as abroad. In fact, foreign investments hold a particular attraction for most individuals. They try and invest their money in foreign countries that promise good returns. But what about the tax implications on those returns? Do you know how and where your foreign returns would be taxed?

Taxation of returns becomes a problem when two countries are involved, one where you live and the other from where you have earned the return. It gives rise to a prominent question “Which country's laws would be followed while taxing the returns?” Would you be taxed twice?

To answer these questions and to resolve the tax implications of internationally earned income, the Double Tax Avoidance Agreement was signed. Do you know what the agreement is all about? Let's explore

What is the Double Tax Avoidance Agreement?

Double Tax Avoidance Agreement (DTAA) is an agreement that has been signed between India and other countries. According to the agreement, an individual earning an income in another country while being a resident of another country does not have to pay two (double) taxes on the same income. For example, if you are an Indian resident and have an income earned in the USA because of the existence of your business in the USA, you would have to pay tax in the USA on the income generated there as well as in India where you file your tax returns. But, when the DTAA is in effect, you would have to pay taxes only in one country, not both. Alternatively, in case your income is chargeable to tax in both countries, then taxes paid in one country will be allowed as a credit in the other country as per the provisions of DTAAs.

Objectives of the Agreement

The tax rules of every country has two main components -

  1. Tax on foreign income
  2. Tax on non-residents

The Tax on foreign income arises when the resident or company of a country earns income in another country. For instance, if an Indian individual, say Mr. Abhinav or Reliance Industries limited, earns an income in USA, it is called a foreign income. Since this foreign income is a part of the individual's or company's income which resident in India, it should be taxed in India.

Tax on non-residents is incurred when a resident of another country earns an income domestically. So, in the above example, if Mr. John, who is a resident of the USA, earns some income in India, so the income earned In India would be taxed in both countries.

Example of DTAA

Abhinav, an Indian resident, earns INR 2500 through his investments in the USA. This INR 2500 would be taxed in India as foreign income and also in the USA as non-resident income. If the tax rates in India and USA are 30% each, an effective tax of 60% would be paid on the income, leaving Abhinav with only INR 1000 (INR 2500 – 60%) as the net income after taxes.

This dual taxation is a loss for the investor, and to address this issue, the Double Tax Avoidance Agreement came into the picture. The agreement was made to promote international trade. Under the provisions of the agreement, in the case of foreign income, taxation is done only once. Thus, when the individual knows that he would be taxed only once on the international income, he would be motivated to do business internationally and increase his scope of earning. This would, in turn, help countries attract investments from entrepreneurs. India can enjoy foreign investments as well as other countries can enjoy investments from Indian entrepreneurs. Thus, the agreement is mutually beneficial for all member countries in boosting their economies.

DTAA Rates

Sl No. Country TDS Rate
1 Armenia 10%
2 Australia 15%
3 Austria 10%
4 Bangladesh 10%
5 Belarus 10%
6 Belgium 15%
7 Botswana 10%
8 Brazil 15%
9 Bulgaria 15%
10 Canada 15%
11 China 15%
12 Cyprus 10%
13 Czech Republic 10%
14 Denmark 15%
15 Egypt 10%
16 Estonia 10%
17 Ethiopia 10%
18 Finland 10%
19 France 10%
20 Georgia 10%
21 Germany 10%
22 Greece As per agreement
23 Hashemite kingdom of Jordan 10%
24 Hungary 10%
25 Iceland 10%
26 Indonesia 10%
27 Ireland 10%
28 Israel 10%
29 Italy 15%
30 Japan 10%
31 Kazakhstan 10%
32 Kenya 15%
33 South Korea 15%
34 Kuwait 10%
35 Kyrgyz Republic 10%
36 Libya As per agreement
37 Lithuania 10%
38 Luxembourg 10%
39 Malaysia 10%
40 Malta 10%
41 Mauritius 7.50-10%
42 Mongolia 15%
43 Montenegro 10%
44 Morocco 10%
45 Mozambique 10%
46 Myanmar 10%
47 Namibia 10%
48 Nepal 15%
49 Netherlands 10%
50 New Zealand 10%
51 Norway 15%
52 Oman 10%
53 Philippines 15%
54 Poland 15%
55 Portuguese Republic 10%
56 Qatar 10%
57 Romania 15%
58 Russia 10%
59 Saudi Arabia 10%
60 Serbia 10%
61 Singapore 15%
62 Slovenia 10%
63 South Africa 10%
64 Spain 15%
65 Sri Lanka 10%
66 Sudan 10%
67 Sweden 10%
68 Swiss Confederation 10%
69 Syrian Arab Republic 7.50%
70 Tajikistan 10%
71 Tanzania 12.50%
72 Thailand 25%
73 Trinidad and Tobago 10%
74 Turkey 15%
75 Turkmenistan 10%
76 UAE 12.50%
77 UAR (Egypt) 10%
78 Uganda 10%
79 UK 15%
80 Ukraine 10%
81 United Mexican States 10%
82 USA 15%
83 Uzbekistan 15%
84 Vietnam 10%
85 Zambia 10%

Application of DTAA

DTAA can be applied either comprehensively or in a limited manner. Let's understand

  • Comprehensive DTAA - Under comprehensive DTAA, tax benefits are provided on income, capital gains, and all sources of income
  • Limited DTAA - Under this DTAA, tax reliefs are available in specific areas like income from shipping, income from air transport, income from estate, gift, or inheritance.

Incomes Exempted under DTAA

In the Indian context, NRIs would not have to pay double tax on the following sources of income earned in India based on the provisions of DTAA with the respective countries:

  • Salary received
  • Payment for services rendered in India
  • Interest on fixed deposits in India
  • Income from house property which is situated in India
  • Interest earned on savings bank account maintained in India
  • Capital gains earned when capital assets are transferred in India

How does the DTAA Work?

DTAA works on two principles

How does the DTAA work?

The source rule is when the income is taxed in the country of origin whether you are a resident of the country or not.

The resident rule specifies that the income would be taxed in the country where you reside, irrespective of the income's origin.

In India, the residence rule is followed. This means that your international income would be taxed in the country where you are a resident. If you are an Indian resident, your international income would be taxed in India. If, on the other hand, you are an NRI, your Indian income would be taxed in your resident country as well as in India. However, you can claim the benefit as per the provisions of the DTAA.

Tax Reliefs under DTAA as per the Indian Laws

Reliefs under DTAA can be categorized as unilateral or bilateral tax reliefs. Let's elaborate.

Bilateral Relief under Section 90 of the Income Tax Act, 1961

Bilateral relief is available in those countries with which India has entered into a DTAA treaty. Currently, India has a DTAA treaty with more than 80 countries where bilateral tax relief is available. Under bilateral tax relief, the tax benefit is granted in two ways:

  1. Exemption method - Under this method, international income is either taxed in any one country, or a specific portion of the income is taxed in both countries.
  2. Tax credit method - Under this method, income is taxed in both countries. Thereafter, you get a tax credit in your tax liability payable in your resident country for the tax already paid in the income source country. For instance, for your income earned in the USA, you paid a tax in the USA. Thereafter, when your tax liability is calculated in India on your total income, you get a deduction for the tax already paid in the USA.

The DTAA provisions would override the provisions of the Income Tax Act. It means that you can opt for the provision which is more beneficial to you.

Unilateral Relief Under Section 91 of the Income Tax Act 1961

You get unilateral tax relief if there is no DTAA treaty between India and the country in which the income originates. To avail unilateral relief, the following conditions would have to be fulfilled.

  • You should be an Indian resident in the year the income is earned
  • The income should be earned outside India
  • The income should be taxable in a foreign country, and such tax should have been paid

Under the unilateral method, the income would be doubly taxed. and a deduction from the Indian income tax would be allowed. The rate of the deduction would be lower of the average tax in India or the average tax of the source country, whichever is lower. The average tax would be the tax paid divided by the total income multiplied by 100. If, both taxes are equal, the Indian tax rate would be allowed as a deduction.

How to claim DTAA benefits?

NRI needs to submit the below documents to avail benefit of lower rate of TDS under DTAA:

  • Form 10F
  • Tax Residency Certificate (TRC) in original
  • Self Declaration from NRI
  • Self attested copy of PAN Card
  • Self attested copy of Passport and VISA/PIO Card

All the above documents are mandatory to avail benefit of reduced rate of TDS under DTAA.

Have you Been Paying Tax Twice on the Same Income? Consult a tax expert and never miss out on any potential tax deduction or exemption. Book tax Consultation Now!

Frequently Asked Questions

Q- What is article DTAA?

DTAA (Double Taxation Avoidance Agreement), as the name suggests, is a treaty signed between two or more countries to avoid double taxation on the same income. It means if a particular provision of the Income Tax Act 1961 is more beneficial to the person than DTAA, then it is up to the person to choose s from any of the two options.

Q- How many countries have DTAA with India?

India has Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries, out of which 86 are presently in force. Tax Rates and jurisdiction on specified types of income has been agreed for transactions involving persons having interest between countries with which India has a DTAA.

Q- What is double tax income?

Double taxation is a taxation principle referring to income taxes paid two times or multiple times on the same income. This situation normally occurs when income is taxed both at corporate level and personal level, or you have income sources from more than one company. Double taxation also occurs in international trade and commerce when the same income is taxed in two different countries, one being the country of residence and the other being the country in which income is earned.

Q- What is DTAA benefits?

DTAA stands for Double Taxation Avoidance Agreement. It is an agreement entered into between two countries with a common objective to avoid taxing the same income twice in both countries. India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 88 countries, out of which 86 agreements are operational as of now.

Q- What is DTAA claim?

A double Taxation Avoidance Agreement or DTAA is an agreement entered between two countries that aims to avoid taxation of the same income in both countries. For claiming the DTAA benefit in India assessee needs to present a Tax Residency Certificate. A Tax Residency Certificate can be obtained by the assessee from the government of the country in which the NRI resides.

Q- What is DTAA rate?

The rates and rules of DTAA vary from country to country depending upon the particular memorandum signed between both parties. TDS rates on interests earned for most countries are either 10% or 15%, though rates range from 7.50% to 15% in general. List of DTAA rates for particular countries has been mentioned above.

Q- From where I can check DTAA entered between India and other countries?

You can check the DTAA entered into by India with other countries from the income tax department's website by visiting the official government website for it.

Understand the DTAA agreement and know that you wouldn't have to pay double taxes on your internationally earned income. Know the provisions of DTAA and claim tax credits or deduction as the case may be. Expand your horizons beyond Indian borders and earn international income without worrying about the taxes. Your Government allows you tax reliefs, and you can count on these reliefs to save your hard-earned income from being taxed twice.

Tax Help
CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.