Double Taxation Avoidance Agreement - How NRIs Claim Benefits Under DTAA

What is Double Taxation Avoidance Agreement (DTAA)?

Double taxation Avoidance Agreement, or DTAA in income tax, is an agreement signed between two countries to ensure that the taxpayers do not have to pay tax twice. This provision helps taxpayers accumulate income savings by paying the tax in only one country It is also crucial in making the country an attractive destination for businesses. DTAA agreement also helps reduce the possibility of tax evasion by providing relief from double taxation. 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.

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How to determine if DTAA is applicable?

DTAA (Double Taxation Avoidance Agreement) applies when an individual or a company is liable to pay taxes in two countries on the same income. Here’s how you can determine if DTAA is applicable:

1. Residency Status: Determine the residency status of the taxpayer as per the tax laws of each country involved. Most DTAA agreements define residency based on the number of days spent or other criteria.
2. Nature of Income: Identify the specific type of income (e.g., salary, dividends, interest) that is subject to taxation in both countries.
3. Taxation Rules in Each Country: Understand the tax rules and rates applicable in both countries to the income in question.
4. Applicable DTAA: Consult the Double Taxation Avoidance Agreement between the two countries. Each DTAA specifies rules for determining which country has the primary right to tax specific types of income.
5. Claiming Benefits: If DTAA benefits are available, ensure that proper procedures are followed to claim these benefits, such as submitting the necessary documents or forms to the tax authorities.
6. Avoidance of Double Taxation: DTAA aims to prevent the same income from being taxed twice, providing relief through exemptions, credits, or reduced rates of tax.

If in doubt, seek advice from a tax expert to determine the applicability of DTAA and ensure compliance. Connect Here.

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What are the Benefits of DTAA in Income Tax?

For NRIs, the Double Taxation Avoidance Agreement (DTAA) can offer substantial tax relief. Here are the key ways NRIs can benefit under DTAA:

Exemption of Certain Income in India

Under DTAA, income earned by an NRI in their country of residence may be exempt from tax in India, depending on the specific agreement. Common types of income that are typically exempt include:

• Salary Income: If an NRI earns a salary in a foreign country, that income may be exempt from Indian tax under the DTAA.
• Interest Income: Interest earned on deposits held abroad (e.g., NRE account interest) may qualify for exemption.
• Dividend Income: Certain dividends may be exempt from Indian tax under the DTAA.
• Pension Income: Pension earned abroad may also be exempt, depending on the DTAA provisions.

Tax Credit for Taxes Paid Abroad

If an NRI has paid taxes in their country of residence, they can often claim a tax credit in India. This reduces their Indian tax liability by the amount already paid abroad. Here’s how it works:

• Taxes paid in a foreign country can be claimed as a credit under the DTAA.
• The credit is applicable for income that is taxable in both countries but cannot exceed the Indian tax liability on the same income.

Example:

If an NRI pays ₹50,000 in taxes abroad on a specific income and the Indian tax on that income is ₹60,000, they can claim a credit of ₹50,000 and only pay the remaining ₹10,000 in India.

Reduced Tax Rates on Specific Income

DTAA agreements often provide lower tax rates for certain types of income. Examples include:

• Royalty Income: Typically taxed at a reduced rate (e.g., 10%) under DTAA.
• Interest Income: Interest from loans or bonds may be taxed at a lower rate in India if a DTAA exists.
• Dividend Income: Many DTAAs offer reduced tax rates (e.g., 10% or 15%) compared to India’s domestic rates.

Example:

Under the India-US DTAA, interest on loans is taxed at 15% in India, compared to the standard rate of 30%.

By leveraging these provisions, NRIs can significantly reduce their tax burden and avoid double taxation on their income.

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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 the 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 other countries can enjoy investments from Indian entrepreneurs. Thus, the agreement is mutually beneficial for all member countries in boosting their economies.

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Rates of DTAA in Income Tax

The rates at which tax is deducted under DTAA depend on the individual agreement between the countries and vary for different countries. For example, the TDS rate in the agreement between India and Singapore might be different from the TDS rate in the agreement between India and Dubai. Generally, the rates range from 10% to 15 %.

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Double Taxation Avoidance Agreement (DTAA) Country List

Below is the list of the nations that India has a DTAA agreement with (withholding rates)-

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What are the Basic Principles of DTAA?

Given below are the principles on which the DTAA works -

• If the DTAA does not address any dispute, but the Income Tax Act contains specific provisions, the provisions of the IT law should be considered.
• If the treaty has certain provisions, but the Income tax law does not contain information on the same, refer to the treaty.
• If both the treaty and the IT law contain provisions, whatever is more beneficial for the taxpayer is considered.
• If the DTAA has certain provisions, but the Income Tax law contradicts them, the treaty will supersede the IT law.

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What are the Documents Required for Claiming DTAA Benefits?

NRIs can claim the benefits of DTAA by submitting the below-mentioned documents -

• Self-Declaration form or Indemnity form
• Self-attested copy of PAN card
• Self-attested Visa
• Self-attested Xerox copy of Passport
• Tax residency certificate (TRC)
• A copy of PIO proof

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How can NRIs Claim the Benefit of DTAA?

Non-resident Indians living in a DTAA country can avail of the DTAA tax benefits by submitting the following documents -

• Tax residency certificate (TRC) - TRC is a mandatory document if you want to avail of tax benefits under DTAA. You can get a TRC by approaching the government authorities of the residence country.
• Form 10F - Form 10F is another essential document to be filed by NRIs to avail of benefits under DTAA.
• PAN Number - You are also required to submit your PAN number in addition to the above-mentioned documents.

It is essential to understand what DTAA means and read the terms between the concerned countries to find the TDS rate. To know more about DTAA, connect with our experts.

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How can one Apply for Double Taxation Avoidance Agreement?

There are a total of 3 ways in which you can claim DTAA benefits -

• Exemption - Exemption from tax can be claimed in any one country, i.e., residence or source country, subject to certain conditions.
• Tax Credit - A credit of the tax paid is claimed in the country where the taxpayer resides.
• Deduction - The country of residence allows the tax paid in a foreign country as a deduction.

For example, Mr.A is an Indian resident having income arising in the U.S. Now, the income arising in a foreign land is taxable both in the origin country and the resident country. Under DTAA, the taxpayer, i.e., Mr.A, can get relief from paying taxes in any one country. Generally, the taxpayer is either granted an exemption, deduction, or tax credit in the resident country.

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What Services are Exempted Under DTAA?

The income earned from the following sources do not attract tax under DTAA -

• Services provided in India
• House property present in India
• Salary received in India
• Capital gains on transfer of assets in India
• Fixed deposits in India
• Savings bank account in India

If you find yourself in a scenario where you are unable to reap the benefits of DTAA, Tax2Win’s team of expert eCAs can assist you with your income tax filing so that you may maximize your returns and keep your worries related to taxation aside. Get in touch with our experts, today!

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