DTAA Explained: How NRIs Can Claim Tax Benefits & Avoid Double Taxation

Residential Status of an Individual

An individual’s residential status is determined mostly by the number of days spent in India during the relevant year as well as the previous 10 years. In general, there are three types of people: residents, non-residents, and residents who are not typically residents (RNOR). The scope of taxable income in India varies depending on residency.

For example, for an NRI doing business outside of India (even if he only qualifies as RNOR for a certain year), his income from that foreign firm may be liable to taxes in India if he operates it from India during his stay here.

---

Benefits Available under DTAAs

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 the 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.

---

DTAA Rates

The DTAA specifies the rate at which tax must be deducted from income received by citizens of that country. This implies that if an NRI earns revenue in India, the TDS will be calculated using the rates specified in the DTAA with that nation. There are different rates in different countries; in general, it ranges between 7.50% to 15%.

---

Income Types under DTAA

NRIs don't have to pay taxes twice on:

• Salary received in India
• House property in India
• Capital Gains in India
• Fixed deposits in banks in India
• Savings banks 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!

---