For NRIs, the risk of being taxed twice on the same income source is real. However, this risk is mitigated by the network of tax treaties, also known as the Double Taxation Avoidance Agreement, that India has signed with 90+ countries.
The key function of DTAA is to avoid double taxation, help NRIs claim foreign tax credits, and reduce withholding tax rates. Now, the benefits of DTAA aren't automatic; you have to claim them by getting the documentation right and within the appropriate time frame.
This is where many NRIs end up making DTAA claim mistakes. These mistakes are primarily due to a lack of awareness of the compels tax rules, incorrect residency status, and failure to file the appropriate forms to claim DTAA on time.
In this blog, we will discuss common DTAA claim mistakes NRIs make and how to avoid them.
Key Takeaways
- DTAA helps reduce tax withholding on cross-border transactions.
- The benefits to DTAA can be claimed via two methods: the Exemption Method and the Tax Credit Method.
- Missing DTAA filing deadlines leads to higher taxation.
- DTAA claim mistakes can be avoided by maintaining detailed documentation, timely submission, accurate reporting, and, lastly, understanding the residency rules.
Most Common DTAA Claim Mistakes NRIs Make
Making DTAA mistakes is not only because NRIs fail to understand the tax laws. It also happens because the entire DTAA claiming process is riddled with loopholes. And to identify these loopholes, you have to be quite mindful, which is why NRIs often seek help from NRI taxation experts with their DTAA process.
And these DTAA mistakes end up costing NRIs, on average, between 15,000 and a lakh of excess tax payments annually.
But not anymore, we will tell you the top seven mistakes that NRIs often end up making, so you don't land in the same place.
Mistake 1: Not Having A Valid Tax Residency Certificate (TRC)
The problem is that if NRIs fail to submit Form 10F and the Tax Residency Certificate (TRC) within the applicable time frame, they lose DTAA benefits and ultimately face higher tax rates in India.
For example, Mr Jayesh, an NRI living in Canada, earned Rs 2 lakh in interest from the Indian fixed deposit. Without TRC, he was liable to pay 30% of the tax, which is Rs 60,000. If he had provided the TRC under the India-Canada DTAA Tax Treaty, he would have been obligated to pay only 15% of the tax, i.e., Rs 30,000.
Hence, ensure you obtain the tax residency certificate, which proves your country of residence for tax purposes and allows you to leverage the benefits of a DTAA.
Get this certificate, as the process takes time, and please ensure to submit it before filing your ITR.
Mistake 2: Using Either an Outdated Or Incorrect Form For DTAA Relief
Filing Form 10F is a pretty simple process, but many NRIs still make errors when filing it, leading to rejection of DTAA benefits.
The standard errors here include:
- Filing Form 67 instead of Form 10F to claim the benefits of DTAA in India. Form 67 is for residents of India to claim foreign tax credit.
- Using the old ITR-1 for NRI when ITR-2 is needed.
- Not submitting forms electronically, instead doing it manually.
Example: Mr Seema, an NRI living in the United States, ends up filing Form 67, meant for Indian residents, instead of Form 10F, which is required to claim DTAA benefits.
Now that her DTAA claim has been rejected, she has to pay taxes twice on the same income source.
To avoid this mistake, please be very mindful when filing your forms, as a single mistake can cost you thousands in extra taxes.
If in doubt, seek professional help, as NRI taxation experts will handle the entire documentation for you.
Mistake 3: Claiming DTAA On Tax-Exempted Or Non-Taxable Income
The problem here is that NRIs, at times, file claims for DTAA benefits on income that is already exempt under Indian tax law.
DTAA benefits are meant only for that income source that is taxable for NRIs in both Indian and the NRI's country of residence. Claiming benefits on non-taxable income leads to unnecessary delays, claim rejections, and even scrutiny by the tax department.
Examples for incorrect claims:
- Seeking DTAA benefits on the bonds that are already taxed in India.
- Applying for DTAA benefits for NRE FD interest, which is not taxable for NRIs in India, and so on.
Henceforth, NRIs must apply DTAA only when the income is actually taxable in India and also abroad, thereby ensuring the general savings from the avoidance of double taxation.
Mistake 4: Filing Form 10F With Inaccurate Information
Filing Form 10F with inaccurate or missing information is like opening the door to penalties, income tax notices, and the possibility of a double taxation avoidance agreement.
Inaccurate filing of the form leads to
- Disallowance of DTAA benefits: the primary Form 10F is being filed by NRIs claiming benefits under the DTAA tax treaty. Now, if the form lacks or contains incorrect information, the Indian tax authorities may deny the claim for benefits. The leads in paying high tax liability.
- High TDS deduction: Inaccurate filing also results in higher tax deductions at source.
- Penalties: Inaccurate filing might result in treating you as an "assessee in default" and subjecting you to higher penalties under various Income Tax Act sections.
To avoid this:
- Accuracy: Double-check all the information you have entered before hitting the submit button.
- Professional Advice: If in doubt, it's best to seek professional advice when filling out the forms, as there may be specific fields that leave you scratching your head. So it's better to be proactive.
- Data Consistency: Please be consistent with the date you enter in the form. Meaning that the details you are entering must match exactly to your TRC or to what is on the e-filing portal.
Mistake 5: Ignoring DTAA Timelines, TDS Deadlines, and Refiling Limits
The problem here is that NRIs are unsure of the deadlines and often miss them. Now, missing deadlines means you pay higher taxes.
Timeline Mistakes NRIs Often End Up Making
- Getting the Tax Residency Certificate after the financial year ends. Please ensure submit your TRC application well before the financial year-end, as the TRC process takes time.
- Submit your TRC and Form 10F to your respective bank before they even pay you the interest. Note that your TRC and your Form 10F need to be submitted well before your ITR filing due date.
- Not informing the bank or the financial institution about the DTAA statutes before the interest payment.
Mistake 6: Selecting the Wrong ITR Form For NRI Income Sources:
This is one of the most common DTAA claim mistakes NRIs make: choosing the wrong ITR form. As an NRI, it is essential to know and select the appropriate ITR form based on your income sources and your residential status.
Correct ITR Forms For NRIs
- ITR-2: For reporting foreign income, capital gains, and multiple sources.
- ITR-3: For business income.
As an NRI, you must never use ITR-1 as it is only for residents.
Mistake 7: Not Maintaining the Right Documentation
As an NRI managing cross-border finances and taxation, if you don't keep meticulous records of the documents, you are going to make a lot of procedural errors.
Maintaining details and properly documenting is important for NRIs during the tax filing process. Every document, whether your income records, expenses, investments, or other financial transactions, is important.
Here's a tip: Keep digital copies of your TRC, foreign tax payment proof, bank statements, and other related documents in your cloud storage. This ensures your documents are exactly where you are.
Potential DTAA Limitations For NRI
- TRC's Long Process: This is one of the most common DTAA limitations NRIs face when claiming DTAA benefits. It is essential to obtain a Tax Residency Certificate (TRC) on time, as many foreign authorities take weeks or even months to issue it.
- DTAA Variation: NRIs must know that the terms and conditions of DTAA vary from country to country. This means that the tax rate, eligibility to claim benefits, and tax exemptions differ depending on your country of residence. This variation often leads to confusion about the treaty rules.
- Documentation Delays: Due to bureaucratic inefficiencies and geographic distances, NRIs sometimes face delays in obtaining documentation. Hence, it is advisable to file every form well in advance.
DTAA Claim Mistakes? Not Anymore
As NRI investments in India increase, so does this cross-border taxation. Hence, the DTAA remains the most crucial tool in financial planning for NRIs. To get the most out of the treaty, you need to understand its terms and concepts, get your documents in order, and just be mindful. With all this, you can save a big chunk in taxes as an NRI.
However, it is always advisable for NRIs to consult an NRI taxation professional who is familiar with both Indian and the foreign country's tax laws.
One such expert who can help you with an appropriate DTAA strategy is Savetaxs. We have been assisting NRIs from 90+ countries with their tax filings under their DTAA.
Our experts bring in more than 30 years of experience to the table hence, you can rest assured that your taxes are in the right hands.
Connect with Savetaxs as we serve our clients 24/7 across all time zones.
Note: This guide is for information purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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