Complete Guide for Double Tax Avoidance Agreement (DTAA) for NRIs

Every person wants to earn as much money as possible, and because of this, they always look for investment options and ideas that can grow their wealth in India as well as overseas. Also, many individuals own citizenship in a specific country but earn money in a different nation. But do you know that on investment returns and the money they generate outside their residential country, they need to pay tax? However, paying double tax on the same income in different countries is no doubt unfair for an individual. This problem is generally most faced by NRIs. Considering this, the Double Tax Avoidance Agreement (DTAA) for NRIs comes to the rescue. So, if you are an NRI facing the problem of double taxation and want to know how to avoid it, then this guide is for you. So, let's start reading.

What Is a Double Tax Avoidance Agreement (DTAA)?

Do you know India has signed the DTAA agreement with 85 countries? A Double Taxation Avoidance Agreement (DTAA) is a contract signed between India and other countries. As per this agreement, a person who is a resident of one country earning money in another country does not need to pay tax twice on the same income. For instance, if you are an NRI, generating income from the USA by working in a US company, on your earned income, you need to pay taxes in both countries. However, through the DTAA agreement, you avoid paying taxes on the same income twice; you only pay tax in one country. Further, if your income is taxable in both countries, then taxes that you paid in one country are credited to the other country as per the DTAA provisions.

Objectives of DTAA Agreement

The key objective of the DTAA agreement is to ensure that no individual on the same income pays taxes twice in two different countries. Apart from this, some of the key objectives of the DTAA agreement are as follows:

• Avoid Double Taxation: Make sure that taxpayers do not pay tax twice on the same income. It further assists in decreasing the burden of tax on international transactions.
• Promoting Investment and International Trade: The DTAA agreement, by decreasing tax burdens and providing clear tax rules, encourages economic activities across borders.
• Tax Relief: Providing tools like tax exemptions, credits, and decreased rates of tax to prevent double taxation.
• Preventing Tax Evasion: By providing the exchange of information between two countries, this agreement aims to prevent fraud and tax evasion.
• Certainty and Clarity: Provides clear guidelines on taxable income, thereby ensuring simple tax administration and reducing disputes.

An Illustration

Arjun, a resident of India, through his investment in the UK, earns Rs 2500. The income, i.e., Rs 2500, he earns is taxable in both countries, i.e., the USA and India. Let's assume that in both countries the tax rates are 30% each. This means Arjun has to pay 60% tax on his earned income, leaving him with only Rs 1000 (Rs 2500- 60%), the net income after tax deduction.

For Arjun, this dual taxation is a loss, and to avoid this issue, the Double Tax Avoidance Agreement came to the rescue. The key aim of the agreement was to boost international trade. Under the agreement provision, foreign income can be taxed once by any one country. Therefore, when a person knows that he/she pay tax only once on their global income, they are motivated to increase their earning scope and internationalize their business. Further, it helps countries attract companies and entrepreneurs to make investments. Through this, India can enjoy foreign investments, as well as other nations can also be able to enjoy investments from entrepreneurs of India. Hence, the DTAA agreement is beneficial for all the countries that signed the agreement and helps them boost their economies.

How to Determine Whether DTAA Is Applicable or Not?

The DTAA agreement is applicable when a company or an individual has to pay taxes on the same income in two different countries. Here is how one can know whether their situation for the DTAA agreement is applicable or not:

• Residency Status: According to the tax laws of the involved country, know the residency status of the individual. Based on the number of days spent in the country by an individual helps in determining his/her residential status in that country.
• Nature of Income: Identify the specific income types, such as whether it is salary, interest, or dividends, that are taxable in both countries.
• Tax Rules in Each Country: Know the tax rules and rates applicable in both countries to pay tax on the income.
• Applicable DTAA: Go through the DTAA agreement between the two nations. Each DTAA has specific rules for knowing which country has the primary right to tax on the specific income.
• Claiming Benefits: If the benefits of DTAA are available, ensure that you follow the complete procedure to claim these, such as filling out the form and submitting the required documents to the tax officials.
• Avoidance of Double Taxation: The DTAA agreement aims to prevent paying tax on the same income twice, offering tax relief through reduced tax rates, credits, and tax exemptions.

Benefits of DTAA

For both countries and taxpayers, signing a Double Tax Avoidance Agreement (DTAA) comes with lots of benefits. To provide you with an idea of this, here are a few perks of the DTAA agreement for taxpayers and the signatory countries:

• The key purpose of the DTAA agreement is to make a country an attractive destination for foreign investment and business.
• It prevents tax evasion by offering relief from paying double tax on the same income in two countries.
• The tax relief can either be provided by avoiding paying tax on the foreign earned income in the resident country or by crediting the tax amount paid in the foreign country.
• The DTAA agreement also offers concessions on tax rates.
• Lower withholding helps the taxpayers to pay less TDS on their income earned from interest, royalty, or dividends.

Documents Required for Claiming DTAA Benefits

Initially, before claiming DTAA benefits, you should check the DTAA income tax agreement between your residential country and the other foreign country where you are planning to go. Once you go through it, you need to submit several documents for tax exemption or claim a tax credit. Do you know that to claim the DTAA benefits, NRIs need to submit several documents? Want to know what they are? Here is the list of the following documents required for claiming DTAA benefits.

• Indemnity form or Self-Declaration form
• Self-attested valid visa to travel to India
• A photocopy of the PIO proof
• Self-attested photocopy of PAN card
• Tax Residency Certificate (TRC)
• Self-attested copy of passport

Apart from them, if you want to claim tax benefits under the DTAA agreement, you also need to provide the Tax Residency Certificate (TRC) for a deductor. According to Sections 90 and 90A of the IT Act, to get your TRC certificate, you need to fill out Form 10FA. Once the application and verification process is done, you will get your TRC certificate.

What Are the Different DTAA Rates for Various Countries?

Do you know that for every country, the DTAA rates are not the same? It depends on the agreement decisions of both nations. Apart from that, these agreements do not have any fixed validity period. It is applicable till any of the nations terminates the contract. Furthermore, the rules and regulations of the DTAA agreement, based on the decisions of both contracting states, are subject to change. Usually, on the earned interest, the TDS rates can vary between 10% and 15%.

However, according to Section 195 of the Income Tax Act, under the DTAA rates, dividend income is chargeable when it is paid to foreign or non-resident companies. In this circumstance, before starting the deduction, first, the relevant DTAA rates will be considered. Considering this, to attract foreign investment and provide tax relief to its residents, India has signed the DTAA contract with around 85 countries. To provide you with an idea of this, here is the list of those nations:

Application of DTAA

The DTAA agreement can be imposed either in a limited manner or comprehensively. Moving further, let's know about it.

• Limited DTAA: According to limited DTAA, there is tax relief available in specific areas such as income from air transport, income from shipping, income from gifts, inheritance, or estate.
• Comprehensive DTAA: Under this, tax benefits are available on income on capital gains, whether long-term or short-term and other sources of income.

Income Exempted Under Double Tax Avoidance Agreement (DTAA) for NRIs

Based on the DTAA provisions with respective countries, NRIs do not need to pay tax twice on the following sources of income that they earned in India:

• Salary received
• Interest received on fixed deposits in India
• Salary received for services rendered in India
• Capital gains earned during the asset transformation in India
• Interest received on an Indian savings bank account
• Income from house property situated in India

How Does the DTAA Agreement Work?

The DTAA agreement works on two basic principles. These are as follows:

• Source Rule: According to this rule, when you pay tax on the earned income in the country from where it originates, whether it is your resident country or not.
• Resident Rule: As per this rule, the income you earn will be taxed in the country where you live, no matter its origin.

India follows the residence rule. According to this, if you get any income from a foreign country, on it, you will need to pay tax in India. In case you are an NRI, the income you earn in India will be taxed in India as well as the country where you currently reside. However, instead of paying tax twice on the same income, you can claim the DTAA benefits.

What Tax Reliefs Come Under DTAA as per the Indian Tax Laws?

Under the DTAA agreement, you can categorise the tax reliefs on two bases, i.e., bilateral and unilateral tax reliefs. Moving ahead, let's know about them in detail.

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

These tax reliefs are applicable in those countries with which India has signed the DTAA agreement. At present, India has signed this agreement with 80+ countries. Under the bilateral relief, you can claim the tax benefits in two ways. These are as follows:

• Exemption Method: In this, the income you earn globally is taxed in one country, or a specific part of it is taxed in both countries, i.e., from where it originated and your resident country.
• Tax Credit Method: In the tax credit method, the income you earn is taxed in both countries. After you pay the tax on your income from where it originated, you get a tax credit on the liable tax amount in your resident country. For example, if you earned money in the USA and paid the tax there, after that, when your tax liability is calculated in India (resident country) on your total earned income, the tax amount you already paid in the USA will be deducted.

Also, the DTAA agreement overrules the Income Tax provisions. This means that you can choose any of the provisions that are more favourable to you.

Unilateral Relief Under Section 91 of the Income Tax Act, 1961

If there is no DTAA agreement signed between India and the country from which you are earning, you get unilateral tax relief. To avail of the unilateral benefits, you need to fulfil the following conditions:

• In the year you earned your income, you should be a resident Indian.
• The income you earn should be from outside India.
• It should be taxable in a foreign country, and you should pay that tax.

Under this method, you would pay the tax twice, and the Indian income tax will also be applicable. The tax deduction rate will be less than the average tax rate of India or the country from which you originated your foreign income, whichever is less. The average tax rate will be calculated by dividing the paid tax by the total earned income, multiplied by 100. If both taxes are equal, the Indian tax rate will be deducted.

How Can NRIs Claim DTAA Benefits?

To avail of the Double Tax Avoidance Agreement (DTAA) benefits, NRIs living in a DTAA country need to submit the following documents:

• Form 10F: To avail of the benefits under the DTAA agreement, NRIs need to fill out the Form 10F. It is one of the essential documents when applying for DTAA.
• Tax Residency Certificate (TRC): If you want to get tax benefits under DTAA, you need to have a Tax Residency Certificate (TRC) by your side. It is one of the mandatory documents required during the application process. To get a TRC certificate, you can apply from the government website of the country where you currently reside.
• PAN Card Number: You also need to provide your PAN card number along with the above-stated documents.

Let's understand this by using an example. For instance, B, an NRI who is a resident of country R, earns INR R from the foreign country N. Here, the tax rate of country R is 30% and the tax rate of country Y is 50%. Now, let's do the tax calculation under the DTAA agreement.

How to Apply for a DTAA Agreement?

There are three ways by which you can claim the DTAA benefits:

• Exemption: This can be claimed in only one country, either the country where you earned income or your residence country, subject to specific conditions.
• Tax Credit: You can claim credit on your paid tax in the country where you currently reside.
• Deductions: The residence country allows the taxpayers to claim a deduction on the paid tax in a foreign country on the same income.

For instance, Mr. D is a resident of India, but his income originates from the UK. Now, here is the income you earn from the UK that is taxable in both countries, India and the UK. Under the DTAA agreement, Mr. D can claim tax relief and pay the tax in only one country. Usually, the taxpayers are either granted a deduction, tax credit, or exemption in the resident country.

Services Exempted Under DTAA Agreement

The income originated from the following sources, exempt under the DTAA agreement, is as follows:

• House property situated in India
• Savings account in India
• Services provided in India
• Fixed deposits in India
• Capital gains received from assets transfer in India
• Salary received in India

Now the question is, are there any pre-conditions for claiming tax relief, or is it only provided if the DTAA benefit is not present or available, but I am opting not to use it?

Double taxation happens when you pay taxes on the same income twice in two different countries. It creates a significant tax burden on the companies and individuals that have foreign income sources, with Double Taxation Avoidance Agreements (DTAAs) with 94 countries. These agreements provide clarity to the taxpayers and allow them to claim tax relief on taxes that they paid overseas against their tax liability in India on the same income. It is mentioned in Section 90 of the Income Tax Act, certifying fair treatment for global income earners.

In case India does not sign the DTAA agreement with a specific nation or if you opt not to use the agreement, Section 91 of the Income Tax Act provides an effective solution through unilateral tax relief. Only under certain conditions can you claim this tax relief:

• Earned Income: The income should be earned in the last accounting year.
• Comparable Tax System: The tax system of the foreign country should be comparable to India. In addition to this, India has not signed the DTAA agreement with this country.
• Tax Liability: The earned income should be taxed in both countries, i.e., where it originated and where it is received.
• Tax Payment: The taxpayer needs to pay tax in the foreign country.
• Tax Relief Calculation: The unilateral tax relief amount should be less than the tax rate of India and the foreign country on the foreign income. This unilateral tax relief amount is then subtracted from the overall Indian tax liability of the taxpayer.

To claim unilateral tax relief under Section 91 or bilateral tax relief under a DTAA agreement, an NRI needs to file an Indian income tax return (ITR) and provide a tax deduction or payment certificate from the official foreign tax authority.

Final Thoughts

This was your complete guide for the Double Tax Avoidance Agreement (DTAA) for NRIs. With this agreement, not only NRIs but any individual who earns income globally can avoid paying the tax twice on the same income. However, the double taxation rule may vary depending on the country. Considering this, it is advisable to check the rules and regulations of both countries before filing the DTAA petition. Furthermore, if you need more guidance and information about the DTAA for NRIs, connect with Savetaxs. We are a team of tax experts who can help you in solving any tax-related query. Additionally, can also assist you in filing your ITR and getting DTAA benefits.

Note: This guide is for informational 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 with either a Chartered Accountant (CA) or a professional Company Secretary (CS) 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.