Here is how NRIs Can Utilize DTAA to their Advantage

Are you a Non-Resident Indian (NRI) who earns income in India, then you should know about the Double Tax Avoidance Agreement (DTAA) to avoid paying double taxes on the same income. Let’s say if you are a resident of the UK having rental income in India, in such instance your rental income is taxable in both countries i.e., in India as it is the source country. Being a resident of the UK, your rental income is also taxable in the UK. Most countries levy income tax on the domestic and foreign income of their residents and the domestic income of their non-residents. Due to this the NRIs generally end up paying dual taxes in both the source country and resident country. In order to overcome this issue Double Tax Avoidance Agreement (DTAA) was introduced.

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What is DTAA?

DTAA is a double tax treaty between two or more countries to avoid levying taxes twice on the same income. India has Double Taxation Avoidance Agreement (DTAA) with 88 countries, but presently 85 have been in force.

Refer to the income tax website attached to know more about the DTAA agreements between India and other countries.  

How NRI is benefited from DTAA? 

There are 2 ways through which NRIs can get relief from double taxation;

Tax Credit Method: Tax credit can be claimed only in the country of residence. For example, Mr. Ram who is an Indian resident earns income from a US-based firm for rendering consultancy services. In this case, the source country is the US and the resident country is India. While computing the tax liability on this Income Mr. Ram can avail tax credit for the tax that he has paid in the US to the extent of tax payable on this foreign income in India.

Tax Exemption Method: Tax exemption can be claimed in any one of the 2 countries. For example, the dividend income is generally taxed in the source country. If an Indian resident earns dividend income from an Indian company, then it is taxed in India. If he earns the dividend income from a foreign company, then the dividend income is taxed in the foreign country and he can avail the tax exemption in India.  

Also Read: NRI Taxation – How is the Income taxed?

Income types under DTAA:

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax twice on the following income earned:

  • Salary Income earned in India

If an NRI receives salary income from India or if he earns income by rendering services in India then he is liable to pay taxes in India (Source Country).

  • Interest Income on NRO Accounts in India:

Most of the NRIs open NRO accounts to carry out their Indian transactions in rupees. The interest earned on the NRO account is taxable in the hands of the account holder and 30% TDS will be deducted from such interest income in India.

  • Capital Gains from the transfer of assets in India;

Capital gain arising from the sale of capital assets in India is liable to tax in India. This includes Movable capital assets like Shares, bonds, etc, and Immovable capital assets like house etc… In case an NRI sells his house property in India then the buyer has to deduct TDS at 20%.

  • Maturity Proceeds from Insurance policies;

If the NRI has invested in ULIPs / Endowment / Money back policy then the insurance company deducts TDS on the maturity proceeds. In order to claim the TDS the NRI should report such income to the tax department through ITR filing.

  • Dividend income from Investments:

If an NRI earns dividend income from Equity shares or Equity mutual funds then 20% TDS is applicable in the case of Individual NRI’s.

If income from these sources is taxable in the NRI’s country of residence, he can avoid paying taxes on it in India by availing the benefits of DTAA.

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How NRI can avail of the DTAA Benefits?       

  • Understand the DTAA agreement between the source country and country of residence.
  • Apply any one of the two methods ie., the Tax Credit Method or Tax Exemption Method to avoid double taxation.
  • The  taxpayer must submit the below documents and any other required information as prescribed in the DTAA to the payer of the income;
  1. Tax Residency Certificate (TRC) obtained from the Government of the home country to determine the NRI residential status. Mandatory details to be mentioned in the TRC are:
  • Name of the assessee
  • Status (individual, company, firm, etc.) of the assessee
  • Nationality of the assessee
  • Assessee’s tax identification number
  • Period for which the residential status as mentioned in TRC is applicable
  • Address of the applicant (outside India) for the period for which TRC is applicable

A TRC containing the above details should be duly verified by the Government of the Country or the Specified Territory of which the NRI claims to be a resident for tax purposes. A TRC is typically valid for one financial year and no other document in lieu of TRC is considered for availing DTAA benefits. Therefore, it is mandatory to submit TRC every year in order to avail DTAA benefit to avoid any hassles.

  1. It is important to note that, if any, of the details mentioned above in point no. 1 to 6 is not available in the TRC, the NRI has to additionally provide Form 10F (as provided in the Act) to the payer of income along with the TRC.Form 10F to be filled with required information such as the applicant’s nationality, tax identification number, address, and period of stay. After verifying the accuracy of the information, the person needs to sign at the end to make the form valid.
  2. Self-attested copy of Passport and Visa
  3. Indemnity-cum-declaration (in case of Banks)
  4. OCI card (if applicable)
  5. Self-attested copy of PAN Card (if available)

NRI cannot avoid tax completely through DTAA, he can just avoid paying double taxes in both countries. DTAA reduces the tax burden and encourages the NRI to explore global investment opportunities and on the other hand, it will also reduce the instances of tax evasion.

Disclaimer:

This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.

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Also Read: A Complete Guide for NRI Mutual Funds Investment in India

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