What is Double Taxation Avoidance Agreement (DTAA)? How NRIs Can Save on Taxes

For many Non-resident Indians (NRIs), a common concern is the possibility of being taxed twice on the same income—once in India and again in the country of residence. This is where the Double Taxation Avoidance Agreement (DTAA) becomes crucial. Let's understand how DTAA works and how NRIs can leverage it to reduce their tax burden.

What is DTAA?

The Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two or more countries to help taxpayers avoid paying tax on the same income in more than one jurisdiction.

India has signed DTAA treaties with more than 90 countries. The objective is to provide relief to NRIs by eliminating the burden of being taxed twice on the same income. These agreements clearly outline the tax treatment of various incomes.

Different Ways to Claim DTAA benefits

NRIs can avail benefits under the Double Taxation Avoidance Agreement (DTAA) through the following methods, depending on the provisions of the specific treaty between India and the country of residence:

Foreign Tax Credit (FTC):

Under this method, the country of residence allows a credit for taxes already paid in the source country, as per its domestic tax laws. This ensures that the same income is not taxed twice.

Exemption Method:

In certain cases, specific types of income may be entirely exempt from tax in one of the two countries, depending on the terms of the relevant DTAA. For example, income that is taxable only in the resident country may be exempt from tax in the source country, thereby avoiding double taxation altogether.

Reduced Rate of Tax (Concessional Tax Rate):

DTAAs often prescribe lower tax rates for certain income categories such as interest, royalties, or dividends.

Consider an NRI who is a tax resident of the UAE and earns interest income of ₹5 lakh from Indian NRO deposits:

Without DTAA: TDS is applied at 31.2% = ₹1,56,000
Under DTAA: TDS capped at 12.5% = ₹62,500

Savings due to DTAA = ₹93,500

The method to be applied depends on the specific DTAA provisions between India and the other country.

Things to Keep in Mind While Applying for DTAA benefits (Documents required)

To claim DTAA benefits in India, NRIs need to submit the following documents:

Tax Residency Certificate (TRC):

Issued by the tax authorities of the resident country. It is mandatory to submit TRC every year to avail DTAA benefit. For more details, please refer our article on “Tax Residency Certificate (TRC): Why It’s Important for NRIs” Click here.

Form 10F:

If the Tax Residency Certificate (TRC) does not include certain details such as the assessee’s status (individual, company, firm, etc.), the applicable period of residency, nationality, tax identification number, or overseas address, this information must be furnished electronically through Form 10F. TRC is required to be attached along with Form 10F.

Different Stages Involved in Claiming DTAA benefits

Residential Status:

To claim DTAA benefits in India, first determine your residential status as per the 'Residence' Article of the relevant DTAA.

Evaluate DTAA Benefits:

NRIs often earn various types of income like capital gains, rent, interest, dividend, etc. You should review the DTAA Article relevant to your income. In order to take benefit of DTAA, you firstly need to evaluate whether DTAA provisions are beneficial in your case or not. It is advisable to consult a tax expert for proper guidance on claiming DTAA benefits.

Obtain a Tax Residency Certificate (TRC):

If the DTAA provision is beneficial, proceed to apply for a TRC (as this is a time-consuming and costly process in some countries). For application of TRC, you may be required to contact your tax advisor/consultant at country of your residence.

Intimation to the Payer and Tax Department:

The Individual may intimate the payer of Income regarding availing of DTAA benefits and submit the copy of valid TRC and form 10F. This enables the payer to examine eligibility for availing DTAA benefit and accordingly, consider withholding tax as per the DTAA.

In case the payer of the income has not been intimated for deducting TDS at concessional rates or as the case may be, the NRI may still avail benefit of DTAA while filing their tax return and request a refund of excess TDS withheld by the payer, as applicable.

Conclusion

For NRIs, understanding and utilizing DTAA is a vital part of smart tax planning. It not only helps save money by avoiding double taxation but also ensures legal compliance across borders. By keeping the required documentation in place and following the correct procedures, NRIs can fully benefit from the provisions of the DTAA.

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