A non-residential individual’s (NRIs) income is subject to the risk of double taxation. Double taxation in this context refers to the same income getting taxed twice in the hands of the same individual. The tax levied by the country in which money is earned (commonly known as "source country" attracts double taxation on the same income, and if the person who earned the income is a resident of another country, the tax is collected by the home country (often known as "residence country" as well.
To put it in simple words, it is an income getting taxed twice because the individual is a resident of one country and derives income from another country. To mitigate this issue, The Double Taxation Avoidance Agreement (DTAA) was introduced.
Did you Know?
If a non-resident individual of India who is in the countries that didn’t enter a DTAA agreement wants to claim the benefits of the double taxation avoidance agreement, then they need to get a tax residence certificate (TRC) from the government of the country in which they reside.
What is DTAA?
The Double Taxation Avoidance Agreement is a bilateral agreement that the Central Government may sign with the Government of a Foreign Country or specified territory outside India. This agreement is signed to relieve NRIs of the burden of paying numerous taxes. NRIs will not be exempted from taxation under the DTAA, but they will be relieved of the burden of paying multiple taxes in both countries.
Also read: All About Special Allowance - its Taxation & Calculation in India
Benefits under DTAA for NRIs
Relief from dual taxation
Relief from double taxation is offered to an individual by exempting income generated in a foreign country from taxation in the resident country or by providing credit for taxes paid abroad.
Lucrative Investments
The agreement is signed to make a country more appealing as a favourable destination and to allow NRIs to invest freely and reap the benefits.
Decreased Burden for taxpayers
NRI taxpayers will benefit largely from lower tax rates, since they can pay less TDS on their income earned in India.
DTAA prevents Tax Evasion
DTAA allows information of a taxpayer to be shared between two countries. Because of this, the risk of tax evasion by an individual is easily mitigated. There is also extended cooperation for the recovery of taxes if an individual is found evading taxes.
Also read: Presumptive Taxation for Business and Profession
What are the DTAA Rates?
All the countries who entered a DTAA with India will have different DTAA rates and rules. This particular component (DTAA rate) is normally determined by the bilateral agreement entered between the countries. The government has signed Double taxation avoidance agreement with more than 80 countries globally. Few countries along with their DTAA Rates are listed below.
|
Country |
DTAA Rates |
|
Russia |
10% |
|
Kenya |
10% |
|
Qatar |
10% |
|
Oman |
10% |
|
Thailand |
25% |
|
Sri Lanka |
10% |
|
New Zealand |
10% |
|
Singapore |
15% |
|
Malaysia |
10% |
|
UAE |
12.50% |
|
Canada |
15% |
|
Australia |
15% |
|
Germany |
10% |
|
South Africa |
10% |
|
United States of America |
15% |
|
United Kingdom |
15% |
How to take advantage of DTAA as an NRI?
There are two methods in which NRIs can take advantage of double taxation relief:
- Tax Credit Method: The Tax Credit Method is a widely used method for obtaining an advantage under DTAA. Income is taxable in both the countries and the resident country allows the NRI to obtain a tax credit of tax paid in the source country in which the income is earned. For Example, India has a DTAA with the UK. Mrs. Y (an Indian resident) was paid by a UK Firm for a job in the United Kingdom. In this situation, the source nation is the United Kingdom and the resident country is India. So, when Mrs. Y's tax liability is calculated, the tax paid in the United Kingdom will be recognized as a tax credit against her overall tax liability, but only up to the amount of tax payable on such foreign income at the Income-tax rate prevalent in India.
- Tax Exemption Method: Under the tax exemption method, income is taxed in one country and exempted in another country. For Example: Suppose an agreement for source rule applies to a specific country. The income from dividends shall be taxed where the income is derived. So, if a citizen of such a country earns a dividend in India, the income will be taxed solely in India. Also. If a resident earns such income in another country, the income will be taxed solely in that country and will not be taxed in India.
Types of Income under DTAA where NRI gets tax exemption
On the incomes stated below, the DTAA can help you avoid paying double taxes if income from such sources is taxable in your home/ resident country :
- Salary Income earned in India
- Savings Bank Accounts in India
- Fixed Deposits in India
- Services provided in India
- Capital Gains from transfer of assets in India
Also read: GST Input Tax Credit on Supply of Goods or Services
How to avail the DTAA Benefits as an NRI?
- Study the tax rates and rules that differ from one nation to another as per the DTAA agreement signed between them.
- Apply any of the two methods namely Tax Credit Method or Tax Exemption Method to avoid double taxation. It is important to note that the tax credit is available in the nation of residency, whereas the exemption is available in either of the two countries.
- To take advantage of the DTAA's benefits, the taxpayer must submit necessary documents and required information as prescribed in the DTAA.
General documents and information to be submitted under DTAA :
- Tax Residency Certificate (TRC): The Tax Residency Certificate aids in determining your residency status. As a result, it is issued by the country in which you live. It can only be provided to countries with which India has a DTAA agreement.
- Form 10F: This form is used for filling 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.
- PAN of the individual.
Conclusion
As we have mentioned earlier, there would be no double tax deduction on earned income due to the relief provided by the Double Tax Avoidance Agreement ( DTAA). This agreement between countries also encourages bilateral and multilateral investments, mutual cooperation, and thus, improves relationship and investor confidence.
Actually, DTAA does not mean that an NRI can escape paying taxes in both countries, but it does mean that they can avoid paying double tax. The DTAA allows an NRI to reduce their tax liability on income made in India. It is a great initiative by the government for boosting the morale of residents of India who have settled abroad and are likely to be benefitted the most from this agreement.
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