written by | March 9, 2022

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Table of content

What are the Benefits under DTAA for NRIs

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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FAQs

Q: How is the residential status of an individual determined?

Ans:

If a taxpayer meets one of the following two criteria, he or she is considered an Indian resident:

  • You must spend at least 182 days in India within a year.
  • You have spent 365 days or more in India in the previous four years and 60 days or more in the current financial year.

If a citizen of India leaves India for employment within a particular financial year, he will only be considered a resident of India if he stays in India for 182 days or more. These individuals are permitted to stay in India for a period that is greater than 60 days but less than 182 days. However, starting from the financial year 2020/2021, for those whose total income (other than foreign sources) exceeds 15 lakhs, the period is decreased to 120 days.

An individual who is a citizen of India and is not liable to tax in any other nation shall be assumed to be a resident of India from the financial year 2020/2021. This provision is applicable if the person’s total income (other than foreign sources) surpasses ₹ 15 lakh and they have no tax duty in other nations or territories due to their residency.

If you do not meet the requirements outlined above, you will be classified as a Non-Resident individual.

Q: What are the details to be included in a Tax Residency Certificate?

Ans:

Tax Residency Certificate contains the following information.

  • Name of the individual.
  • Status of the individual.
  • Nationality of the person.
  • Country of residence.
  • NRI’s tax Identification or the Unique ID number of the relevant country.
  • Tax residential status.
  • Validity time of the certificate.
  • Address of the applicant.

Q: What type of Incomes are charged for tax deduction in India from a non-resident individual?

Ans:

The Income chargeable to a tax deduction from a Non-Resident individual can be understood by the below table:

Nature of income

Non Resident

Income which accrues or arises in India

Taxed

Income which is deemed to accrue or arise in India

Taxed

Income which is received in India

Taxed

Income which is deemed to be received in India

Taxed

Income accruing outside India from a business controlled from India or a profession set up in India.

Not taxed

Q: What is the procedure to obtain a Tax Residency Certificate?

Ans:

An NRI can obtain a Tax Residency Certificate by contacting the proper Income Tax or Government Authorities in the nation where they reside. TRC applications can be submitted to the Income Tax Department in Form 10FA by an Indian resident. The Income Tax Department will then issue a TRC to the Indian resident in Form 10FB after verifying the provided information.

Q: Does an individual need to submit the necessary documents every year in order to avail the benefits under DTAA?

Ans:

The DTAA benefits are renewed every year. This means that NRIs will have to produce all required documents at the beginning of each financial year to continue receiving the DTAA benefits.

Q: Is the income that is exempted from tax deduction to an NRI same for all countries?

Ans:

 The income on which an NRI can claim tax exemption/credit is mentioned in the DTAA with the resident country. The provisions of DTAA differ country-wise and hence, the income that is exempted from tax deduction to an NRI isn’t the same for all countries.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.