For Non-Resident Indians (NRIs) working abroad, the Double Taxation Avoidance Agreement (DTAA) prevents them from being taxed on the same income in both their country of residence and India. The main purpose of DTAA is to eliminate the issue of double taxation, ensuring taxpayers pay taxes only once on the same income. India has 85 active DTAA agreements, which aim to promote economic trade and investment between countries.
What is DTAA?
DTAA refers to a tax treaty between two or more countries that helps prevent the same income from being taxed twice. When a person resides in one country and earns income in another, they may be taxed by both countries. DTAA ensures that income is taxed only once, either in the country of residence or the country where the income is earned. For example, Mr. Arjun, an Indian living in the UK, earns income from investments in India. DTAA ensures that he will not be taxed in both countries on the same income.
Types of DTAA
Relief from double taxation can be offered in two ways:
- Bilateral Treaties:
DTAA agreements between two countries can provide relief through: - Exemption Method: Income is taxed in only one country, offering exemption from tax in the other country.
- Tax Credit Method: Income is taxed in both countries, but relief is given in the form of a credit for taxes already paid in the other country.
- Unilateral Relief:
If no mutual agreement exists between two countries, the home country may provide relief unilaterally.
Nature of DTAA
- Comprehensive DTAA: Covers a wide range of income types, including wealth tax, gift tax, and others.
- Limited DTAA: Restricts coverage to specific types of income.
Benefits of DTAA
DTAA makes a country more attractive for investment by offering tax relief on foreign income. The advantages include:
- Prevention of Double Taxation: Exemption or tax credits help reduce the burden of being taxed twice.
- Tax Rate Reductions: DTAA provisions may lead to lower tax rates on foreign income.
- Lower Withholding Tax: DTAA may result in lower withholding tax rates on interest, royalty, or dividend income.
How DTAA Works
DTAA can be implemented in two ways:
- Exemption: Income is taxed only in one country.
- Tax Credit: Taxes are paid in both countries, but relief is granted by allowing tax credits for taxes already paid.
For example, if Mr. Arjun’s income from investments in India is taxable in both the UK and India, the DTAA agreement might allow India to exempt this income, meaning Mr. Arjun will only pay taxes in India. If both countries tax his income, Mr. Arjun will receive a tax credit for the taxes paid in the UK when filing taxes in India.
How Can NRIs Claim DTAA Benefits?
To claim benefits under DTAA, NRIs need to submit the following documents:
- Tax Residency Certificate (TRC): This document, issued by the tax authority in the country of residence, is required to claim DTAA benefits.
- Form 10F: This form must be submitted to support the claim for benefits under DTAA.
- PAN (Permanent Account Number): NRIs must submit their PAN number to avail of tax benefits.
These documents must be submitted annually by the due dates.
How to Apply for DTAA Benefits?
The process for applying for DTAA benefits involves the following steps:
- Determine Tax Applicability: Ensure the issue is covered by the DTAA.
- Check Relevant Tax Provisions: Verify that the treaty applies to the specific tax in question, typically listed under Article 2 of the agreement.
- Ensure the Treaty Is Active: Confirm that the DTAA is in force during the relevant tax period.
Calculating Double Taxation Relief
When an NRI claims relief under DTAA, the following steps are used to calculate the relief:
- Calculate global income (total income from India and abroad).
- Compute tax on global income using applicable tax rates.
- Determine the average tax rate by dividing total tax by global income.
- Multiply foreign income by the average tax rate to calculate the tax credit.
- Compare the tax credit with the tax paid in the foreign country. The relief is the lower of these two amounts.
If there is no DTAA agreement, relief can be claimed under section 91 of the Indian Income Tax Act.
List of Countries with DTAA with India
India has signed DTAA agreements with many countries. Below is a list of some of the countries with which India has DTAA agreements:
|
Country |
DTAA TDS Rate |
|
United States of America |
15% |
|
United Kingdom |
15% |
|
Canada |
15% |
|
Australia |
15% |
|
Germany |
10% |
|
South Africa |
10% |
|
New Zealand |
10% |
|
Singapore |
15% |
|
Mauritius |
7.5% to 10% |
|
Malaysia |
10% |
|
UAE |
12.5% |
|
Qatar |
10% |
|
Oman |
10% |
|
Thailand |
25% |
|
Sri Lanka |
10% |
|
Russia |
10% |
|
Kenya |
10% |
Conclusion
The Double Taxation Avoidance Agreement is an essential mechanism for NRIs to avoid the financial burden of paying taxes on the same income in multiple countries. By ensuring that income is only taxed once, DTAA promotes international trade and investment. NRIs can easily claim the benefits of DTAA by submitting the necessary documents and following the proper application procedure.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.