Benefits of DTAA for the NRIs

Overview

DTAA is Double Tax Avoidance Agreement. DTAA is an agreement between two countries to avoid double taxation. It is globally known as a tax treaty. The term DTAA is a popular term known to most of the NRI’s. Most of the NRI have dual income which they earn in a foreign country as well as in India. In such cases, it is possible that income earned in one country would attract tax in another country also. This is called double taxation. E.g If you are moving abroad by keeping your income source in India such as fixed deposit, saving bank account etc. Taxes are applicable to these sources in India as well as the country of your residence. This is called double taxation. To avoid double taxation and to make the country attractive destination a concept of double tax avoidance agreement is developed.

Understanding DTAA

DTAA does not eliminate the amount of tax payable as a whole. It enables NRI to reduce the tax burden which means that the NRIs can avoid paying higher taxes in both countries and cut down on their tax implications on the income earned in India. In simple terms whenever NRIs earn an income in India, instead of normal TDS, tax rate decided under tax treaty DTAA is applicable. DTAA does allow an NRI to reduce the instances of tax evasion too. India has established DDTA with 80 foreign countries across the world.

Types of DTAA

DTAA can be of two types.

1. Comprehensive.
2. Limited

Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.

Limited DTAAs are those which are limited to certain types of incomes only, e.g. DTAA between India and Pakistan is limited to shipping and aircraft profits only.

DTAA Rates

The DTAA is aplied by India with different countries by fixing a specific rate at which TDS has to be deducted on income paid to residents of that country. This means that the TDS applicable would be according to the rates set in the Double Tax Avoidance Agreement with that country when NRIs earn an income in India.

You can find the rates on clicking on the link below:

https://www.incometaxindia.gov.in/Documents/tax-rates-as-per-income-tax-act-and-tax-treaties.htm

Income types under DTAA

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

• Services provided in India
• Salary received in India
• House property located in India
• Capital gains on transfer of assets in India
• Fixed deposits in India
• Savings bank account in India

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

Ways to avoid Double Taxation

Double taxation can be avoided in two ways. One, the resident country exempts income earned in the foreign country. Or, it grants credits for the tax paid in the other country. The rules vary from treaty to treaty. For example, the tax treaty with Mauritius has zero tax for capital gains on equities, but that with the US taxes capital gains

How To Apply For It

To avail of the benefits of DTAA, the first step is to determine the country of residence. As mentioned earlier, the rules vary from treaty to treaty. The first step is to check the DTAA between the countries in question.

If a person has to claim tax exemption or tax credit on the basis of tax paid in a non-resident country, he/she will have to furnish the relevant documents to the tax authorities. These include tax residency certificate (TRC), self-attested copy of PAN card, self-declaration-cum-indemnity form, selfattested copy of passport and visa, and copy of proof that the taxpayer is a person of Indian origin in case the passport has been renewed during the financial year.

The TRC has to be submitted to the deductor (in most cases it is a bank). TRC is issued by the tax/government authorities in the country of one’s residence to get the TRC. In better words, In order to avail he DTTA benefits, NRIs need to apply for TRC from tax authorities. Once it is done, they can submit a self-declaration form along with copies of PAN, TRC, passport and visa to the tax authorities.