Being a resident of one country while having ties with your homeland means having to embrace the changes that come with it. This is especially true when you have financial interests in both the countries as a Non-Resident Indian (NRI). This is why India has signed Double Taxation Avoidance Agreement (DTAA) with over 90 countries. With the DTAA agreement in effect, you can avoid paying taxes twice (in your resident country and homeland) on the same income. Learn how this agreement works and how you can make the most of it to save on taxes.
What is a Double Taxation Avoidance Agreement (DTAA)?
Double Taxation Avoidance Agreement or DTAA is a treaty signed between two countries to help residents residing in the other country with double taxation. Without DTAA, taxation can become complicated for Non-Resident Indians due to separate taxation laws in both the countries.
With DTAA in place, taxation is simplified. It avoids the duplication where you end up paying taxes for the same income in two countries.
DTAA is not to be confused as a solution to avoid taxes. It simply prevents you from paying taxes twice. The agreement outlines the country holding taxation rights for specific categories of income. Generally, the country where your income originates attains taxation rights alongside the country where you are a resident.
Let’s say you are an NRI residing in the US, where you earn your salary. But you also have investments in India that yield you interest income. Without DTAA, this income may get taxed in India as well as the US. Such a repetition is avoided with the US-India DTAA. You only pay tax in India for the interest income or claim a credit or reduced tax rate. The exact way the DTAA is applicable will depend on the DTAA treaty.
Understanding how DTAA works
DTAA applies to various categories of income like salary, business profits, interest income, royalties, capital gains, etc. You can get these types of incomes taxed fairly through DTAA in the following ways:
- Tax credit
You pay tax in the country where the income is earned (the source country) and then claim that amount as a credit in your country of residence.
- Tax exemption
In some cases, income is taxed only in one country, and you are exempt in the other. For example: If you are an NRI working in the UK, the salary you earn there is taxed only in the UK and not again in India, even though you are an Indian citizen.
- Reduced tax rate
DTAA agreements also include a reduced rate of tax for certain incomes. This is applicable for treaties signed with specific countries as DTAA is modifiable and negotiable based on the interests of co-signing countries.
For example, your interest on loans is taxed at 15% if you reside in the US as an NRI. The India-US DTAA reduces the tax rate from the standard rate of 30%.
How to claim the tax benefits of DTAA
You can follow these steps to claim DTAA benefits and save on taxes as an NRI:
- Check whether DTAA is applicable between your resident country and India.
- Verify your residency status under the DTAA agreement. It is crucial to claim benefits.
- Consider the list of incomes covered under India and your resident country’s DTAA treaty.
- Stay prepared with the following documents:
- Tax Residency Certificate (TRC): You will get this document from the tax authority in the country you reside. With TRC, you can claim your residency with essential details, such as your address and tax information. TRC proves your residency for one financial year. This means, you must apply for a TRC annually.
- Form 10F: This serves as a DTAA application form. With this document, you provide all the details not covered in the TRC. You can electronically file Form 10F on the Indian Income Tax portal. The form remains valid for one financial year.
- Valid Identity Proof: You will need your PAN Card to verify your identity while claiming for DTAA benefits.
- A No Permanent Establishment Declaration: This document is a self-certification by the NRI to declare that they are entitled to DTAA benefits.
Note:You might have to go through additional or slightly different steps. This depends on the method of DTAA application. So, it is good to research based on your specific situation and avoid any confusion.
Conclusion
DTAA comes as a blessing for NRIs to simplify the taxation process for foreign and Indian income. Now that you understand how DTAA can help you, you are more than ready to file taxes efficiently. Be sure to check up on any updates in the tax rules in India and your resident country to avoid hiccups. With DTAA, you can carry out your tax obligations in the right way and save big.
