Non-Resident Indians (NRIs) often face the challenge of being taxed in both their country of residence and India on the same income. This can lead to double taxation, which can significantly reduce their overall income. However, India has signed Double Taxation Avoidance Agreements (DTAA) with several countries to prevent this situation. DTAA provides relief to NRIs by either exempting certain incomes from tax in one country or allowing them to claim a tax credit for taxes paid in the other country.
In this blog, we will explain how NRIs can claim benefits under DTAA, the process involved, and the key provisions of these agreements.
What is DTAA?
DTAA is an agreement between two countries to avoid taxing the same income twice. The primary aim of these agreements is to provide relief to taxpayers who might be subject to taxes in both countries. Under a DTAA, taxpayers may be able to claim relief in the form of:
Exemption Method: One country may exempt certain income from taxation, even if the taxpayer is subject to tax in the other country.
Tax Credit Method: The taxpayer is allowed to claim a credit for the taxes paid in the other country, which can be used to reduce their tax liability in the home country.
India has DTAA agreements with over 85 countries, including the United States, the United Kingdom, Canada, Australia, and many other nations.
How NRIs Can Benefit from DTAA
For NRIs, the DTAA can provide significant tax relief. Here are the common ways NRIs can claim benefits under DTAA:
1. Exemption of Certain Income in India
Under DTAA, income earned by an NRI in their country of residence may be exempt from tax in India, depending on the provisions of the specific agreement. Common types of income that are typically exempt under DTAA include:
Income from Salary: If an NRI is working in a foreign country and receives salary income there, the income may be exempt from tax in India if it is covered under the DTAA.
Interest Income: Interest income earned on deposits held abroad (e.g., NRE account interest) may be exempt under the DTAA.
Dividend Income: Certain dividend incomes may be exempt from Indian tax under the DTAA.
Pension: Pension income earned abroad may also qualify for exemptions depending on the specific DTAA provisions.
2. Tax Credit for Taxes Paid in the Foreign Country
If an NRI has paid tax in the foreign country where they are residing, they can often claim a tax credit in India. This reduces their Indian tax liability by the amount of tax already paid abroad. Here's how it works:
If you are paying tax on income in your country of residence, you can claim a foreign tax credit under the DTAA.
The credit is usually available for taxes paid on income that is also taxable in India. However, it cannot exceed the tax payable on the same income in India.
For example:
If an NRI pays ₹50,000 in taxes in the foreign country on a certain income and the Indian tax on the same income is ₹60,000, the NRI can claim a tax credit of ₹50,000 and only need to pay the remaining ₹10,000 in India.
3. Reduced Tax Rates on Specific Income
DTAA agreements often provide reduced tax rates for certain types of income. For example:
Royalty Income: Typically taxed at a reduced rate (e.g., 10%) under DTAA.
Interest Income: Interest from certain sources, like loans or bonds, may be taxed at a lower rate in India if a DTAA exists with the other country.
Dividend Income: Many DTAA agreements offer lower tax rates on dividend income (e.g., 10% or 15%) compared to the higher domestic rates.
For instance, under the India-US DTAA, interest on loans is taxed at a reduced rate of 15% (compared to the standard rate of 30% in India).
Steps for NRIs to Claim DTAA Benefits
To claim the benefits of DTAA, NRIs must follow these steps:
Step 1: Determine the Type of Income
The first step is to determine which types of income are eligible for relief under the DTAA. Common eligible incomes include salary, business income, capital gains, interest, and royalties.
Step 2: Check the Specific DTAA Provisions
Since India has signed DTAA with multiple countries, the provisions may vary. NRIs should check the specific DTAA between India and the country of residence to understand which income is exempt or eligible for a tax credit and the tax rates that apply. This can be done by reviewing the DTAA document or consulting a tax professional.
Step 3: File Income Tax Returns in India
To claim the DTAA benefits, NRIs must file their Income Tax Return (ITR) in India. In the ITR, they need to:
Disclose the foreign income and the tax paid in the foreign country.
Claim the tax credit for foreign taxes paid, if applicable.
Attach Form 67 (a mandatory form for claiming tax relief under the DTAA) while filing the return.
Step 4: Submit Supporting Documents
NRIs must also submit supporting documents, such as:
Tax paid certificates from the foreign country (like the Tax Residency Certificate or TRC).
Proof of income earned and taxes paid in the foreign country.
Details of income and tax credit claimed.
Key Considerations for NRIs
Tax Residency Certificate (TRC): Most DTAA agreements require NRIs to provide a Tax Residency Certificate (TRC) from their country of residence. This certificate confirms that the individual is a resident of the foreign country for tax purposes.
Tax Deducted at Source (TDS): In India, taxes on certain income types like dividends and interest are deducted at source. NRIs can claim credit for this TDS while filing their return, especially if they are also paying tax on the same income in their country of residence.
Double Taxation Relief (DTR): The DTAA prevents the same income from being taxed twice. However, if there is no DTAA agreement with a particular country, the taxpayer may have to seek relief under the provisions of Indian tax laws and the foreign tax laws.
Example: Claiming Benefits Under DTAA
Suppose an NRI living in the United States has earned a salary in the US and interest income from an NRO account in India.
Salary Income: The NRI is paying taxes on salary income in the US. According to the India-US DTAA, salary income earned in the US is taxable in the US and exempt in India. Hence, the NRI will not be taxed on this income in India.
Interest Income: The interest earned on NRO deposits in India is taxable in India. The NRI can claim tax credit for the taxes paid on this income in India while filing their return in the US.
Conclusion
The Double Taxation Avoidance Agreement (DTAA) is a powerful tool for NRIs to avoid paying tax twice on the same income. By claiming the appropriate exemptions, tax credits, and reduced tax rates under the DTAA, NRIs can significantly reduce their tax burden and optimize their global income tax liability.
Always consult a tax expert or financial advisor to understand the specific provisions of the DTAA between India and your country of residence and ensure that you maximize the benefits available under these agreements. Proper documentation and adherence to tax filing procedures are essential to ensure that you receive the full benefits of the DTAA.
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