How NRI Can Claim Benefits under DTA Agreement?

Who is NRI?

As per section 6(1) of income tax act 1961, an individual is said to be resident in India in any previous year, if he

  • is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
  • having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

Simply, we can say that if an individual resides in India in any previous year for 182 days or more than that OR if he resides in India for 365 days or more than that in 4 years preceding to previous year and 60 or more days in previous year , he is called as RESIDENT of India. If he is not fulfilling any of the above condition then he is called Non- Resident of India (NRI).

What is Double Taxation?

Double taxation means same income is taxed twice i.e. a person has to pay double tax. The people who migrate to other countries to earn money or whatever the reason is have to pay taxes in their country of residence as per prevalent taxes laws of the country. However it is very likely that these people have certain investment in their home country, India, they are liable to pay taxes on gains on such investments. This is acceptable to all concerned. Now the problem occurs when people are told as per the globally accepted norms, if a person is resident of one country but has a source of income in another country, this is situation where the income is taxed in both countries.

What is DTAA?

DTAA means Double Taxation Avoidance Agreement. A DTAA, referred to as a Tax Treaty, is a bilateral economic agreement between two countries that aims to avoid or eliminate double taxation of the same income in two countries. DTAA is signed by India with many countries. DTAA does not mean that the NRI’s can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries. DTAA does allow an NRI to cut down to their tax implications on the income earned in India. The provisions of the DTAA override the general provisions of taxing statute of a particular country. According to Section 90(2) of the income tax act, an NRI holds the power to choose whether to be governed by the income tax or the DTAA, whichever is more beneficial. 

How NRI’s can claim benefits under DTAA?

India has comprehensive DTAA with 84 countries.

The benefits of DTAA are:

  1. Lower Withholding Taxes (TDS)
  2. Complete Exemption of Income tax Taxes
  3. Underlying Tax Credits
  4. Tax Sparing Credits

NRI can avail benefits under DTAA by timely submission of documents listed below to the deductor:

  1. Tax Residency Certificate (TRC)
  2. Self-attested copy of PAN card
  3. Self-declaration cum indemnity format
  4. Self- attested copy of Passport and Visa
  5. Copy of PIO Proof (applicable if the passport has been renewed during the FY)

Details to be included in TRC:

  1. Name of the assessee
  2. Status (individual, company etc) of the assessee
  3. Nationality (in case of individual)
  4. Country or specified territory of incorporation or registration (in case of others)
  5. Assessee’s tax identification number
  6. Residential status for the purpose of tax
  7. Period for which the certificate is applicable
  8. Address of the applicant for the period for which the certificate is applicable

The certificate containing this details should be duly verified by the government of the country.

DTAA Rates

DTAA signed by India with different countries fix a rate at which TDS has to be deducted on income paid to resident of that country. It means that when NRI earn income in India TDS applicable would be according to rate of DTAA.

DTAA signed by India with some countries are:

Country DTAA TDS Rates
USA 15%
Thailand 25%
United Kingdom 15%
Canada 15%
Australia 15%
Germany 10%
South Africa 10%
Russia 10%
UAE 12.5%

Incomes covered by DTAA

  1. Services provided in India
  2. Salary provided in India
  3. House property located in India
  4. Capital gain on transfer of asset in India
  5. Fixed Deposit in India
  6. Saving bank account in India

If these income are taxable in NRI’s country of residence as well, they can avoid paying tax in India.

Various Methods of Availing

  1. Exemption Method: Resident country will exempt income earned in a foreign country. In this method income is taxed in only one of the two country.
  2. Deduction Method: Tax paid in one country is deducted from the Global income and remaining income is taxed.
  3. Tax credit Method: It grants credits of the tax paid in other country.

Example illustrating all methods

Let the tax payable in source country is 20% and in resident country is 30% and income from source country is Rs.30,000 and income from resident country is Rs.20,000.

  1. Exemption method: Tax paid in source country is Rs. 6,000 (30000 X 20%) and tax paid in resident country is Rs. 6,000 (20000 X 30%)
  2. Deduction Method: Total income is Rs 50,000. Tax paid in source country is Rs.6,000 (30000 X 20%) then total income in resident country is Rs 44,000. Tax paid in resident country Rs.13,200 (44000 X 30%). Total tax paid Rs. 19,200.
  3. Tax credit Method: Tax paid in source country Rs 6,000 and tax payable in resident country on total income is Rs 15,000 less tax credit on tax paid in source country Rs 6,000, tax paid in resident country Rs 9000. Total tax paid Rs 15,000.

Points to be remembered

  1. The documents listed above must be furnished on annual basis for claiming DTAA tax benefits each year
  2. If the TRC is not submitted within timelines required by the deductor, the deductor will deduct tax on NRO deposits at the presently applicable rate of 30.9%.

About the Author

arpit goyalArpit Goyal is pursuing CA and & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.

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