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How NRIs can Claim Tax Benefits under DTAA?

Last Update Date : August 13, 2018

DTAA is an abbreviation of the popular term Double Tax Avoidance Agreement. This is very crucial for NRIs because it’s obvious for many NRIs to earn in foreign land and also churn income from homeland. In this case, chances are higher that their income earned in one country would attract tax liability in other country, India as well as the country of which they are resident. It means they may have to pay double tax on the same income. However, NRIs can avoid paying double taxes by claiming benefits under DTAA.

tax benefits of DTAA

Double Tax Avoidance Agreement (DTAA) is universally known as a tax treaty. DTAA is an agreement entered in between two countries in order to prevent double taxation of same income. It does not eliminate the amount of taxes payable in its entirety. So it means the maximum tax which a taxpayer has to pay in any case cannot exceed the higher of the tax rate in force in either of the two countries.

Tax is deductible at the rates prescribed under the Act or under the relevant DTAA, whichever is more beneficial for non-resident. With most of the major countries, where Indians are residing as NRIs, India has signed Double Tax Avoidance Agreement.

How to Claim Tax Benefits under DTAA?

Following incomes are typically covered under DTAAs on which NRIs can get relief for double taxation:

  • Capital gains on transfer of assets in India
  • House property located in India
  • Interest income earned in India (Income earned on Savings A/c or FD)
  • Royalty earned in India
  • Salary earned in India due to employment rendered in India
  • Services provided in India

Certificate of Tax Residency

For NRIs, it is vital to know that they can claim benefits under DTAA and what the procedure is. NRIs can reduce their tax burden and avail benefits by arranging Tax Residency Certificate. To claim the treaty benefit the NRI will have to produce Tax Residency Certificate (TRC) from the country of residence. NRI can obtain the Tax Residency Certificate (TRC) from the Tax department of the country in which s/he resides. The TRC should have information mentioned below which is mandatory to be furnished.

  • Name
  • Status (individual, firm, company, or any other)
  • Address
  • Nationality
  • Country
  • Tax identification number of the person in that country
  • Tax status
  • Tax period for which benefits under DTAA is claimed

These mandatory details help to make a valid compliance of TRC to the Indian tax deductor. Further, the entire filled up details need to be duly verified by the government of the country of which NRI claims to be resident for tax purpose.

DTAA Methods to Avail Tax Benefits

The basic objective of DTAA is to avoid taxation of an NRI in both the countries (India and foreign country).  The benefit of DTAA can be used by the following methods:

Tax credit

Tax relief under this method can be claimed in the country of residence. Here, the taxpayer adds his income from foreign sources to his total taxable income from resident country and then calculate income tax. Based on the laws and provisions of that particular country, the taxpayer then become eligible to claim the credit of foreign taxes paid on income from foreign sources against the taxes payable on such income in the country of residence. Among all methods, this is most commonly used method to avoid double taxation.

Exemption

Tax relief under this method can be claimed in any one of the two countries. Here, a taxpayer is allowed to claim his income from foreign sources under tax exemption. It means the entire income from foreign sources is allowed to get exempted from total taxable income, which will eventually completely eliminate the scenario of double taxation. As mentioned above, India has signed tax treaties with many countries few of them provide for exemption of certain specific incomes from double / dual taxation.

Deduction method

Under this method, the taxpayer pays the tax in the country where income is earned and it gets subtracted from the total global income in the country of residence. Then tax is calculated on the difference and paid in the country of residence. Since this method allows deduction from the taxable income to taxpayer for resident country, it is referred as deduction method. However, compared to other methods, this method is less popular as it does not completely eliminate dual taxation.

The below table shows comparative difference among all three methods:

Sr. No Particulars Tax credit method Exemption method Deduction method
1 Source country income             2,000             2,000             2,000
2 Resident country income             2,000             2,000             2,000
3 Exemption/deduction (tax paid in foreign country)           (2,000)              (300)
4 Total income             4,000             2,000             3,700
5 Total tax payable in country of residence on total income (assume 20%)                 800                 400                 740
6 Tax paid in source country on foreign source income (assumed 15%)                 300                 300                 300
7 Tax payable in resident country on foreign source income (assumed 20%)                 400                    –                 340
8 Relief available under DTAA (Lower of 6 and 7)                 300                    –                      –  
9 Balance Tax payable in country of residence (4-7)                 500                 400                 740
10 Total tax paid                 800                 400             1,040

To sum up, it can be said that DTAA is tax planning tool for NRIs. Want to claim benefits under DTAA? Click here for easy and hassle-free e-filing. For any other query regarding NRI tax filing and tax benefits, Contact us. We’d be happy to help you.

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