If an Indian resident earns income abroad or if a non-resident earns income in India, they could be taxed on the same income in both countries. To avoid such situations, nations usually have double taxation avoidance agreements (DTAAs), which enables taxpayers to pay taxes only in one nation.
However, to claim this benefit and prevent double taxation, taxpayers need to submit proof of the country in which they are . This is where a tax residency certificate becomes relevant. In India, this official document is issued by the income tax department that proves you are a tax resident in India for a particular financial year.
Who pays taxes in India?
In India, individuals classified as ‘Resident and Ordinarily Resident’ (ROR) under income tax rules are liable to pay taxes on their global income, meaning earnings generated both within India and abroad are taxable in the country, according to Pranav Sai S, tax expert at ClearTax. This includes salary, business income, capital gains, rental income, interest and other sources of income earned worldwide.
Non-Resident taxpayers are also taxed on income that is earned in India. At the same time, the same income may also be taxable in the foreign country where the taxpayer resides or where the income originates, resulting in a situation of double taxation. Hence, to avoid this, India has DTAAs with almost 100 nations.
To avail this benefit, taxpayers need to prove that India is their country of residence by showing a TRC certificate. Non-resident taxpayers can also claim the benefits of by receiving a TRC from their home countries.
Additionally, a tax residence certificate remains valid till the end of the financial year from its date of issue. Therefore, taxpayers have to apply for it every year to gain the DTAA treaty benefits.
How to apply for a tax residency certificate in India?
An Indian resident who wishes to obtain a certificate of residence can apply for it with the income tax department. They can file a TRC request by submitting an application Form 42 (previously Form 10FA).
If the assessing officer is satisfied with the application, they will issue a TRC via Form 43 (previously 10FB), according to the income tax portal.
How can NRIs claim relief under a DTAA?
Double taxation relief is available to taxpayers who have income that is taxed both in India and in another country under a tax treaty. To allow the to verify such claims, non-resident taxpayers are required to submit certain additional information.
Form 41 (previously 10F) is the form prescribed for providing these details. It must be filed when a non-resident wants to claim relief under a DTAA as provided in section 159 of the Income tax Act.
Filing Form 41 ensures that the supporting information required is properly furnished so that the claim for relief can be made correctly. Form 41 is available on the e-filing portal and can be submitted online, according to the information available on the income tax portal.
Details NRIs require to obtain residency certificate in their residence country
NRIs need to obtain a tax residency certificate from the foreign country’s authorities or the country in which they are a resident. They need to provide the following details:
- Name of the taxpayer
- Assessee’s status (individual, firm, or company)
- Aadhaar number of Permanent Account Number (PAN)
- Nationality (in case of individual taxpayers) or country/country of registration (for others)
- Tax Identification Number (TIN) of the assessee
- Period of residential status as present under Section 90 (4) or Section 90A (4).
- Assessee’s address in the country outside India.
The format and contents of a tax residency certificate can vary from one country another. If the TRC issued by a foreign government does not include the above-mentioned details, then NRIs are required to furnish the missing information separately by filing Form 41.
Taxpayers can also renew their tax residency certificates before the end of the financial year to continue receiving the DTAA treaty benefits. This can be done by submitting the updated documents and following the renewal requirements. However, this process is not instantaneous and the required time can vary across countries. Thus, applying for a TRC renewal well before the financial year ends is advisable, according to ClearTax.