The double taxation avoidance agreement (DTAA) is a tax treaty that helps taxpayers avoid paying tax twice on the same income in two different countries. If you are an non-resident Indian (NRI) and have income both in India and your country of resident, this treaty can provide tax relief through exemptions, reduces rates, or foreign tax credits.
India has signed treaties with more than 100 countries across the world, including the US, UK, UAE, Canada, Australia and more, making cross-border taxation less burdensome. This benefit may apply to income from salary received in India, investment income such as dividends, interest from foreign bank accounts or bonds, as well as capital gains.
How are DTAA rates determined?
Under DTAA, if you earn income in one country while residing in another, you are required to pay tax in only one country or at a significantly reduced rate in both. This is especially important for NRIs as it protects their income earned in India from being taxed twice.
DTAA, signed by India with different countries, fixes a specific rate at which tax has to be deducted on income paid to residents of that country. This means that when earn an income in India, the TDS applicable would be according to the rates set in the Double Tax Avoidance Agreement with that country.
How does this treaty work?
Suppose an NRI lives and works in the United States but also earns ₹5 lakh annually from NRE fixed deposits in India. The interest income is taxable in India and as per applicable US tax laws, it may also be taxable in their country of residence. Without DTAA, the NRI could end up paying tax on the same ₹5 lakh in both countries.
Under the India–US DTAA, the NRI can claim a foreign tax credit in the US for the tax already paid in India. Since the interest income in India is ₹5 lakh, let’s understand DTAA using the following hypothetical scenario.
- Tax paid in India: ₹50,000
- Tax liability on the same income in the US: Equivalent of ₹70,000
Hence, in such a case, the NRI can claim a tax credit of ₹50,000 (the tax already paid in India) against the US tax liability and pay only the balance ₹20,000 in the US, ensuring the income is not taxed twice.
How to claim DTAA benefits?
The benefit of DTAA can be claimed using three methods, as per the existing rules of the treaty:
- Deduction: Taxpayers can claim the taxes paid to foreign governments as a deduction in the country of residence.
- Exemption: on a certain income under this method can be claimed in any one of the two countries.
- Tax credit: Tax relief under this method can be claimed only in the country of residence.
How to determine if DTAA is applicable?
Follow these steps to determine which DTAA applies in your case:
Step 1: Check whether the income is taxable both in India and in another country. DTAA relief is generally available only in cases where the same income may be subject to tax in two jurisdictions and one party involved in the transaction is a non-resident (NR) or a foreign company (FC).
Step 2: Determine the tax residency of the non-resident individual or foreign company. Once the country of residence is identified, the relevant DTAA between India and that country can be examined to determine the applicable tax treatment and available relief.