US or for that matter any country never lets an opportunity slip to collect tax from citizens/residents. Have you ever wondered if you stay in US and earn income in India or elsewhere how you’ll be taxed.
You need to pay tax in both countries? Don’t worry. If that is the case I might not well invest/save 🙂
You have the DTAA – Double Taxation Avoidance Agreement. DTAA is a tax treaty between India and 84 other countries to avoid this double taxation issue at country of residence and citizenship.
It is quite likely that a person shifts base to another country for employment, leaving behind investments in their home country. The returns on such investments are taxable under the Income Tax Act of India.
The point to note is that these returns on investments are considered to be global income and are taxable in your country of residence as well. This is known as double taxation.
What is the Double Tax Avoidance Agreement and How to Benefit From it?
To avoid double taxation you must use Double Taxation Avoidance Agreement (DTAA) that India might have signed with the country of your residence in order to avoid taxation of the same income twice.
The treaty can be applied to two or more countries, therefore it may be termed as bilateral or multi-lateral, as the case maybe.
The Provisions of the DTAA override the general provisions of a 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 Act or the DTAA: whichever is more beneficial.
Benefits of DTAA
The benefits of the double tax avoidance agreement are:
- Lower withholding tax (tax deduction at source)
- Exemption from tax
- Underlying tax credits, and
- Tax sparing credits.
Currently, India has a DTAA with 84 nations, which include USA, the UK, Australia, Singapore, the UAE, New Zealand and more. Moreover, India is constantly striving to come to bilateral agreements with other countries.
Various Methods of Calculation of Tax Under the DTAA
Relief from double taxation can generally be availed through one of three methods:
- Exemption Method: Under this method, income is taxed in only one of the two countries. This method follows tax deduction at source (TDS). The TDS rate for each country differs and is applicable according to the DTAA. Given below is a table with TDS rates applicable in some countries in accordance with the DTAA.
|Country||TDS Rates Applicable|
DTAA agreements between India and other countries can be seen at Income Tax Website.
Various rates of tax and scenarios can be checked here
- Deduction Method: Tax paid in the home country is first deducted from the global income then the tax in the resident country is calculated on the remaining income.
- Credit Method: The country of residence gives credit for the country of source of income and the tax already paid at the source is deducted in the country of source.
For tax exemption under the DTAA, you must mention the correct method while applying for the same. Your tax deductor can help you determine the method most appropriate for you.
For tax deduction at source, you can take credit for tax and benefit in the country of your residence by submitting your TRC (Tax Residency Certificate) to the Income Tax Department in India.
You can opt for the deduction method when the tax rates is high in the other country or your income is very low in your country of residence.
You can opt for the exemption method when you have already paid tax on your income in the country of residence.
Tip: If you’re NRI always use a specialist Chartered Accountant to file your tax returns in both countries. This I say from my and other’s personal experience 🙂 You’re bound to misinterpret or miss something.
Given below is a tabular representation of the three methods.
Different sources of income are differently taxed in India and under the DTAA respectively. Here we look at some of them.
- Salary – Salary is taxed under three different rates in India. Some of the treaties provide relaxation if the person stays in India for less than 183 days and the salary is not borne by a permanent establishment or employer in India and received outside India.
- Income from a business/profession – India taxes income from a business connection. However, most treaties provide for taxing business profits only in cases where the income has been earned from a permanent establishment or a fixed base.
- Dividends – Dividends can be taxed by the source country on the condition that the tax rates must not increase the rate mentioned in the treaty. Dividends from mutual fund investments are tax free in India but the resident country might tax the dividend.
- Interest – Generally, interest earned from bank deposits are treated as income and taxed at the rate of the tax slab. However, under the provision of the DTAA, the interest earned is generally taxed at a concessional rate in resident country. NRE fixed deposit deposit interest is tax free in India but Commercial Deposits and debt funds have short term gains tax of 30%.
- Royalty and fee for technical services – It is also taxed at a concessional rate under the DTAA, rather than what is prevalent in India otherwise.
- Capital Gains – Some of the treaties that India has signed exempt one from capital gains tax, like the treaty with Mauritius. Based on the clause in the treaty, the resident country gives credits for the capital gains tax paid in the other country involved in the treaty. Long-term and short term capital gains from property and gold are taxable in India, while only short term capital gains(15%) from shares, mutual funds are taxable.
Documents to be Submitted to Benefit from the DTAA
NRIs can apply for the benefits under the DTAA by timely submission of the following documents to the concerned deducting intermediary (to the bank whose services you are availing):
- Tax Residency Certificate – This certificate is to be obtained from the government of the country in which the NRI resides. Certain information needs to be compulsorily mentioned in the TRC. You can consult the tax deductor to know more. Some of the things that should be mentioned in the TRC are name, status (individual/ company/ firm), address, nationality, country, tax identification number of the person in that country, tax status and the period for which the tax certificate is issued. You may have to get TRC for two consecutive years, since in India, the calendar year and the financial year differ.
- Self declaration cum Identity form
- Self attested copy of PAN card
- Self attested copy of passport
Taxation for an NRI residing in any of the 84 nations with whom India has signed a DTAA – Double Tax Avoidance Agreement is subject to the clauses in that particular treaty.
DTAA is something created to reduce your tax burden and not tax evasion. So Use the DTAA judiciously to plan your income tax in India and country of residence – be it UK, UAE, US. Let us know if this article was useful or if you want something to be elaborated.