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.
Check Who is an NRI -Definition by Income Tax Act
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 |
| Australia | 15% |
| USA | 15% |
| China | 10% |
| UK | 15% |
| UAE | 12.5% |
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.
Photo Source: MoneyToday
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.
Top 5 safe NRI investment options
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.
I am an NRI living in Hong Kong since March 2010. I had bought one property in India in 2012 and one in 2013. I had bought one more property in India in 2004. I used to sail on foreign going cargo ships and was maintaining NRI status when I bought property in 2004. Now I want to sell those properties in India and buy a property in Hong Kong. I have NRE account in SBI and NRO account in ICICI. I have a home loan on one of my properties in Indian and monthly EMI is paid through my NRE account. Please advise if I have to pay long-term capital gains for all those 3 properties even if I buy a property in Hong Kong. Is there any regulation that if I buy a property in Hong Kong then I do not have to pay capital gain tax in India. Can tax liability be reduced because of DTAA (Double tax avoidance agreement) as I have been paying taxes in HK and I bought two properties (in 2012 & 2013) when I was in HK and paid tax here in HK? Also, after selling those properties in India I will get money in my NRO account, which needs to be transferred to my HK oversea account. Please advise the formalities to transfer money (about 2,00,00,000 INR) from NRO account to HK account. Do I have to pay anything extra if I transfer from NRO to HK overseas account? Is there any benefit if I sell my properties to NRIs and get money into my NRE account and then get that money transferred into my overseas account (will it be easier and better option).
Warm Regards
Please reply on my quarry.
I am Canadian passport holder and paying taxes in Canada on Pension/ rental/ investment income as resident of Canada. Further , since I have stayed more than 182 days in India , I have ti file taxes in India also. I have pension / rental/ investment income generated in India also. Please clarify that I am liable to pay taxes on Indian income only since I am having tax residency certificate from Canada and all income from Canada is exempted in India even though I am filling tax return as resident in India.
Hi
Have a query .. I have invested in india in mutual funds ( Debt and Equity) but never took it back to UK only kept on changing after some time so what ever tds paid in India on debt that has been done and in equity mf all are ltcg which is nil.. Should i declare those income from last many years in uk since i have read somewhere i need not to since i have not taken back this to UK ..
2 Some one suggested me that in UK FATCA will be applicable from 1st April 2017 so i take this money back to UK in my Son’s ( My Son also holds UK passport) account thus need not to pay any tax in UK since money will go to my Son’s account ( nor my son has to pay) then bring back this money back and thus invest again by doing this i can avoid paying any taxes which i have made earleir
My daughter is an Indian resident; works for Canadian firm on salary which is credited to her Bank a/c in Canada, and TDS regularly deducted by the firm. She also has income in India.
1. Which method would be practicable and suit her most?
2. Also what documents are to be submitted to Indian tax authorities for claiming tax credit? (Canada will not give TRC for Canadian Non-residents) Will the Firms monthly salary slips do? Any thing else?
3. She has worked there during November and December 2016. In Indian ITR 4, can she claim credit for 5 months Nov 2016 to March 31 2017, assuming TDS has been made for these 5 months?
I shall be grateful for your kind clarification.
DCB
Hi,
I am Australian Citizen and my main source of income (commission) would be from India. Can I claim full TDS deduction from India, in Australia.. ? I don’t have branch in India nor PAN in India. How much TDS would be deducted and How much can I get refund?
Hello Parsha,
I have a company in UAE, trading in the public markets, I am an NRI. Are my short term capital gains exempt from capital gains tax?
thank you
arun
Hi ,
1. I have been living and working in abroad from past 5 years , I do not hold any NRE/NRO account but I do earn interest on my fixed deposit from my India account and part of my salary to india account . Would I be liable for complete tax refund on the tax I paid for my FD under DTAA?
2. My wife also works in abroad for few months in a year , she earns interest on Fixed deposits on India account she also doesn’t hold any NRE/NRO account. Would she also be liable for complete tax refund on the tax she paid for FD under DTAA?
Thanks in advance
Dear Sir,
I have investments in DSP Blackrock Funds in World Gold Fund and World Mining fund (also in general in any Liquid / Debt Funds), I have the following query.
I am investing in liquid and World Gold Funds / World Mining mutual funds as NRI Investor from UAE with whom India currently as Double Taxation Avoidance Agreement (DTAA).
Based on DTAA bank applies TDS on my interest income on NRO bank fixed deposits at a reduced rate at 12.5% instead of 30% (normal rate). For this I need to submit a self declaration that I am a NRI from UAE and nothing more is required. Even this TDS can be claimed back up to a limit of 1.5Lacs income (as tax free income) by submitting a formal IT returns with the IT Department and the IT department refunds this amount by crediting back to my bank account.
Now in mutual funds, every time I redeem funds debt / liquid / international funds (classified as debt) the TDS is being deducted at 33% by the Mutual Funds.
I have 2 questions / clarifications in this regard.
1. If I provide DTTA declaration (as I provide for my bank fixed deposit account), can this TDS be deducted at a lower rate of 10% by Mutual Fund?
2. Alternatively, am I allowed to claim this as tax refund from IT Department by filing tax returns? What is the Income Tax rule in this regard with regard to the taxation for NRI for investments on debt mutual funds with regard to short term capital gain and long term capital gain in Debt/Liquid/International funds taking in to consieration DTAA and how can one claim the money back?
It is to be noted that there are no tax certificate issued by UAE goverment and bank is deducting TDS at a lower rate based on the self declaration in prescribed format.
If fixed deposit TDS are done at reduced rate based on self declaration why not the same is possible in MF both long and short term capital gains (debt / international MF mainly)? If not could you please confirm whether I can file tax returns and claim this as refund? I have no other taxable income in India!
I have checked with couple of Charted Accountants, none of them could provide a proper answer to the above. Your above post is the closest what I could find as appropriate to the subject matter.
Request your feedback the above.
Regards
Ajay
what is the TDS applicable in India under DTAA with NZ for an NZ citizen who pays tax in NZ and has interest income in an Indian bank account
Hello,
I moved to the USA for employment in November 2015. I have received salary from November 2015 to March 2016 in the USA.
For my income tax return in India for AY 16-17, as i am a resident, do i need to include my salary from Nov 15 to Mar 16 and claim relief u/s 90?
or need not include the salary income in return in accordance with Article 16 of DTAA between India and USA?
Will i be exempt i.e need not include income in USA into ITR or i need to take credit?
Please suggest.
Regards,
Rahul
Hi parsha,
I am in India and my Employer gave RSUs in US exchange where one-third was sold automatically at the time of vesting for tax.
My Form 16 does not show that one-third share values as TDS. Instead the entire share value is shown as Perquisite even though I have W8-BEN submitted sometime ago.
It seems like I am paying Double Tax. Your thoughts?
I am a NRI with citizenship in New Zealand. Before moving to New Zealand I was in the gulf. I had opened FCNR accounts in India while in Gulf. I have not declared this to the New Zealand authorities for few years deliberately because I thought the interest obtained is tax free in India and therefore I lose out on that benefit. Now I realize that it was wrong. How do I go about the process for declaring the interest earned over the last few years to the New Zealand authority without incurring a penalty?
I am NRI living in US and I have taken US citizenship. I have some ESOP from my employer (India based Employer and listed on BSE). My Organization is not collecting any tax from me in India upon exercising these options. They are reporting the gain (Difference between Grant Price and Exercise Price) on my US payroll and I am being taxed in US for the gain. Should I be paying any taxes in India for this gain? If not should I be filing tax returns in India?
Hi Reddy
Yes, you’ll be taxed in USA for notional gains. No filing tax returns required in India until gains/loss realized. Have your US tax deductions and when you actually sell the investments use DTAA . I don think you’ll be required to pay tax in India if more than one year but better you file the return for that year.