What is the Objective Behind DTAA?
DTAA is a bilateral agreement entered by the central government with the government of another country outside India or a specified territory outside India to eliminate double tax on the same income in both countries. It provides a just system for tax payers and facilitates hassle-free international transactions.
Some important objectives of DTAA are:
- Prevent double taxation
Ensures income earned in one nation is not taxed doubly in another, lessening additional financial burden. - Grant tax relief
Gives provision such as exemptions, credits, or reduced rates of tax so that taxpayers are not taxed twice. - Support trade and investment
Facilitates international business by providing clear tax regulations on cross-border income. - Prevent tax evasion
Assists governments in tracing income and sharing information to prevent abuse of tax policies. - Bring clarity
Creates clear guidelines that minimize controversies and simplify tax administration.
Key Benefits of the Double Taxation Avoidance Agreement (DTAA)
Under the Income Tax Act, 1961, an NRI can avail relief via the following sections:
Section 90 covers cases where India has signed a DTAA with another country. Taxpayers can claim relief on income that has already been taxed abroad.
Section 91 comes into action with those countries with whom no DTAA exists. Even in such cases, India allows taxpayers to claim relief on foreign income.
This ensures that taxpayers are not unfairly burdened. Some key advantages of DTAA are:
- As explained earlier, DTAA avoids taxing the same income twice. Taxpayers either receive an exemption in one state or a credit for payment of taxes made overseas.
- With distinct tax regulations, DTAA makes India a favourable destination for investors and NRIs.
- Earnings such as interest, dividends, and royalties are taxed lower with a withholding tax under DTAA.
- By facilitating information sharing on taxes between nations, Double Tax Avoidance Agreement minimises evasion.
DTAA Tenure and Applicable Tax Rates
When asking about what is DTAA in income tax, it's helpful to consider that these treaties are valid until either nation officially terminates them. India presently has operative DTAAs with 94 nations2, preventing double taxation. Most treaties have a fixed withholding tax rate—ranging from 7.5% and going up to 25%1, . For NRIs, relief applies to income such as salary earned , capital gains on asset transfers when capital assets are transferred in India, income from house property in India, etc , making cross-border incomes more tax-effective.
How does DTAA in Income Tax work?
NRIs can benefit from DTAA if their country of residence has a tax treaty/agreement with India. The treaty offers an exemption on being taxed twice and helps in determining the taxing rights of each country on different types of income earned by the NRI.
Let’s say, an NRI is residing in the United States and invests in India by purchasing shares in an Indian company. The NRI receives capital gains and dividends from his/her investments in India.
Taxation without DTAA in income tax:
Without the provisions of DTAA, the income of the NRI would be liable to pay tax, both in the United States (their country of residence) and in India (where the income has accrued). The NRI would have to pay tax at the applicable rate in India on the dividend and capital gains from the investment and also report this income in the United States where their tax liability would be considered and paid on worldwide income. 5
Taxation with DTAA in income tax:
There are two types of benefit available under DTAA. Let’s consider the same case but with the benefits of DTAA.
Tax credit for tax paid in other country
If India has entered into a DTAA agreement with the U.S. and the NRI is eligible to claim the benefits under the terms of the DTAA between India and the U.S., he/she can get a reduced withholding tax rate according to the provisions stipulated in the DTAA. If the NRI pays tax in India at the applicable rate on the dividend income and capital gains, the NRI can claim a foreign tax credit in the U.S. for the taxes paid to India, reducing the U.S. tax liability, subject to the provisions of the DTAA between India and the U.S.5
Tax exemption in either country
If India has entered into a DTAA agreement with the U.S. and the NRI is eligible to claim the benefits under the terms of the DTAA between India and the U.S., he/she needs to pay tax only in India or in U.S. For example, if income is subject to be taxed in India, he/she need not pay tax in U.S on the income earned and accrued in India.
How to Check Your Eligibility for DTAA Benefits?
Before claiming relief, check whether you actually qualify under the double tax avoidance agreement (DTAA). Here’s how you should proceed:
Check applicability
DTAA is applicable only if your income is taxable in both India and abroad, and one of the parties involved in the transaction is a non-resident (NR) or a foreign company (FC).
Identify the correct DTAA
Check the residence country of the non-resident taxpayer. The DTAA between India and that country will be used.
Residential status check
Verify your status as an NRI under the Indian Income Tax Act, as DTAA relief depends on this.
Nature of income
Check that the income type meets the criteria for DTAA relief.
Document requirement
Lastly, ensure you are in a position to furnish TRC, PAN, and other documents .
Required Documents to Avail DTAA Advantage
To avail of relief under the double tax avoidance agreement (DTAA), NRIs are required to provide specified documents to the deductor in time. These documents assist in ascertaining tax residency and eligibility.
- Self-declaration cum indemnity stating that you are availing DTAA benefits.
- A self-attested copy of the PAN card is required for Indian taxation purposes.
- Self-attested copy of passport and visa to determine foreign residency.
- PIO card or evidence, if any, for Persons of Indian Origin.
- Tax Residency Certificate (TRC) granted by the foreign country, a requirement under the Finance Act, 2013.
- TRC application is submitted on Form 10FA, and after approval, the certificate is issued in Form 10FB.
Step-by-Step Process to Claim DTAA Benefits
Use the DTAA method applicable in your situation, then calculate relief and file accordingly.
- Check if there is a DTAA agreement between India and your resident country. If there is, identify the DTAA article applicable and the relief available, i.e., exemption, credit, or deduction on the tax paid.
- Submit documents (TRC, Form 10F, PAN) to the deductor to deduct the treaty rate at source, or claim relief in your ITR subsequently.
- Calculate relief using the suitable method:
- Deduction: Income from abroad is deducted from the overall income earned globally. The remaining is taxed in the country of residence.
- Exemption: Income is taxed in only one country; the other provides a full exemption.
- Tax credit: The tax paid on the foreign income is allowed as a credit in the country where you reside.
Key Takeaways
- DTAA prevents NRIs from being taxed twice on the same income.
- Its objective is to relax the tax burden and encourage cross-border trade.
- DTAA benefits include lower tax obligations, enhanced investment prospects.
- India has 94 DTAAs, with tax rates generally from 7.5%–25%2.
- Eligibility for the DTAA benefit is based on residential status, income type, and DTAA applicability.
- Key documents needed are PAN, passport, visa, Form 10F and Tax Residency Certificate.
- DTAA operates by deduction, exemption, or tax credit mechanisms.
Conclusion
With the Double Taxation Avoidance Agreement (DTAA), the NRIs can strategically manage their tax liabilities both in their home countries and in India. By leveraging and understanding the provisions of DTAA in Income Tax, NRIs can explore different investment opportunities in India.
FAQs
What does DTAA stand for in taxation?
DTAA means Double Taxation Avoidance Agreement. It is a tax agreement between two nations that ensures individuals and entities are not taxed twice on the same income .
What is the main purpose of the Double Taxation Avoidance Agreement?
The primary aim of DTAA is to provide relief to NRIs from the payment of double tax on the same income in two signatory countries. It assists in tax savings and encourages smoother cross-border investments.
Which countries have a DTAA with India?
India currently has DTAA with 94 nations2. Some of them include the UK, Singapore, Australia, Canada, and Germany. Rules and tax rates vary with each treaty.
How is DTAA tax relief calculated?
There are two methods to calculate the DTAA relief. You can either claim a credit in your residence country for the tax paid in another country, or you can claim tax exemption from the source country or the residence country. The actual method depends on the agreement between the two countries.
Is DTAA applicable to both individuals and companies?
Yes, DTAA applies to both individuals and corporations. Non-resident Indians and foreign companies earning income in India can avail its benefits according to the treaty provisions.
Sources:
- https://tax2win.in/guide/double-tax-avoidance-agreement-dtaa
- https://centralbankofindia.co.in/en/Understanding_Double_Tax_Avoidance_Agreement_(DTAA)#:~:text=To%20help%20Non%2DResident%20Indians,the%20UK%2C%20and%20many%20others.
