How does a Double Taxation Avoidance Agreement (DTAA) help NRIs/OCIs/PIOs?

Double taxation occurs when the same revenue is taxed by two different countries: the country where your business generates income (known as the source country) and the country where you, as a business owner, are a tax resident (known as the resident country).

To shield NRI business owners from the burden of double taxation, India has put in place comprehensive Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. These include major markets like Australia, Canada, France, Germany, Hong Kong, Portugal, Singapore, the UAE, the USA, the UK, and more. These agreements ensure that the income your business earns and the remittances you make are taxed and benefit according to the DTAA terms with your resident country.

What is Double Taxation Avoidance Agreement (DTAA)?

A Double Taxation Avoidance Agreement (DTAA) is a strategic treaty between two countries designed to make one country more attractive for investment while offering relief to Non-Resident Indian (NRI) business owners from being taxed multiple times on the same business income or profits. Although DTAA doesn’t completely exempt NRIs from taxes, it does prevent the burden of excessively high taxes in both countries. Additionally, these agreements minimize the risk of tax evasion.

DTAAs cover various types of income relevant to business owners, including business profits, dividends, interest, royalties, and capital gains. They clearly define which country has the right to tax specific types of income. Typically, the country where your business generates income has the primary right to tax it, while the country where you reside may also impose taxes, often at a reduced rate.

Types of Income Exempt from Taxation

Under the Double Tax Avoidance Agreement (DTAA), NRI business owners are exempt from paying taxes on certain types of income earned in India, including:

– Revenue from services provided in India – Salary received in India – Income from residential property in India – Profits from the sale of assets in India – Interest earned on fixed deposits and savings accounts in India

However, tax rates can differ between countries. If the tax rate in your resident country is higher, you may need to pay the difference. For instance, if Singapore taxes the same income at 20% while India taxes it at 15% under the DTAA, you would be required to pay the remaining 5% in Singapore.

Income Tax Slab Rates

Income Tax Slab | Tax Rate

• Up to Rs 2.5 Lakh | Nil
• Rs 2.5 Lakh to Rs 5 Lakh | 5%
• Rs 5 Lakh to Rs 7.5 Lakh | 10%
• Rs 7.5 Lakh to Rs 10 Lakh | 15%
• Rs 10 Lakh to Rs 12.5 Lakh | 20%
• Rs 12.5 Lakh to Rs 15 Lakh | 25%
• Rs 15 Lakh and above | 30%

Source: SBNRI Data

How to Apply DTAA for Business Owners & Individuals

Here’s how you can determine the application of the Double Tax Avoidance Agreement (DTAA):

1. Tax Liability as per Income Tax Act: Identify the type of income that is subject to DTAA and assess its tax liability under the Income Tax Act.
2. Tax Liability under DTAA: If the income is covered by specific provisions of the DTAA, then it will be taxed according to those provisions.
3. Finalize the Tax Liability: Use Section 90(2) to compare the tax liabilities under the Income Tax Act and the DTAA. Choose the option that is more beneficial (Treaty Override).

Note: If the Non-Resident (NR) or Foreign Company (FC) has a Permanent Establishment (PE) in India, then the general taxation rules will apply.

How to Claim DTAA Benefits

There are three ways to claim DTAA benefits:

1. Deduction: Taxpayers can claim a deduction for taxes paid to foreign governments in their country of residence.
2. Exemption: Under this method, tax relief can be claimed in one of the two countries.
3. Tax Credit: Tax relief can be claimed as a credit in the country of residence.

Example:

Suppose A, a resident of country X, earns Rs.100 from country Y.

• Tax rate in Country X: 30%
• Tax rate in Country Y: 50%

Here’s how the tax will be calculated under each method:

Countries with which India Has a DTAA

India has established Double Tax Avoidance Agreements (DTAAs) with nearly 100 countries where Indians commonly reside. Some of these countries and their respective DTAA Tax Deducted at Source (TDS) rates are:

Country

DTAA TDS Rate

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Frequently Asked Questions

Here are some commonly asked questions about Double Tax Avoidance Agreement (DTAA):

• Which methods are used to avoid double taxation?

• Deduction: Taxpayers can deduct taxes paid to foreign governments in their country of residence.
• Exemption: Tax relief can be claimed in one of the two countries.
• Tax Credit: Tax relief can be claimed in the country of residence.

• Are there any conditions to benefit from DTAA?
• Yes, to benefit from DTAA, taxpayers must meet certain conditions such as residing in a treaty country, providing proof of tax residency, and adhering to treaty provisions.

• Who benefits from DTAA?
• DTAA benefits individuals and companies that earn income outside their country of residence. It helps prevent double taxation, ensuring taxpayers do not pay more tax than necessary