What is a Double Tax Avoidance Agreement (DTAA)
20 May 2022

What is a Double Tax Avoidance Agreement (DTAA)

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Key Takeaways

Being an NRI, you may have income sources in India and abroad. You may also wonder about implications these sources would have on taxation. Would you be liable to pay income tax in your home country (India) besides your country of residence? Double Tax Avoidance Agreement (DTAA) treaties between countries ensure that you don't pay tax twice on the same income. Read this article on DTAA for a better idea.

What is DTAA?

Double Taxation Avoidance Agreement (DTAA) is an arrangement between India and another country. It aims to ensure that taxpayers don't pay double taxes on the income earned from the home country and the host country. Without a DTAA, you could end up paying tax twice for the same income.

What Are the Advantages of a DTAA?

The benefits of DTAA are lower withholding tax (tax deducted at source or TDS), a complete waiver from being taxed, and credits for taxes paid on the income that has been taxed twice, and which can be encashed in the future.

India has signed DTAAs with several countries and plans to enter into such tax treaties with many other nations too. Some of the major countries with which India has signed a DTAA are the United States, the United Kingdom, Australia, Canada, Saudi Arabia, Singapore and New Zealand.

There are two ways to avoid double taxation. The first way is that the resident country exempts income earned in a foreign country. Or it can grant tax credits for tax paid in the other country.

The rules under different treaties are different. For instance, the tax treaty with Mauritius levies 0% tax on long term capital gains on equities, but the one with the US taxes capital gains.

Under a DTAA, the country where the income has been generated will have the right to levy tax. The country of residence will give credits for this tax and apply tax at a lower rate.

For example, if India has a 20% tax rate on long-term capital gains, and the host country where such gains are taxed is 30%, then the latter will levy only 10% tax on this kind of income.

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In many cases, where an individual has opted to live in another country with which India has signed a DTAA, then India's income will be taxed at the rate agreed upon in the treaty.

For example, suppose a person has been a resident of the US during an assessment year. In that case, the TDS applicable to interest earned on fixed deposits in India will be 15% instead of the prevailing domestic rate of 30%.

Documents Required to Avail Benefits

The initial step is to determine the country of residence and check the DTAA between the concerned countries.

When an NRI wants to claim a tax exemption or tax credit in India based on the tax paid in a foreign country, the individual will need to submit the necessary documentation to the tax authorities. These documents for India are:

  • A tax residency certificate (TRC)
  • A self-attested copy of PAN card
  • A self-declaration-and-indemnity form
  • A self-attested copy of passport and visa,
  • A copy of proof that the person is of Indian origin (if the passport has been renewed during the financial year)

The TRC has to be submitted to the deductor, which in most cases is a bank. TRC is issued by the government/tax authorities in India.

Final Note

You are free to earn a living in the country of your choice without compromising on citizenship and the implications it would hold for you with regards to taxation. It helps immensely to the provisions of a DTAA (in the host country and India).

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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.