A DTAA is a tax treaty signed between two or more countries to help investors avoid Double Taxation. The key objective is that tax-payers in these countries can avoid being taxed twice for the same income. A DTAA or Double Tax Avoidance Agreement applies in cases where a taxpayer resides in one country and earns income in another.
Let’s take an example of Double Tax Avoidance Agreement or DTAA to understand this. For example, – Raj is a US-based NRI investing in Indian Mutual Funds and makes short-term capital gains by selling Equity Oriented Mutual Funds (Not taking TDS deducted by MF for example sake). As per Indian taxation, pays 15% tax in India. As per US tax laws, the rate of such gain is 30%.
So suppose India does not have a DTAA with the US, Raj will end up paying 15% in India and 30% in the US.
But fortunately DTAA between India & US exists, hence Raj will pay only higher of the 2 rates in the US. So he will pay only 15% in his US returns and take tax credit benefit of the tax already paid in India.
Hence his outgo is 30% and not 45%, in case the 2 countries do not have a DTAA.
Another example, If an NRI has an NRO account in India, the TDS rate is 30%. But if the resident country is say, Sri Lanka, the TDS will be 10% only.
Some more examples related to insurance maturity/withdrawal payouts:
DTAA between India and USA – As per the treaty, other income earned from India will be taxable in India and not USA; hence TDS will be applicable on Other Income as per tax laws in India.
DTAA between India and UAE – As per the treaty, Other Income earned from India will be taxable in UAE only; hence TDS provisions of India will not attract, however, to avail this benefit the policyholder needs to submit valid TRC (Tax Residency Certificate) and Form 10F.
So DTAA works for both for Tax Credit & lower tax concessions.
So Double Tax Avoidance Agreement is:
A type of agreement between two countries with reason to avoid doubling of taxes in hands of its residents. Otherwise, do you think NRIs would like to invest in their home country?
Other objectives of DTAA
- Tax-payers investment information collection and clarity on rules for cross-border transactions.
- Attracting investments from home country. For eg from India, many NRI wishes and already invest for the love country, returns and intention to settle back.
- Offer concessions in the tax rate. In many countries’ DTAA, the rate is 10% or 15%.
- Money invested and tax helps the development of the country.
- DTAA also clears ambiguity in taxation for income earners from sectors like shipping income or air.
Scope of DTAA
India has the Double Tax Avoidance Agreement or DTAA agreement with more than 89 countries which includes Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK, and the US.
You can check these agreements here: https://www.incometaxindia.gov.in/pages/international-taxation/dtaa.aspx
DTAA can be comprehensive in nature like covering all aspects of income. It can be limited in nature, only with the scope of addressing income related to inheritance, shipping etc.
The rules are different for each country & respective treaty. For eg, the tax treaty with Mauritius has zero tax on equities capital gains, but the US imposes capital gains on such investments.
Situations you can benefit from DTAA
- Temporary deputation in another country and income arising in a foreign country.
- Being NRI, you wish to invest your foreign income in India.
- Fees for technical work and royalty are taxed at 25% in India. Under DTAA the rates are in the range of 10-15% for most of the countries.
- Equity investing through certain countries like Mauritius or Singapore can be advantageous in comparison to US, UK or UAE.
Generally followed methods to Calculate Tax under DTAA
2 methods are followed:
Tax Credit Method
Under the tax credit method, the person will take all his income into consideration. This will include his foreign country & home country income. He will calculate the taxes applicable to him.
Then he will calculate the taxes as per his home country laws and pay it & take the credit..
For example, if someone has an NRO bank interest in India for 10 lacs and the tax rates applicable is 30%. In the foreign country, he is living may have tax at 40%, then the person will be able to use the credit of 30% and only pay additional 10% taxes. This method makes sure that there are almost no way a person pays dual taxes.
Exemption Method
Under this method, one does not consider his home country income. He will the taxes on the income which is earned in a foreign country. So one will not consider taxes from different countries. As per the Double Tax Avoidance Agreement, one will skip the home country income altogether, and will pay taxes in the home country on the foreign income.
Tax Credit Method is used mostly.
Requirements to claim Benefits under DTAA
The most important document that you need is the Tax Residency Certificate or TRC in short.
A TRC is a certificate from the Government of the country in which such person is a resident. This is like an evidence of a person’s residency in that country. The income tax authority provides the certificate after filling the form and depositing the prescribed fees.
One needs to submit TRC to the deductor (bank or institution) to avail the lower tax concession.
Apart from TRC, one also need to be ready with a copy of PAN card, self-declaration-cum-indemnity form, copy of passport and visa etc as supporting documents.
This article gives you a birds’ eye of DTAA or Double Tax Avoidance Agreement. The details can be worked out as per situation with your accountant.
Do share with your NRI or would be NRI friends & relatives.
