Many NRIs are keen to invest in India in a variety of options available. But they are apprehensive of the taxation process. They fear that they might have to pay tax twice after they invest—once in India, and then again in their country of residence.
But this fear is unfounded. NRIs can avoid paying taxes twice courtesy the Double Tax Avoidance Agreement (DTAA).
What is DTAA?
DTAA, or Double Tax Avoidance Agreement, is an agreement between two nations. Through it, they decide on the tax payable by the citizen of one country so that he/she isn’t taxed again in the other.
DTAA is not a mode of tax avoidance or evasion. Rather, DTAA is a process of exemption so that NRIs aren’t taxed twice in both countries.
What are the DTAA rates?
India has signed the DTAA with a host of countries. As per the agreement, when NRIs earn any income in India, the Tax Deducted at Source (TDS) won’t be the usual 30.9%. The rate would be as specified in the agreement; this rate is between 10% and 25%.
With which countries does India have DTAA?
India has DTAA with 88 countries. The prominent ones among them are the U.S., the United Kingdom, the UAE, Singapore, Australia, Canada, New Zealand, France, Germany, Saudi Arabia, Japan, and more.
What are the types of income applicable under DTAA?
- Fixed deposits in India
- Salary received in India
- Services provided in India
- Capital gains earned in India on the transfer of assets
- Savings account interest earned in India
- House property in India
Let us look at a scenario to understand how DTAA works.
An Indian person is employed with a company in India that requires him to stay on-site in a DTAA-partner country (say, the U.S.) for more than 182 days every year. He earns his salary in India, and he pays the applicable taxes in India.
Now, as per U.S. law, this person also needs to pay taxes there. But because of DTAA, he can avoid it. The tax he pays in India gets deducted from his tax liability in the U.S. He would need to pay the balance, if any.
Getting tax benefits under DTAA
There are two ways that you can do this.
- Tax credit: Get a tax credit in your country of residence if you have already paid the tax in India
- Tax exemption: You might have already filed the DTAA before the deduction of TDS. Then, the tax on the income will be exempt in either of the countries.
Required documents to claim DTAA benefits
- Form 10F
- Tax Residency Certificate
- Permanent Account Number (PAN) details
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