NRI can use DTAA as a Tax Planning tool – India

What is double taxation? If you are an Indian and a resident in another country ( NRI)  with multiple sources of income across both the countries, you can get taxed twice – once in your resident country and once in India. There are other ways to get double taxed too. For example, if you stay in India and work as a freelancer for a company based in United States, your income can be treated as taxable income in both countries. In India, you are a resident earning income and in U.S., your income can be subject to tax as the source of income is from U.S.

DTAA India NRI Tax

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

What is DTAA?

Paying taxes twice on one income source is not in the individual’s best interests. Therefore India has signed a treaty called the Double Tax Avoidance Agreement (DTAA) with many countries.  Individuals can use the provisions of this agreement to avoid double taxation.

Read: Should NRIs hold Resident Saving Account in India

How to avail of DTAA benefits?

You can avail of DTAA benefits in the following manner –

  • Check if the DTAA agreement is in place between the two countries in question. You can check here to find out if DTAA is applicable to the country in question.
  • Submit the following documents on time –
  • Tax Residency Certificate – You have to get a tax residency form from the government of the country you reside in. It has details like name, status, nationality, address, tax information.
  • DTAA Application Form – Form 10F should be obtained from the income tax department and verified by the government of the country where you reside.
  • Self Declaration and Identity Form – A declaration stating which country you reside for the relevant  financial period and that DTAA is applicable in your case.
  • Self Attested copy of PAN Card
  • Self Attested copy of passport

ReadTax on NRI FDs

How is the DTAA benefit calculated and provided to an individual?

There are primarily three methods to claim relief from taxes under DTAA –

1) Exemption method

2) Deduction Method and

3) Tax credit method.

The exemption method follows the Tax deducted at Source (TDS) method. Here, you are taxed in one country and exempted from tax in the other. Tax is deducted at source as per the rate applicable as per the DTAA agreement between India and the relevant country.

Let us look at an example. Here we assume a tax rate of 10% in resident country and 20% in source of income country

dtaa exemption method tds tax

In the deduction method, tax is paid in the country where income is earned and is subtracted from the total global income. Then tax is calculated on the difference and paid in the home country.

deduction method dtaa tax nri

In the tax credit method, total global income is taxed in the country where you reside. Then tax relief can be claimed from the country where the income is earned.

nri dtaa tax credit method

You can select the taxation method that is most beneficial to you. For example, you choose the exemption method if you have already paid taxes or use the deduction method when the tax rates are high in the other country that you are not residing in.

DTAA is a provision that can be used to reduce tax burden. You should not evade paying tax but plan your taxes such that you pay as less as possible within the legal domain.

“I  contend that for  a nation to try to tax itself into prosperity is like a man
standing in a bucket and trying  to lift himself up by the  handle.”
 ~Winston Churchill 

Read – When is the right time to send money to India?

Note: – We are not a tax expert – this is just based on interaction with clients & reading.

If you are an NRI please share your  experience with DTAA or taxation in your country.

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{ 2 comments… add one }
  • Bijoy Jose December 14, 2016, 1:36 PM

    I am a NRI residing in UAE for the past 15 years. The problem I am facing in availing DTAA benefit in India is the exorbitant cost of securing Tax Residency Certificate in UAE. The fee payable for a 1 year valid Tax Residency Certificate in UAE is AED 2,000 (Rs 36,760) which to a certain extent negates the TDS benefit I receive (TDS of 12.5% instead of 33%) for my income in India. I am wondering why Indian government is insisting on TRC for NRI’s employed overseas (who clearly have certified employment contracts, regular salary receipts in resident country banks and employee status residence visa in other countries) for availing DTAA benefits, thereby exposing Indian citizens for monetary exploitation by other countries.

  • Kamal Kishroe Naria December 21, 2016, 3:40 PM

    My son left India on 15.7.2016 for USA and joined job in a USA Co. He let out his house in India on a monthly rent of Rs 21000 and also has interest income. He invested Rs 1.50 under section 80C. His overall income is below Rs 2.50 lakhs. Does he need to file ITR and if yes does he need to show his US salary income in his return and claim credit undr DTAA

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