DTAA - Double Taxation Avoidance Agreement for NRIs

DTAA rules are important for any NRI (who earns money in more than one country) to understand.

Read on...

Background

It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid.

How does it work

To avoid double taxation, the taxpayer must declare himself (in the foreign country) to be non-resident there. The “Double Tax Avoidance Agreement (DTAA)” or “Tax Treaty” is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid taxation of income in both the countries (i.e. Double taxation of same income). Currently India has comprehensive DTAA or Tax Treaty with 84 other countries.

To understand how DTAA works, an NRI residing in ABC country is maintaining NRO Account with a bank in India. The interest earned on balances in this account is considered as the NRIs income originating in India. If India has DTAA with country ABC, this income will be taxed at the rate prescribed in the agreement. Else, it will be taxed at 30.90 % (the existing withholding tax).

Applicability

The Non-Resident can certainly take the benefit of the provisions of DTAA entered into between India and the country, in which he resides, more particularly in respect of Interest Income from NRO account, Government securities, Loans, Fixed Deposits with Companies and dividends etc.

How to avail benefits under the DTAA

Any NRI can avail benefits under the DTAA by timely submission of documents listed below to the deductor.

• Tax Residency Certificate (TRC)
• Self-attested copy of PAN Card
• Self-declaration cum indemnity format (formats of such letter are availabe in the bank website)
• Self-attested copy of Passport and Visa
• Copy of PIO Proof (applicable if the passport has been renewed during the Financial Year)

Mandatory details to be included in the TRC

• Name of the assessee
• Status (individual, company, firm etc.) of the assessee
• Nationality (in case of individual)
• Country or specified territory of incorporation or registration (in case of others)
• Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then a unique number on the basis of which the person is identified by the Government of the country or the specified territory
• Residential status for the purposes of tax
• Period for which the certificate is applicable
• Address of the applicant for the period for which the certificate is applicable

The certificate containing above details should be duly verified by the Government of the country or the specified territory of which the NRI claims to be a resident for the purposes of tax.

How to obtain the TRC

You can approach the tax/government authorities of the overseas where you reside to obtain the TRC. You may also check with your Chartered Accountant / Tax Consultant abroad on the procedure to obtain the same. No other document in lieu of the TRC is considered for availing the benefits under DTAA.

You will need to submit these documents every year to avail benefits under the DTAA, because DTAA benefit is extended on an annual basis. Therefore, any NRI is required to provide all the requisite documents every year to continue availing the benefit under DTAA. If the NRI doesn’t submit TRC and other documents to the bank within stipulated timelines, the bank will have to deduct interest earned on NRO deposits at the presently applicable rate of 30.90%.

Categories of India incomes and applicable DTAAs

Currently, India has DTAA with around 80 countries. In this post, we focus only at DTAA provisions that India has with UK and US. Broadly, NRIs will be able to avail a reduced TDS rate on certain incomes in India. 

(1) Interest on bank deposits, bonds etc.

If the interest is earned by an NRI out of deposits in India, the country in which he is resident has the right to tax this income. But TDS will be deducted on the same in India at the lower rate of 15 per cent (as against TDS rate of 30 per cent in absence of any DTAA). So, the TDS rate on this income will be at 15 per cent. As an NRI in these countries, you would have to add this income to your taxable income in the country of your residence. But you can get a tax credit for the tax paid in India. 

(2) Dividends

Dividend earned on equity shares traded on a recognized stock exchange in India are tax-free in the hands of the person earning the dividend. Therefore, there will be no tax deducted at source on your dividend earnings. Do remember however, that dividends are taxed in the US and the UK, and this income will therefore be taxed in your country of residence. 

(3) Capital gains on securities

    (a) Equity shares and equity mutual funds (mutual funds with more than 65 per cent in equities)

• Long term capital gains, that is profits made on sale after one year from date of purchase, are taxed as per the tax rates for a resident Indian. There will be no TDS applicable.
• Short term capital gains, that is, profits on sale within one year of date of purchase, will be subject to a TDS of 15 per cent in India. There is no reduction in TDS rate available under the DTAA.

     (b) Small Cases

• Small Cases are treated like direct stock investments. The tax implications are the same for long term and short term as for any resident Indian.

    (c) Debt mutual funds, corporate debentures

• Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.
• Short term capital gains will be subject to a TDS of 30 per cent. There is no reduction of TDS rate available in the DTAA with respect to these gains.

For US and UK residents, these gains will be taxed in the country of your residence. You will however, be able to claim a credit on the tax that has been deducted at source. 

(4) Capital gains on other assets like house property, gold

There is no reduction of TDS rate available in the DTAA with US and the UK. Therefore, long term capital gains will be subject to a TDS of 20 per cent and short-term capital gains will be subject to a TDS of 30 per cent.

Again, for UK and US residents, these incomes need to be added to the total taxable income in the country of your residence. You will be eligible to claim a credit on the TDS paid in India.

(5) Rent

If you are an NRI and have given a property on rent in India, the income from rent will be charged to tax only in India. Therefore, TDS would be charged at 30 per cent. If the tenant does not deduct tax at source, you must file your tax returns and pay up the right amount of taxes as per your tax slab. You would still have to disclose this income in your tax return in the US or UK and claim the credit of tax paid in India. 

Understanding of DTAA agreement for your own specific foreign country can help you save good amount of taxes in the country of your permanent residence. So, get into the details and get hold of the DTAA agreement that is applicable to you. Save money.

Cheers

Manoj Arora

Official Website