All You Need to Know About DTAA

Malini, an IT professional has scheduled her travel to the US for working onsite. Travelling overseas for work was not new for Malini, but this time, with a big project in hand, she was likely to be abroad for more than a year.

While Malini was happy that an onsite work profile would do well for her career, she was confused about the tax aspects, as she would be acquiring a NRI status.

Are NRIs liable to pay taxes for their income earning in India? How are the tax liabilities of NRIs for their assets in India?

Here’s what NRIs and soon-to-be NRIs should know about their tax liabilities in this upcoming tax season.

In the early days, every government insisted that they had the right to collect income tax for any income made by people on their shores. However this resulted in double taxation for people who were being taxed both in their home country as well as in their residing country. As this made life difficult for the common man, countries have entered into mutual agreements to avoid this.

India on its part has Double Taxation Avoidance Agreements with over 85 nations, allowing Indians working in those countries to pay tax only in one country.

Understanding Double Taxation Avoidance Agreement:

To make sure that people do not end up paying taxes on the same income twice (in India as well as in their residing country), the government of India has inked a Double Tax Avoidance Agreement or DTAA. As per DTAA, those who were filing taxes in India earlier, and qualified as a Non Resident Indian, can save tax deductions through DTAA.

Understanding the implications of DTAA:  

Scenario 1: NRIs working for Indian companies

Let us assume that Malini stays in the US for a period more than 182 days in one financial year, making her a Non Resident Indian for the financial year in question. Since Malini is working onsite, she continues to receive her regular income in India in her salary account with TDS deduction. So Malini needs to pay income tax in India.

Now as per USA laws, Malini will need to pay income tax there for her Indian income. Here’s where DTAA comes to her rescue. As TDS is being deducted from Malini’s salary in India, she can get the tax paid in India deducted from her overall tax liability in USA and pay only the remaining amount ( if any applicable) as tax there.

As per the law in USA, anyone living in the country for more than 31 days in one calendar year would need to pay income tax on their global income in USA. But as India has entered into DTAA, Malini’s taxation there will be limited as above.

Scenario 2: NRIs working for foreign companies, but earning income from other sources in India

There are many NRIs who are earning interest income, income from assets, house properties etc., in India. The taxation rules under DTAA offer lower taxation for NRIs, if they are paying taxes for income in their resident country.

Deposits of these NRIs come with lower TDS rates as applicable. Dividends earning on equity trading through recognized stock exchanges in India and long term capital gains from equity mutual funds are tax-free. However, short term capital gains will be subject to a TDS of 15 per cent.

There is no reduction of TDS rate as per the DTAA with countries like US and the UK. Therefore, the residents of these countries will be subject to a TDS of 20 per cent for long term capital gains and 30 per cent for short term capital gains. As residents of these countries will have to add these incomes to the total taxable income in their country, they are eligible to claim a credit on the TDS paid in India.

If you are an NRI and are earning rental income in India, this will be taxed only in India. NRIs providing professional services in India will be taxed only in the country of their residence.

How to avail tax benefits under DTAA

To avail benefits under DTAA, NRIs will have to furnish the following documents on an annual basis:

Tax residency certificate: The Tax Residency Certificate or TRC can be obtained from the government of the country in which they reside.

Self declaration-cum indemnity form: You will have to submit a self-declaration or an indemnity form to your bank, which is essentially a declaration that you are a NRI for the period for which you are seeking tax relief.

Furthermore you will need to submit self attested copies of your PAN card, visa and passport, along with any PIO proof, if applicable.

With the world becoming a global village, businessmen and professionals are now travelling all over the globe for work.  DTAA saves people from unnecessary taxation liability in two countries for the same income. DTAA can be used only for residents in those countries that have a dedicated agreement with India.