The incidence of double taxation occurs when an individual is required to pay tax more than once on the same income generated from a country different from his/her home country. A taxpayer’s own country (referred to as home country) has a sovereign right to tax the individual; the source of income may be in some other country (referred to as host country) which also claims a right to tax the income arising in that country. The result is that income arising to a resident of the home country is subject to tax in the home country as part of the individual’s total world income and, also in host country which provides the source for that income.
In order to avoid the hardship of double taxation, the Government of India has entered into DTAA. The basic objective of a DTAA is to mitigate tax on the same income in both home and host countries (i.e. double taxation of same income) and to promote and foster economic trade and investment between two countries.
A NRI can take the benefit of DTAA provisions entered into between India and the home country, more particularly in respect of interest income from NRO a/c, Government securities, loans, FDs with companies and dividends, or other incomes which he/she may have. A DTAA allocates taxing rights to the home country and the host country and the rate of taxation in the host country is restricted to certain prescribed rates for respective sources of income.
The provisions of DTAA generally override the provisions of the taxing statute of a particular country.
For e.g.: Interest on an NRO FD is subject to TDS at the rate of 30% in India if DTAA benefit is not provided. However, there are different beneficial and lower rates of tax on Interest prescribed for different countries which may range from 10% to 15%.
NRIs can claim the benefit of TDS deduction at such lower rates by availing DTAA benefit / relief after submission of required documents / information as may be required to the deductor.