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The incidence of Double taxation is attracted in Indian context, when a Non-resident of India (NRI) is liable for tax in the source country (i.e. India) and also in country of his residence (say USA) on his worldwide income as well as on the income accruing or arising or received in India, resulting in Double taxation on said income.

A Double Taxation Avoidance Agreement (DTAA) is entered by two countries, with the basic objective to mitigate said double taxation on the same income in both home and source/host countries (i.e. double taxation of same income) thus 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.

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Yes, the provisions of DTAA generally override the provisions of the taxing statute of a particular country as per the option/choice of the taxpayer.

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%.

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DTAA makes provision for elimination on double taxation in one of the following manner:

·       Exemption Method: Granting exclusive right to tax to one of the countries;

·       Concessional Rate of tax: Granting taxing rights to both countries but making a provision for limiting the rate of taxation of each country;

·       Tax Credit Method: Granting right to resident of another country to obtain credit for taxes paid in the source country

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Following documents are mandatorily required to be submitted by a NRI:

i.    Tax Residency Certificate (TRC) from the Government of his / her country of Residence certifying that the NRI is resident of representative foreign country

ii.    Form 10F as per Income Tax Rules (mandatory to be filed electronically through Assessee’s Income tax e-filing portal);

iii.    Declaration to the payer that the payee is eligible to claim DTAA benefit; and 

iv.    Other document if any, required by the payer

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The following details should be mandatorily mentioned in TRC:

1.  Name of the assessee

2.  Status (individual, company, firm etc.) of the assessee

3.  Nationality of the assessee

4.  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

5.  Period for which the residential status as mentioned in TRC is applicable

6.  Address of the applicant (outside India) for the period for which TRC is applicable 

A TRC containing the 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 tax purposes.

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A NRI may approach the appropriate Income Tax or Government Authorities of the country where he/she resides to obtain a TRC. NRI may check with a Chartered Accountant for the detailed procedure to obtain TRC.

In case of an Indian resident, he/she may make an application for TRC in Form 10FA to the Income Tax Department. Subsequently on verification of details furnished, the Income Tax Department will issue a TRC to the Indian resident in Form 10FB.

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The TRC so obtained can be submitted to the below authorities:

Ø  Option 1: Submit to the payer of Income:

The Individual may consider submitting the copy of TRC to payer of the income, thereby ensuring that such payer withholds taxes at such concessional rates or at zero rate as per the benefit/relief mentioned in the DTAA with respective country.

For eg: Continuing the above example if TRC is submitted to the bank in India, the said bank will withhold taxes at concessional rate of 15% as mentioned in DTAA between India and USA instead of withholding the taxes at highest rate of 30% as mentioned under the provisions of the Act.

Ø  Option 2: Submit to Income Tax Department at the time of filing of Tax returns

In case, if TRC is not submitted and tax is not withheld at concessional rates or at zero rate as per the benefit/relief mentioned in the DTAA with respective country, then NRI may avail benefit of DTAA while filing his tax return and claim any refund of excess tax withheld, which is at the discretion of the Income Tax Department and involves time lag in receipt of said refund.

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Yes, the NRI can avail benefit of lower rate of tax in India as prescribed under the DTAA upon furnishing of the documents as specified in the above questions. Under the India - USA DTAA, NRIs interest income will be subject to tax at the rate of 15%. Accordingly, the NRI will be able to save excessive tax deduction of 16.20% (i.e., 31.2% - 15%) on the interest income earned on the NRO FD.

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When the NRI has earned income on which tax is payable in both the countries, i.e., India and country of NRI’s residence and there is no DTAA between these two countries, the NRI may claim relief of tax paid in India against tax liability of the said income in country of NRI’s residence. The amount of taxes paid in India which shall qualify for tax credit is subject to domestic tax laws of country of residence of NRI.

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India shall be considered as a “source country” and hence interest income shall be taxable in India. In addition, NRI being a Resident of USA the same interest income shall be taxed by USA as a “residence country”. The actual tax liability on NRO interest of Rs. 1 lakh is given below:

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An individual offering any income to tax as per the concessional rate mentioned under DTAA is not required to pay surcharge and CESS in addition to such concessional rate.

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India has recently signed the Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as Multilateral Instrument-MLI) along with representatives of many countries and its provisions will be applicable on India’s DTAAs from FY 2020-21 so as to act as a deterrent to tax planning strategies and curb revenue loss through treaty abuse and base erosion and profit shifting strategies.

The MLI is an outcome of the G20-OECD project to tackle Base Erosion and Profit Shifting (the BEPS Project), i.e. tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall tax being paid. The MLI will modify India’s DTAAs to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out. The MLI will be applied alongside existing DTAAs, modifying their application in order to implement the BEPS measures.

Updated 01/2024