A double tax avoidance agreement (DTAA) is a treaty that India signs with another country to help non-resident Indians (NRIs) living there avoid paying tax twice on the same income
A double tax avoidance agreement (DTAA) is a treaty that India signs with another country to help non-resident Indians (NRIs) living there avoid paying tax twice on the same income. Indians living overseas sometimes earn income in India as well, which can be taxed in both countries. Depending on the residential status, income earned abroad can be taxed in India.
“DTAA applies to any cross-border transactions, meaning if a person is a resident of one country and derives income from another country, then this treaty is likely to come into play," said Gautam Nayak, a chartered accountant.
Through DTAA, an NRI cannot completely avoid paying taxes, but can cut down on the tax implications on the income earned in India. NRIs still have to pay tax deducted at source (TDS) on income, which they can claim as exemption or credit under DTAA.
The DTAA benefit can be availed of through two methods. First is tax credit, under which tax relief can be claimed by NRIs in the country of their residence. Second is exemption, which NRIs can claim in any of the two counties.
To get benefits of the treaty, NRIs need to get a tax residency certificate (TRC) from the country in which they are residents. This helps in identifying and certifying the residency status as per the income tax laws. For claiming tax credit for TDS on dividends, NRIs can show Form 16A obtained in India as proof in their resident country.
In India, NRIs can avoid paying tax twice on income from the following sources: services provided, salary received, capital gains on transfer of assets, fixed deposits and savings bank account.
An important purpose that DTAA between two countries serves is reducing instances of tax evasion.
India has currently DTAAs with at least 90 countries, including the UK, Australia, China, Germany, France, Canada, Singapore, Mauritius and Italy. “Apart from certain tax haven countries such as British Virgin Islands, there are no major countries with which India hasn’t signed a DTAA treaty," said Nayak.