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What is Double Taxation Avoidance Agreement (DTAA)? How NRIs can Claim Benefits Under DTAA

By Ektha Surana

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Updated on: Jun 5th, 2024

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9 min read

As the world becomes more connected and globalised, it has become increasingly common for individuals and companies to conduct business across borders or work remotely. This also means they may have to pay taxes in multiple countries from where they earn their income. This can lead to double taxation. This is where Double Taxation Avoidance Agreements (DTAAs) come in. 

Let's understand how DTAA works with the help of an example. Let's say you are a resident of India who has invested in a company located in the United States (US stocks). When you receive dividend or any income from these investments, then that will be subject to tax in both India and United States. But if India and US have a DTAA agreement, you will not have to pay double taxes. This income earned by you from the US will be taxed in either India or the US, depending on the terms of the agreement. 

What is Double Taxation Avoidance Agreement (DTAA)?

The Double Tax Avoidance Agreement is a treaty signed by two countries. The agreement is signed to make a country an attractive destination as well as to enable NRIs to get relief from having to pay taxes multiple times. DTAA does not mean that the NRI can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries. DTAA also reduces the instances of tax evasion.

The DTAA agreements cover a range of income such as income from employment, business profits, dividends, interest, royalties, capital gains, among others. These agreements specify guidelines as to which country holds the right to impose taxes on particular types of income. Typically, the country where the income is generated retains the primary right to levy taxes on it, whereas the country of residency may also impose taxes, at a lower rate.

DTAA Rates 

DTAA, signed by India with different countries, fixes a specific rate at which tax has to be deducted on income paid to residents of that country. This means that when NRIs earn an income in India, the TDS applicable would be according to the rates set in the Double Tax Avoidance Agreement with that country. 

How to determine if DTAA is applicable?

Follow these steps to determine which Double Taxation Avoidance Agreement (DTAA) applies in your case:

Step 1Is DTAA applicable?DTAA applies only when the transaction is taxable both in India and in an another country. Also, one party involved in the transaction should be a non-resident (NR) or a foreign company (FC).
Step 2Which DTAA is applicable?Identify the residential status of the non-resident party. 
DTAA between India and that country will be applicable

How to apply DTAA?

The following are the steps to determine how to apply DTAA:

  1. Tax Liability as per Income Tax Act: Find out the type of income on which DTAA applies and its tax liability under the Income Tax Act.
  2. Tax liability under the DTAA: If the income falls under specific articles of DTAA, then the income will be taxed as per those articles.
  3. Finalize the tax liability: Using section 90(2), decide which is more advantageous between the IT Act and DTAA (Treaty Override).

Note: If the NR/FC has a Permanent Establishment (PE) in India, then general articles for taxation would apply.

How to claim DTAA benefits?

The benefit of DTAA can be claimed by three methods:

  • Deduction: Taxpayers can claim the taxes paid to foreign government as a deduction in the country of residence.
  • Exemption: Tax relief under this method can be claimed in any one of the two countries.
  • Tax credit: Tax relief under this method can be claimed in the country of residence.

Example: A who is a resident of country X, earns Rs 100 from country Y. 
Tax rate of Country X – 30%
Tax rate of Country Y – 50%

ParticularsDeduction MethodExemption MethodTax Credit Method
Foreign Income100100100
Foreign Income Tax (30%)303030
Net Domestic Income70Nil100
Domestic Tax35Nil50
Creditxx(30)
Final Domestic tax35Nil20
Total Domestic and Foreign Taxes653050

Example of DTAA

Neha invests in US stocks and receives dividend every year. US withholds a tax of 25% on such dividend payouts. 

Let's examine the reason why a 25% deduction occurred in the US. This is because of the India-US DTAA, which specifies that any dividend income earned in the other country (USA) will be subject to a 25% tax rate in that country (USA).
Additionally, according to the DTAA, this dividend income may also be subject to taxation in India based on the recipient's residence status.

ParticularsAmount (Rs)
Dividend20,00,000
Withholding Tax (25%)5,00,000
Net Income15,00,000

It is important to note that the gross amount of the dividend (Rs 20 lakh) will be reported in the Income Tax Return (ITR), rather than the net amount. However, you can claim a foreign tax credit for the taxes that were deducted in US.

Let's take a quick look at how to calculate the Foreign Tax Credit (FTC). To simplify matters, we will assume that Neha is in the 30% tax bracket and that the tax rate in India is a flat 30% (excluding any cess for this example).

ParticularsAmount (Rs)
Dividend 20,00,000
Withholding Tax (25%)(A)5,00,000
Tax in India(B)3,00,000
Foreign Tax Credit(C) = Lower of (A) or (B)3,00,000
Tax Payable in India(B) - (C)0

Few basic principles of DTAA

DTAAIncome Tax ActRemarks
If the treaty does not address a particular disputeBut the Income Tax law contains relevant provisions, Refer to the Income Tax Act for guidance on the matter.
If a treaty includes certain provisions But law is silent on dispute resolution mechanismRefer treaty
If the treaty has a provisionIncome tax law also has the same provisionFollow whatever is more beneficial for the taxpayer
If treaty has some provisionsLaw has contradictory provisionstreaty will prevail

Section 89A introduced in Budget 2021

Finance Act 2021 introduced a new Section 89A for removing hardship for NRI due to double taxation on money accrued in foreign retirement accounts maintained with notified countries.

This provision is applicable to "specified persons" - individuals who are residents of India, opened an account in a notified country while being a non-resident of India, and a resident of that particular country. 
A "notified account" refers to an account established by a specified person in the notified country for retirement benefits, and income from such an account is not taxable on an accrual basis, but is taxable by that country on a receipt basis.
The new provision states that such income will be taxed in such manner and in the year as may be prescribed.

Countries that India has a DTAA with 

India has signed a Double Tax Avoidance Agreement with most major nations where Indians reside. Some of these countries are:

CountryDTAA TDS rate
United States of America15%
United Kingdom15%
Canada15%
Australia15%
Germany10%
South Africa10%
New Zealand10%
Singapore15%
Mauritius7.5% to 10%
Malaysia10%
UAE12.5%
Qatar10%
Oman10%
Thailand25%
Sri Lanka10%
Russia10%
Kenya10%

On what type of income DTAA is not applicable?

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax twice on the following income earned from:

  • Services provided in India.
  • Salary received in India.
  • House property located in India.
  • Capital gains on transfer of assets in India.
  • Fixed deposits in India.
  • Savings bank account in India.

If income from these sources is taxable in the NRI’s country of residence, they can prevent double taxation by utilizing the benefits of the DTAA.

Frequently Asked Questions

What are the incomes on which an NRI can claim tax credit/tax exemption for income earned in India in the resident country?

The income on which a NRI can claim tax exemption/credit will be mentioned in the DTTA with the resident country. The provisions of DTAA are not the same for all countries.

 
About the Author

Multitasking between pouring myself coffees and poring over the ever-changing tax laws. Here, I've authored 100+ blogs on income tax and simplified complex income tax topics like the intimidating crypto tax rules, old vs new tax regime debate, changes in debt funds taxation, budget analysis and more. Some combinations I like- tax and content, finance & startups, technology & psychology, fitness & neuroscience. Read more

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Quick Summary

Double Tax Avoidance Agreements (DTAAs) prevent double taxation for individuals and companies with international income. Agreements specify guidelines on which country can levy taxes. NRIs can claim benefits through deduction, exemption, or tax credit. DTAA rates vary for different countries. Example: Neha invested in US stocks, subject to DTAA with India. New provision Section 89A addresses double taxation on retirement accounts. DTAAs cover various income types, except for specific cases listed. DTAA benefits differ by country.

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