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

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between India and over 100 countries to ensure that NRIs and taxpayers are not taxed twice on the same income. Under DTAA, income is taxed in only one country or at a reduced rate in both, depending on the terms of the agreement. India has signed DTAA with countries including the US, UK, UAE, Canada, Singapore, and more.

What is Double Taxation Avoidance Agreement (DTAA)?

DTAA, or Double Taxation Avoidance Agreement, is a treaty signed between two countries to prevent the same income from being taxed twice. Under DTAA, if you earn income in one country while residing in another, you are required to pay tax in only one country or at a significantly reduced rate in both.

For NRIs, DTAA is especially important as it protects income earned in India from being taxed both in India and in their country of residence.

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:

How to Apply DTAA?

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

• 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.
• Tax liability under the DTAA: If the income falls under specific articles of DTAA, then the income will be taxed as per those articles.
• 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 governments 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%

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.

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).

Few Basic Principles of DTAA

Section 89A of Income Tax Act

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 now 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 almost 100 major nations where Indians reside. Some of these countries are:

• United States of America
• Canada
• United Kingdom
• Australia
• UAE
• Singapore

On What Type of Income DTAA is Applicable?

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

• 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.