Double Tax Avoidance Agreement (DTAA) Between India and UK

Double taxation can be a concerning issue for all income taxpayers who earn in foreign currencies. There are chances that both resident and home countries levy taxes according to their tax slabs. The Indian government has entered into the Double Tax Avoidance Agreements (DTAA) to counter this problem by providing relief and tax credits. 

A Double Tax Avoidance Agreement (DTAA) between India and the United Kingdom helps Indian non-residents who live in the United Kingdom avoid paying taxes twice on the same income. Apart from the UK, India has also signed the DTAA with 84 other countries, where Non-Resident Indians are eligible for either tax relief or foreign tax credit.

What is DTAA between India and the UK?

DTAA between India and the UK was introduced back on 26th October 1993 when both parties agreed to abide by the articles included in the agreement. With this agreement, both India and the United Kingdom are responsible to avoid double taxation on income earned by residents of these countries in India or the UK. 

This DTAA applies to the tax residents of India and the UK (together referred to as the Contracting States). Without this agreement, they will have to pay taxes twice on the same income, once in India and then in the UK. 

Anyone living in the UK for at least 182 days in a fiscal year is eligible for tax exemptions under India UK DTAA. This particular agreement has 31 articles and a few subsections under them which explain the rules and regulations of tax benefits that a tax resident of either of the countries can claim. 

Significance of India UK DTAA for Both Countries

DTAA between India and the UK is significant to both countries for numerous reasons. Some of them are:

• It helps to ensure that the taxation system is fair to the taxpayers. The taxation system aims to create a system that taxes every earning citizen fairly, especially for people who are earning internationally. 
• This agreement allows tax benefits through a bilateral relief system. The bilateral system offers relief on either tax deducted at source (TDS), tax exemption or tax credit to the taxpayers. 
• This agreement also helps to manage the issue of tax evasion by providing fairer opportunities to the NRI taxpayers where they can pay justified taxes on their income.
• DTAA helps to foster multinational job opportunities in India because it encourages people to take part in the global business environment and earn safely.
• DTAA allows all partnership farms to function freely in the UK and India without the fear of double taxation.
• DTAA between India and the UK is there to help the UK and India-based organisations pay taxes fairly under section 90A of the Income Tax Act, 1961. 
• Taxpayers can claim the benefit of this treaty as per Section 90A. This section implements the bilateral relief system for taxpayers in India. 
• Indian Students living in the UK also fall under the DTAA as they can enjoy tax benefits on their earnings under Article 21 of India UK DTAA for first 5 years of his stay in the UK.

Taxes Covered Under DTAA

DTAA applies to various types of taxes in both countries.  There are two categories of taxes including ‘United Kingdom Tax’ and ‘Indian Tax.’

Taxes in the ‘United Kingdom Tax’ under DTAA are:

• Income tax
• Corporate taxes
• Taxes on capital gains
• Taxes on petroleum revenue

Taxes that fall under ‘Indian Tax’ category are:

• Income tax along with any/all surcharges

Apart from these, other taxes, either the same or similar to these kinds of taxes, are included within the DTAA.

India UK DTAA TDS Rates

Taxpayers can get relief on the TDS or Tax Deducted at source under DTAA. 

• In case of the UK, Article 11 of the DTAA says that the TDS rate on dividend income cannot exceed 15% if the gains are derived directly or indirectly from immovable property. This 15% rate applies to interest, royalty and technical fees as well.
• In all other cases of dividend income, rate of TDS is 10%. 
• According to the India UK DTAA, anyone can avail benefit of 15% rate on the dividend income. 
• At the same time, a tax credit of up to 15% is also possible according to Article 12(2). 

So if you are an Indian tax resident the maximum TDS that can be deducted in the UK on Interest income in UK is 15% and you will be eligible for credit of foreign tax in India as per the provisions of DTAA read with Section 90A.

Taxation on Capital Gains under DTAA

Capital gains are also taxed under India UK DTAA as per Article 14 of the agreement, capital gains arising in any of the contracting states can be taxed in accordance with the domestic laws of that country unless they are under the categories mentioned under Articles 8 and 9. Hence, there is no restriction on maximum capital gains tax payable in the contracting state in which it arises, however, the said tax will be creditable in accordance with the domestic laws of the countries.

So if you are an Indian tax resident and you earn gains by selling shares in the UK, the said gain will be taxable in UK as per the domestic tax laws of the UK and you will be eligible for credit of foreign tax in India.

Articles 8 and 9 mention capital gains earned through air transportation and shipping-related contractual incomes which are only acceptable for tax relief under UK India DTAA.

Final Word

UK India Double Taxation Avoidance Agreement (DTAA) is an important financial tool to establish a fair taxation system for both countries. It has many benefits for the taxpayers. Anyone who is earning in foreign currencies should know about the tax benefits under DTAA to claim benefits and relief offered. 

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