Double Taxation Avoidance Agreement, commonly known as DTAA helps NRIs who are working in other countries, to avoid paying taxes twice on their income earned in both their country of residence and India. Knowing the details about DTAA will surely benefit the taxpayers.
DTAA is defined as a tax treaty that is signed between one country to another ( or any two/multiple countries) so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.
This agreement on double taxation avoidance is only applicable in cases where an individual is a resident of one nation but earns income in another. As of now, India has currently 85 active DTAA agreements with other countries. Individuals seeking more about DTAA, benefits, and other details can check below.
Know details about DTAA
As aforementioned, DTAA is a Tax Treaty between two or more countries to avoid double taxation on the same income. DTAAs can be either be comprehensive, or sum up all income sources, or limited to certain areas, which means taxing of income from shipping, inheritance, air transport, etc. The main motive of DTAA is to promote and foster economic trade and investment between two countries by avoiding double taxation.
DTAA includes the taxpayers who are residing in one country and earning income in some other country. This agreement means that the involved countries have agreed upon tax rates and jurisdictions for income arising from their country.
DTAA can easily be understandable with the below example.
For example, Mr. Rahul is an Indian but is currently residing in the UK. He has made investments in India on which he earned returns. Now, this Income earned due to investment in India can be taxable in both India and the UK. But because of DTAA, Mr. Rahul will not be taxed in both countries for the same income. He only has to pay the taxes in one country.
Types of DTAA
The Relief from Double Taxation agreement can be provided in two ways:
● Bilateral Treaties: When there is an agreement of DTAA between the two countries, relief is calculated according to mutual agreement between such two countries, which can be granted by either of the following methods:
- Exemption method: The income is taxed in only one country under this method.
- Tax credit: Income is taxed in both countries but some credits will be granted to the taxpayer. Relief is granted in the country in which the taxpayer is the resident.
● Unilateral Relief: The source nation of the taxpayers provides relief when there is no mutual agreement between the countries
Advantages of DTAA
● Due to an active DTAA agreement, a country appears as an attractive investment destination by providing relief on dual taxation.
● Due to exemption on income earned in a foreign country from tax, this relief is provided in the resident nation.
● The credits are offered to the extent of taxes, which have been paid abroad.
● The possibility of tax evasion is reduced in both or either of the signatory countries
● High concessions on tax rates
● Lower Withholding Tax: Lower withholding tax is a plus for taxpayers as a lower TDS on their interest, royalty, or dividend incomes in India can be paid, while some agreements provide for tax credits in the source or country of operations
How can a taxpayer claim the benefit of DTAA?
NRIs residing in any of the countries which have signed the DTAA agreement can avail of tax benefits provided under it. The benefits under DTAA can only be claimed by timely submission of the following documents every financial year within the due dates:
● TRC (Tax Residency Certificate): Taxpayers need to submit TRC to claim benefits under DTAA. In order to obtain a TRC, one can easily approach the tax/government authorities of their current residence country, where they would get TRC certified, after completing the process of form 10F.
● Form 10F: One needs to submit form 10F to avail of benefits under DTAA.
● PAN number: Taxpayers also need to submit their PAN (Permanent Account Number) along with the above documents to get tax benefits.