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What is DTAA? A complete guide to Double Taxation Avoidance Agreement
Key Takeaways
A DTAA protects NRIs from paying tax on the same income in both India and their country of residence, thereby avoiding double taxation.
- To claim DTAA benefits you must submit a Tax Residency Certificate and Form 10F in India before paying or deducting tax at source.
- The agreement covers income categories like salary, property, capital gains, savings and fixed deposits, depending on your country of residence.
- By using NRE accounts and submitting the correct documentation, NRIs at IDFC FIRST Bank can maximise tax efficiency and safeguard international income.
NRIs (Non-Resident Indians) who wish to invest in Indian securities and whose income originates abroad must plan their taxes well to make the most of their earnings. Now, NRIs must also know about the NRE account taxation rules and the details of how their income earned abroad is taxed. Tax planning for NRIs is an important step, and it begins with being aware of the details of DTAA treaties and double taxation.
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What is the Double Taxation Avoidance Agreement or DTAA?
The term “Non-Resident Indians (NRIs)” for tax purposes must be understood in the context of the term “resident Indian”. A resident Indian, according to Section 6 the Income Tax Act of 1961, is an individual who meets one of the following two conditions:
- They have resided in India for a minimum period of 182 days during the previous financial year or
- They have been in India for at least 60 days in the previous financial year and for a total of 365 days in the immediately preceding 4 years.
An NRI is someone who does not satisfy any of the above two conditions. The income earned by an NRI is susceptible to an error in taxation called “Double Taxation” – where an NRI’s income is taxed both in India and their country of employment. To avoid this error, the Government of India has signed “Double Taxation Avoidance Treaties” or DTAAs with several countries across the world. Thanks to these DTAAs, an NRI working outside India need not pay tax on the income that they earn outside India. India has signed DTAAs with major countries such as Australia, Belgium, Canada, China, France, Germany, Italy, Japan, and the United States. For more information, please refer below link.
https://incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx
Depending on the businesses that citizens of one country have in another country and their overall holdings, a DTAA may cover all categories of income or focus on a specific category of income.
Which categories of income does a DTAA treaty cover?
NRIs must know that DTAA treaties deal with the issue of international double taxation. Therefore, depending on the businesses that citizens of one country have in another country and their overall holdings, a DTAA may cover all categories of income or focus on a specific category of income. A DTAA agreement may cover the following categories of income:
- Salary
- Capital gains
- Services
- Property
- Savings
- Fixed deposit accounts
IDFC FIRST Bank’s NRE and NRO fixed deposit accounts help NRIs steadily grow their savings at high interest rates. NRIs can access their FDs seamlessly through IDFC FIRST Bank’s mobile banking and net banking services.
Documents that NRIs need to claim DTAA advantages
DTAA treaties can help NRIs save a significant amount by helping them avoid paying taxes in two countries. However, to benefit from the advantages offered by DTAA agreements, NRIs must submit a set of documents to the bank:
- DTAA request form on the IDFC FIRST Bank website
- Electronic Form 10F with Digital Signature Certificate
- Tax Residency Certificate for the current financial year
Here are a few tips that an NRI can follow to obtain their tax residency certificate in their country of residence:
- An NRI can approach the government or tax authorities in their country of residence to obtain their tax residency certificate.
- It is also advisable for NRIs to check with a tax consultant in their country of residence about the procedure to apply for a tax residency certificate.
- NRIs must pay attention to the format to be followed while applying for a tax residency certificate and must check if their country of residence prescribes a particular format.
- In case of any queries regarding the details to be mentioned in the tax residency certificate, NRIs can contact their bank to resolve their queries.
What are the benefits of the DTAA agreement for NRIs?
DTAA treaties offer several distinct benefits to NRIs such as:
- NRIs can avoid double taxation: The primary objective of DTAAs is to help NRIs save money on taxes by avoiding double taxation. NRIs can thereby increase their income originating abroad.
- NRI who own businesses benefit a great deal from DTAAs: DTAA agreements between India and any other country benefit NRIs who own businesses across the world. Thanks to these agreements, NRI businesspeople can benefit a great deal by avoiding double taxation on the income earned through their businesses.
- DTAA treaties also offer tax exemptions: In addition to not taxing NRI income that originates abroad, DTAA agreements also offer tax exemptions to NRIs. DTAAs also specify the terms and conditions under which an NRI can benefit from tax exemptions.
- DTAAs benefit the countries involved since it streamlines the taxation process: A DTAA is also beneficial for both the countries involved since it contributes towards making taxation more transparent by eliminating international double taxation. This translates to better international relations between the two nations involved and promotes the investment in developing nations like India.
How can NRIs plan their taxes more efficiently?
As an NRI, you can follow certain tips to plan your taxes more efficiently:
- Open an NRE savings account: NRE savings accounts are ideal for NRIs who wish to save up on taxes since the principal and interest amounts are exempt from taxation in India. IDFC FIRST Bank’s NRE accounts offer benefits such as fully repatriable funds and convenient online fund transfer options.
- Avoid double taxation by using DTAA to your advantage: NRIs must fill the DTAA application form (form 10F) to sign up for the benefits offered by the DTAA between India and their country of residence.
- You can benefit from your RNOR status if you have just returned to India: The Resident but Not Ordinarily Resident (RNOR) status allows NRIs to pay tax only on income received or accrued in India. Capital gains and rent received abroad will remain tax-free in India. NRIs can use their RNOR status for three years after returning to India.
NRIs can take advantage of NRE account tax exemptions to save more and grow their savings. It is also advisable for NRIs to check the tax deductions for which they are eligible (such as interest paid on home loans and premiums paid towards health insurance) while planning their taxes.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirst.bank.in for latest updates.
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