Understanding DTAA for NRIs
Double taxation arises when a Non-Resident Indian (NRI) is taxed on the same income
both in India (source country) and in the country of residence.
A Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries
to eliminate such double taxation and promote cross-border trade and investment.
Methods of Relief under DTAA
Exemption Method
Exclusive right to tax is granted to one country,
making the income completely exempt in the other.
Concessional Tax Rate
Both countries can tax the income, but tax rate is capped
at a lower rate under the treaty.
Tax Credit Method
Taxes paid in the source country are allowed as credit
in the country of residence.
Illustration of DTAA Benefits
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Interest income earned in India by an NRI may be taxed at a concessional DTAA rate,
instead of higher domestic tax rates.
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Excess tax deducted in India can be claimed as refund or foreign tax credit
in the country of residence.
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DTAA provisions can be applied only if they are more beneficial than Indian tax laws.
How to Claim DTAA Benefits
- Determine tax residency under the applicable DTAA
- Identify relevant DTAA article for income type
- Submit mandatory documents to payer or tax department
Documents Required
- Tax Residency Certificate (TRC)
- Form 10F (mandatory electronic filing)
- Passport and Visa copy
- PAN Card (if available)
- Declaration / indemnity (for banks)
Tax Residency Certificate (TRC)
TRC is issued by the tax authority of the country of residence and is mandatory
to claim DTAA benefits. It is valid for one financial year and must be submitted annually.
Impact of Multilateral Instrument (MLI)
India has adopted the Multilateral Instrument (MLI) to prevent treaty abuse
and base erosion. MLI provisions override certain DTAA clauses from FY 2020–21
and restrict aggressive tax planning.