Double taxation is a situation where a taxpayer has to pay income tax multiple times on the same source of income. With the Double Taxation Avoidance Agreement (DTAA), NRIs can avoid paying higher taxes in both countries.
Double Taxation Avoidance Agreement
The Double Taxation Avoidance Agreement is an agreement between two countries to avoid double taxation on a single source of income. DTAA will provide relief from paying dual taxes, especially for NRIs who live abroad and getting paid in India. Non-resident Indians in any of the countries with which India has entered into DTAA can avail of the tax benefits by submitting requisite documents.
To explain this in simpler terms, let us assume Rohan, an Indian resident works as a software analyst in the US. For his work in the US, he is paid a remuneration. For income earned in the US, federal income tax is levied. Rohan will have to pay income tax to the Indian Government on the same income, as he is an Indian resident. Thus, Rohan ends up having to pay tax twice on the same income. To help tide over this dual taxation aspect, the governments of two or more countries may enter into an agreement known as the Double Taxation Avoidance Agreement (DTAA). India has signed the DTAAs with almost 84 nations.
Tax relief can avail either by exempting the entire income earned overseas or by providing credit to the extent of tax already paid in the foreign country.
Documents to be submitted to avail DTAA benefits
To utilize the benefits under DTAA, an NRI has to submit the following list of documents to the deductor at the designated time:
- Self-attested passport and visa copy
- Self-attested PAN card copy
- Self-declaration plus indemnity format
- Tax Residency Certificate (TRC)
- PIO proof copy if applicable
An individual taxpayer is not eligible to claim DTAA benefits without submitting TRC to the deductor, according to the Finance Act 2013. To receive the Tax Residency Certificate, the taxpayer has to submit Form 10FA and TRC will be issued as Form 10FB. The Tax Residency Certificate will have details such as the assessee’s name, assessee status, nationality, tax identification number of the country, address proof, validity proof of the certificate, and residential address for tax purposes.
The DTAA benefits can avail on an annual basis. Thus, an NRI has to produce all necessary documents at the start of every financial year.