DTAA or Double Taxation Avoidance Agreement is a tax agreement that India has with various countries. In simple language, this means that for an NRI, if he/she is a resident in any of those 65 countries and is paying taxes on the income earned in that country, then he/she is eligible for a lower deduction of tax on income earned in India in that financial year.

This article would talk about Applicability of DTAA and It’s Benefits to NRI .

It is an agreement entered into by two countries so that income earned and taxed in one country is not taxed again in the second country and thus double taxation is avoided. The Provisions of DTAA override the general provisions of taxing statute of a particular country.

Some of the relevant incomes covered under DTAA agreement are:

• Dividends,
• Interest,
• Royalties and fees for Included Services,
• Gains,
• Independent personal services Ex: Independent activities of physicians, surgeons, lawyers, engineers, accountants etc,
• Dependent personal services Ex: Salaries, wages and other similar remuneration in respect of employment.

Benefits of DTAA to NRI’s

The Double Taxation Avoidance Agreement (DTAA) benefit is provided as per the provisions of Section 90 of Income Tax Act 1961. In the recent Union budget of FY 2012-2013 there has been an amendment in Section 90 of the Income Tax Act 1961. With regard to the amendment, all NRIs who wish to avail DTAA benefit for the financial year 2012-2013 will have to mandatorily provide Tax Residency Certificate (TRC). TRC is issued by the tax/government authority of the country where the NRI is tax Resident. As there are specific provisions in the Income Tax Act for TRC, no other document in lieu of TRC shall be considered for availing the DTAA rate for the said financial year. In case if NRIs have availed the DTAA benefit earlier or wish to avail the same for the same for FY 2012-13, then they have to provide the latest copy of TRC. In case of non receipt of the Tax Residency Certificate, interest earned on NRIs income, NRO account will be taxed at 30.90%. Furthermore, Tax Deducted at Source (TDS) once deducted cannot be refunded.

In order to take the benefit of lower rates of tax as per double taxation avoidance agreement entered in by India, NRIs need to submit the Residency Certificate issued by Tax Authorities of the country of his residence. These documents should be submitted to the designated bank branch at the time of opening the bank account or subsequently. New TDS rate shall be applied only after the acceptance of the Residency Certificate by the designated bank.

Further issue that can be faced is that if the person is earning income in a country that comes under DTAA Benefit –The financial years of other countries are usually different from the financial year of India.
The residential status needs to be examined very carefully to ascertain whether DTAA benefit applies or not. Peculiar situations could arise as a person may be a resident of both countries or a non resident of both countries as per the DTAA (this is possible in case of highly mobile employees) for a particular period of the tax year.

Where a person is a resident of both countries, the residential status for the purposes of the tax agreement is determined by applying the ‘tie breaker’ test in the DTAA. This is essential, since the country of residence relieves the burden of double taxation by giving either the credit for taxes paid in the source country or the country in which the individual is not a resident.

On the other hand, if individual is considered to be a non resident of both countries, individual is not entitled to the DTAA benefits and thus individual will be governed by the respective domestic tax laws of those countries relating to residence and taxability.

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