Introduction
Are you a Non-Resident Indian (NRI)? If so, then the Double Taxation Avoidance Agreement (DTAA) could be of great help to you. Any NRI who works in a different country than India has to pay double taxes on the income they earn. However, double taxation can be avoided if India and their country of residence have this double tax avoidance agreement with each other. Currently, India has this agreement with 80 different countries in the world. If you want to crack open the Double Taxation Avoidance Agreement concept, then continue reading this blog!
What is a Double Taxation Avoidance Agreement?
The Double Tax Avoidance Agreement, abbreviated as DTAA, is a tax alliance that two or more countries sign with the mutual aim of helping taxpayers to avoid paying double taxes on the same income. A DTAA applies to individuals who earn income in a different nation but are citizens of India. The name DTAA itself explains the purpose of the agreement. Double Taxation Avoidance Agreement can be comprehensive, confining to all income sources or restricted to specific segments, which means taxing income from shipping, air transport, inheritance, etc. Currently, India has a Double Taxation Avoidance Agreement with more than 80 countries. Plus, the country plans to sign more such treaties with other countries in the coming years. India has a comprehensive agreement with countries include Canada, Australia, the United Kingdom, the United States of America, Germany, the United Arab Emirates, Mauritius, etc. Earlier, there was an imbalance in tax collection on the global income of NRIs, and that’s where the need for DTAA arose. If individuals wish to conduct business in a foreign country, they may pay taxes for both countries, i.e. the country where they hold citizenship and the other where they earn. For example, suppose you are moving to Australia from India and leave income sources like interest from deposits in this country. In that case, you will have to pay interest to both India and the other country of your current residence according to your consolidated global income. In such cases, you end up paying tax twice over the same income, where the DTAA helps taxpayers.
DTAA Benefits
The prime intent behind the DTAA is to make a nation appear as an attractive investment destination by offering relief on double taxes. Such relief is provided by allowing exemption on the income earned in a foreign country from tax in the resident country. Or it can also be done by extending credit to the extent of taxes paid abroad. For instance, suppose you got an opportunity to move abroad on deputation. You get payments while you are away from home. The income you have earned during this period will attract tax in both countries. So, what you can do is claim relief during the filing of a tax return for that financial year, given there’s an applicable DTAA. However, if you are an NRI having investments in India, particular DTAA frameworks could apply to income from such investments. In certain circumstances, DTAAs also offer concessions on tax rates. For example, interest earned on NRI bank deposits lures 30% TDS. Nevertheless, since India has signed DTAA with other countries, tax has been scrapped from 10 to 15 per cent. In a nutshell, besides not having to pay double taxes on the same income, the DTAA offers the following advantages: