To avoid this problem for NRIs, the Indian government has signed a Double Taxation Avoidance Agreement (DTA).DTAA) with more than 90 countries including the US, UK, Korea and Taiwan.
How DTAA helps in avoiding double taxation of the same income for NRIs
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says that many countries follow residence-based tax systems, where the global income of residents is subject to tax in such countries. “Hence, the country of residence of an NRI can also tax the income earned by the NRI in India as part of his global income. Further, such Indian-sourced income would be taxable in India under Indian domestic tax laws, to which the beneficial provisions, if any, of the Double Taxation Avoidance Convention (DTAA) could be applied,” he says.
For example, global income of US residents is subject to tax in the US. Therefore, Indian income of an NRI who is a US resident may be subject to tax in the US at the rates applicable to such income for such NRI. “In this situation, the NRI can claim the beneficial provisions under the India-US DTAA, if any, for the taxes payable in the source country. In such a case, the NRI can claim the beneficial rate of tax under the India-US DTAA subject to obtaining a CVR and the online 10F form,” says Jhunjhunwala.
Jhunjhunwala explains the concept with an example: “For instance, when an NRI earns dividends from the shares held by him in an Indian company, the Indian Income Tax Act prescribes withholding tax (TDS) at the rate of 20 per cent (plus applicable surcharge and cess) on such dividend payments/accruals to a US resident. However, Section 10 of the India-US DTAA provides for a tax rate of 15 per cent on dividends (in certain specified cases). In such a case, the NRI can claim the beneficial rate of tax under the India-US DTAA subject to obtaining a TRC and filing Form 10F online.”
Your claim for double tax treaty fees and income tax relief may be rejected if Form 10F and TRC are not submitted.
If you do not file Form 10F and Certificate of tax residence (TRC) then the favourable rates under the DTAA might not be granted. TRC is a document issued by the tax authorities of a country certifying the tax residency status of an individual. “TRC is particularly relevant for Non-Resident Indians (NRIs) who may have sources of income or assets both in India and another country,” says Yeeshu Sehgal, Director, Tax Markets at AKM Global. According to the income tax department, “Non-resident taxpayers claiming the benefit of lower tax rates under the relevant DTAA, must obtain a tax residency certificate from the tax jurisdiction having DTAA with India under which the benefit of lower tax rate is claimed. Also, ensure that the certification in the prescribed Form No. 10F, including a copy of the tax residency certificate obtained from the resident jurisdiction, has been submitted through the ITR e-filing portal.”
CA (Dr.) Suresh Surana says that among the multiple pre-conditions for claiming DTAA tax exemption, one includes the taxpayer being a “resident” of a country with a DTAA signed with India. “This residency must be established through a Tax Residency Certificate (TRC) issued by the tax authorities of the country of residence. The TRC provides evidence that you are a tax resident of a country that has a tax treaty with India,” says Surana.
Deadline for filing Form 10F and TRC?
According to Sehgal, there is no deadline for NRIs to file Form 10F and TRC. “Form 10F and TRC are filed whenever there is a case of double taxation and the NRI wishes to claim DTAA benefits,” he added.
How NRIs can avoid double taxation even if they do not file Form 10F and TRC
CA Abhishek Soni, co-founder of Tax2Win, says that without filing Form 10F and TRC, Indian tax authorities might not grant tax relief under the DTAA, “potentially leading to higher tax liability.”
Experts say that even if an NRI does not provide the TRC and Form 10F, he can still avoid paying double tax on the same income. “Even if an NRI does not provide a TRC and Form 10F, he can still claim double tax on the same income.” foreign tax credit in their jurisdiction of residence to avoid double taxation,” says Sehgal.
Jhunjhunwala explains with an example: “The NRI can claim credit for tax withheld in India in his/her US income tax return, subject to compliance with the foreign tax credit claiming requirements of the US domestic tax laws.”
How does DTAA work?
According to Surana, many double tax agreements with other countries typically provide for reduced tax rates or exemptions on certain types of income (such as dividends, interest, royalties, etc.) for residents of the treaty countries. “To avail of the lower tax rates or exemptions under a double tax agreement, a taxpayer must provide specific documentation, including the TRC, to prove that he or she is a tax resident of a country that has a tax treaty with India,” says Surana.
According to Surana, the CTR must support the request for tax resident status to obtain a lower tax rate or an exemption under the DTAA. “Without it, one may pay taxes at the higher domestic rate or lose the benefits of the treaty. For example, if a taxpayer earns interest from a foreign country, the DTAA may allow the taxpayer to pay taxes on that interest at a reduced rate in the home country or claim a credit for the foreign taxes paid in the home country,” he says.
According to Surana, there are two types of double tax relief: Section 90 (when there is a treaty country) or Section 91 (when there is a non-treaty country).
Surana says Section 90, also known as “bilateral relief,” applies when a DTAA is in place. “The taxpayer can claim relief based on the provisions of the DTAA, which may include lower tax rates or exemptions,” he says.
Section 91, on the other hand, is known as ‘unilateral relief’. “This section is applicable where there is no DTAA between India and the foreign country. In this case, the taxpayer can claim relief on taxes paid in the foreign country, limited to the Indian tax payable on the same income,” says Surana.
According to Soni, in order to claim relief under Article 91 (unilateral relief without a DTAA treaty), the following conditions must be met:
- Income obtained: The income must have been obtained during the previous year.
- Fiscal responsibility: The income must be taxed both in India and in the foreign country.
- Comparable tax system: The tax system of the foreign country should be comparable to that of India and India should not have a double taxation agreement with the country in question.
- Tax payment: The taxpayer must have paid taxes in the foreign country.
- Relief calculation: The amount of unilateral relief is the lower of the Indian or foreign tax rates applied to the foreign income. This amount is then deducted from the taxpayer’s total tax liability in India.
Disclaimer
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.