DTAA - Double Taxation Avoidance Agreement : Definition, Types, and Benefits

For NRIs who are working in other countries, the DTAA (Double Taxation Avoidance Agreement) helps to avoid paying double taxes on income earned in both their country of residence and India. Its key objective is that tax-payers in these countries can avoid taxation for the same income twice. India has 85 active agreements. The basic objective of DTAA is to promote and foster economic trade and investment between two Countries by avoiding double taxation. You can check the DTAA entered into by India with other countries from the income tax department’s website through this link Notification of Government.

What is DTAA?

DTAA means a Tax Treaty between two or more countries to avoid taxing the same income twice. When a person is residing in one country and earning income in some other country they are covered under DTAA. This means that involved countries have agreed upon tax rates and jurisdictions for income arising from their country.

For example, Mr. Arjun is an Indian residing in the UK. He has made investments in India on which he earns returns. Now, this Income can be taxable in both India and the UK. But because of DTAA, Mr. Arjun will not be taxed in both countries for the same income.

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Types of DTAA

Relief from Double Taxation can be provided in two ways:

• Bilateral Treaties: When there is an agreement of DTAA between the Two countries relief is calculated according to mutual agreement between such two countries. Bilateral relief can be granted by either of the following methods:
  • Exemption method: Under this method, income is taxed in only one country
  • Tax credit:  Income is taxed in both countries. Relief is granted in the country in which the taxpayer is the resident.
• Unilateral Relief: The home nation provides relief when there is no mutual agreement between the countries 

Nature of DTAA

• Comprehensive: Comprehensive DTAA’s are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.
• Limited: Limited DTAA’s are those which are limited to certain types of incomes only.

Advantages of DTAA

• The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation.
• This relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
• Reducing the possibility of tax evasion in both or either of the signatory countries
• Tax rate concessions
• Lower Withholding Tax: Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty, or dividend incomes in India.

Treatment of Double Taxation Avoidance Agreement

There are two ways of implementing DTAA:

1. By either exempting the income earned abroad in its entirety
2. By providing credit to the extent of tax already paid in the other country

Continuing the example, as Mr. Arjun is covered under DTAA. And the agreement states that the UK will exempt his entire income earned on investments made in India then he has to pay taxes only in India and not the UK. Only one particular country will charge his income.

Now, let’s say that the agreement states that India and the UK both will charge taxes on that income. In that case, Mr. Arjun will get a credit of the taxes paid by him in the UK which will be deducted while paying taxes in India. So he will end up paying taxes in both countries but at lowered rates.

The Governments of different countries enter into Double Taxation Avoidance Agreements to provide reliefs to the tax-payers and encourage more investments.

How can NRI claim benefit of DTAA?

Non resident Indians residing in any of the DTAA countries can avail of tax benefits provided under DTAA by timely submission of the following documents every financial year within the due dates:

• TRC (Tax Residency Certificate): You need to submit TRC to claim benefits under DTAA. To obtain a TRC, you can approach the tax/government authorities of your current residence country, where you would get TRC certified, upon downloading form 10F.
• Form 10F: You need to submit form 10F to avail benefits under DTAA.
• PAN number: You also need to submit your PAN (Permanent Account Number) along with the above documents to get tax benefits.

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Residential Status Calculator for Income Tax. Taxability in India depends on residential status. Know your residential status from Resident, NRI, Resident but Not Ordinarily Resident(RNOR)

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Residential Status Calculator

Residential Status Calculator for Income Tax. Taxability in India depends on residential status. Know your residential status from Resident, NRI, Resident but Not Ordinarily Resident(RNOR)

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How to apply for DTAA?

The process of application of DTAA involves a series of steps, involving the different types of provisions.

• Determine whether the issue is within the scope of the convention.
• Check that the treaty applies to the tax in issue – is it a tax listed in Article 2 (or a tax substantially similar to such a tax).
• Thirdly, check that the treaty is in force for the taxable period in issue.

How is Double Taxation Avoidance Agreement relief calculated?

In case there is DTAA with the Country, then Tax Relief can be claimed u/s 90. Steps to compute Double Taxation relief:

1. Calculate Global Income i.e. aggregate of Indian income and Foreign income;
2. Compute tax on such global income as per the slab rates applicable;
3. Calculate the average rate of tax (i.e. Global income divided by the amount of tax);
4. Compute an amount by multiplying Foreign income with such average rate of tax;
5. Compute Tax paid in Foreign country

The amount of relief shall be lower of (4) and (5).

In case there is No DTAA, then Tax Relief can be claimed u/s 91. Steps to compute relief:

1. Compute tax payable in India
2. Compute lower of Indian rate of tax and rate of tax in Foreign country
3. Multiply the rate obtained in Step 3 by the doubly taxed income.

Relief will be the amount as computed in Step 3.

List of countries that have DTAA with India

India has signed a Double Tax Avoidance Agreement with most major nations where Indians reside. Following is the list of some of the major countries:

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