When it comes to money, everyone wants to earn as much as possible, isn’t it? That is why you look for different investment avenues and wealth generation ideas both in India as well as abroad. In fact, foreign investments hold a particular attraction for most individuals. They try and invest their money in foreign countries which promise good return. But what about the tax implications on those returns? Do you know how and where your foreign returns would be taxed?
Taxation of returns becomes a problem when two countries are involved, one where you live and the other from where you have earned the return. It gives rise to a prominent question – according to which country’s laws would the returns be taxed? Would you be taxed twice?
To answer these questions and to resolve the tax implications of internationally earned income, Double Tax Avoidance Agreement was signed. Do you know what the agreement is all about? Let’s explore –
What is the Double Tax Avoidance Agreement?
Double Tax Avoidance Agreement (DTAA) is an agreement which has been signed between India and other countries. According to the agreement, an individual earning an income in another country while being a resident of another country does not have to pay two (double) taxes on the same income. For example, if you are an Indian resident and have an income earned in USA because of your business being done in USA, you would have to pay tax in the USA on the income generated there as well as in India where you file your tax returns. But, when the DTAA is in effect, you would have to pay taxes only in one country, not both. Alternatively, in case your income is chargeable to tax in both the countries then taxes paid in one country will be allowed as a credit in the other country as per the provisions of DTAAs.
Objectives of the agreement
The tax rules of every country has two main components –
- Tax on foreign income
- Tax on non-residents
The Tax on foreign income arises when the resident or company of a country earns an income in another country. For instance, if an Indian individual say Mr Abhinav or Reliance Industries limited, earns an income in USA , it is called a foreign income. Since this foreign income is a part of the individual’s or company’s income which are resident in India, it should be taxed in India.
Tax on non-residents is incurred when a resident of another country earns an income domestically. So, in the above example, if Mr John, who is resident of USA earns some income in India, so the income earned In India would be taxed in both the countries.
Let’s understand this with the help of an example –
Abhinav, an Indian resident, earns INR 2500 through his investments in USA. This INR 2500 would be taxed in India as foreign income and also in USA as non-resident income. If, the tax rates in India and USA are 30% each, an effective tax of 60% would be paid on the income leaving Abhinav with only INR 1000 (INR 2500 – 60%) as the net income after taxes.
This dual taxation is a loss for the investor and to address this issue, the Double Tax Avoidance Agreement came into the picture. The agreement was made to promote international trade. Under the provisions of the agreement, in case of foreign income, taxation is done only once. Thus, when the individual knows that he would be taxed only once on the international income, he would be motivated to do business internationally and increase his scope of earning. This would, in turn, help countries attract investments from entrepreneurs. India can enjoy foreign investments as well as other countries can enjoy investments from Indian entrepreneurs. Thus, the agreement is mutually beneficial for all member countries in boosting their economies.
Application of DTAA
DTAA can be applied either comprehensively or in a limited manner. Let’s understand –
- Comprehensive DTAA – under comprehensive DTAA, tax benefits are provided on income, capital gains and all sources of income
- Limited DTAA – under this DTAA, tax reliefs are available on specific areas like income from shipping, income from air transport, income from estate, gift or inheritance.
Incomes exempted under DTAA
In the Indian context, NRIs would not have to pay double tax on the following sources of income earned in India based on the provisions of DTAA with the respective countries:
- Salary received
- Payment for services rendered in India
- Interest on fixed deposits in India
- Income from house property which is situated in India
- Interest earned on savings bank account maintained in India
- Capital gains earned when capital assets are transferred in India
How does the DTAA work?
DTAA works on two principles –
Source rule is when the income is taxed in the country of origin whether you are a resident of the country or not.
Resident rule specifies that the income would be taxed in the country where you reside irrespective of the income’s origin.
In India, residence rule is followed. This means that your international income would be taxed in the country where you are a resident. If you are an Indian resident, your international income would be taxed in India. If, on the other hand, you are a NRI, your Indian income would be taxed in your resident country as well as in India also. However, you can claim the benefit as per the provisions of the DTAA.
Tax reliefs under DTAA as per the Indian Laws:
Reliefs under DTAA can be categorised as unilateral or bilateral tax reliefs. Let’s elaborate –
Bilateral relief under Section 90 of the Income Tax Act, 1961:
Bilateral relief is available in those countries with which India has entered into a DTAA treaty. Currently, India has DTAA treaty with more than 80 countries where bilateral tax relief is available. Under bilateral tax relief, tax benefit is granted in two ways –
- Exemption method – under this method, international income is either taxed in any one country or a specific portion of the income is taxed in both countries.
- Tax credit method – under this method, income is taxed in both countries. Thereafter, you get a tax credit in your tax liability payable in your resident country for the tax already paid in the income source country. For instance, for your income earned in USA, you paid a tax in USA. Thereafter, when your tax liability is calculated in India on your total income, you get a deduction for the tax already paid in USA.
The DTAA provisions would override the provisions of the Income Tax Act. It means that you can opt the provision which is more beneficial to you.
Unilateral relief under Section 91 of the Income Tax Act 1961
You get unilateral tax relief if DTAA treaty is not in place between India and the country in which the income originates. To avail unilateral relief, the following conditions would have to be fulfilled –
- You should be an Indian resident in the year the income is earned
- The income should be earned outside India
- The income should be taxable in a foreign country and such tax should have been paid
Under unilateral method, the income would be doubly taxed. Then, deduction from the Indian income tax would be allowed. The rate of deduction would be lower of the average tax in India or average tax of the source country, whichever is lower. Average tax would be the tax paid divided by the total income multiplied by 100. If, however, both taxes are equal, the Indian tax rate would be allowed as deduction.
Countries having DTAA with India
Presently, 88 countries have signed DTAA agreements with India but only 85 of these agreements are active. The countries having DTAA with India are mentioned in the table below along with the withholding tax rate on different types of incomes –
|Australia||15%||15%||10% or 15%||10% or 15%|
|Bangladesh||10% or 15%||10%||10%||Not applicable|
|Belarus||10% or 15%||10%||15%||15%|
|Belgium||15%||10% or 15%||10%||10%|
|Botswana||7.5% or 10%||10%||10%||10%|
|Brazil||15%||15%||25% or 15%||Not applicable|
|Bulgaria||15%||15%||15% or 20%||20%|
|Canada||25% or 15%||15%||10% or 15%||10% or 15%|
|Croatia||5% or 15%||10%||10%||10%|
|Denmark||15% or 25%||10% or 15%||20%||20%|
|Mauritius||5% or 15%||7.5%||15%||10%|
|Montenegro||5% or 10%||10%||10%||10%|
|Nepal||5% or 10%||10%||15%||Not applicable|
|Oman||10% or 12.5%||10%||15%||15%|
|Philippines||15% or 20%||10% or 15%||15%||not applicable|
|Portugal||10% or 15%||10%||10%||10%|
|Qatar||5% or 10%||10%||10%||10%|
|Saudi Arabia||5%||10%||10%||Not applicable|
|Serbia||5% or 15%||10%||10%||10%|
|Singapore||10% or 15%||10% or 15%||10%||10%|
|Slovenia||5% or 15%||10%||10%||10%|
|Italy||15% or 25%||15%||20%||20%|
|Lithuania||5% or 15%||10%||10%||10%|
|Spain||15%||15%||10% or 20%||20%|
|Syria||5% or 10%||10%||10%||Not applicable|
|Tajikistan||5% or 10%||10%||10%||Not applicable|
|Tanzania||5% or 10%||10%||10%||Not applicable|
|Trinidad & Tobago||10%||10%||10%||10%|
|Turkey||15%||10% or 15%||15%||15%|
|Ukraine||10% or 15%||10%||10%||10%|
|United Arab Emirates||10%||5% or 12.5%||10%||Not applicable|
|United Mexican States||10%||10%||10%||10%|
|United Kingdom||10% or 15%||0%, 10% or 15%||10% or 15%||10% or 15%|
|United States||15% or 25%||10% or 15%||10% or 15%||10% or 15%|
|Zambia||5% or 15%||10%||10%||10%|
What is article DTAA ?
DTAA (Double Taxation Avoidance Agreement), as the name suggests is a treaty signed between two or more countries to avoid double taxation on the same income. It means if a particular provision of Income Tax Act 1961 is more beneficial to the person than DTAA then it is up to the person to choose s from any of the two option.
How many countries have DTAA with India?
India has Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries out of which 86 are presently in force. Tax Rates and jurisdiction on specified types of income has been agreed for transactions involving persons having interest between countries with which India has a DTAA.
What is double tax income ?
Double taxation is a taxation principle referring to income taxes paid two times or multiple times on the same income. This situation normally occurs when income is taxed both at corporate level and personal level or you have income sources from more than one company. Double taxation also occurs in international trade and commerce when the same income is taxed in two different countries, one being country of residence and the other being the country in which income is earned.
What is DTAA benefits ?
DTAA stands for Double Taxation Avoidance Agreement. It is an agreement entered into between two countries with a common objective to avoid taxing the same income twice in both the countries. India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 88 countries out of which 86 agreements are operational as of now.
What is DTAA claim ?
Double Taxation Avoidance Agreement or DTAA is an agreement entered between two countries which aims to avoid taxation of the same income in both countries. For claiming the DTAA benefit in India assessee needs to present Tax Residency Certificate. Tax Residency Certificate can be obtained by the assessee from the government of the country in which NRI resides.
What is DTAA rate ?
The rates and rules of DTAA vary from country to country depending upon the particular memorandum signed between both parties. TDS rates on interests earned for most countries is either 10% or 15%, though rates range from 7.50% to 15% in general. List of DTAA rates for particular countries have been mentioned above.
From where I can check DTAA entered between India and other countries?
You can check the DTAA entered into by India with other countries from income tax department’s website through this link Notification of Government.
Understand the DTAA agreement and know that you wouldn’t have to pay double taxes on your internationally earned income. Know the provisions of DTAA and claim tax credits or deduction as the case may be. Expand your horizons beyond Indian borders and earn international income without worrying about the taxes. Your Government allows you tax reliefs and you can count these reliefs to save your hard-earned income from being taxed twice.
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