The residential status of an individual is critical in determining the way how his or her income will be taxed in India for that year. It is common to see non-resident Indians (NRIs) and persons of Indian origin (PIOs) carefully planning their stay in India for the specified year so that their income does not fall under the taxation category in both countries.
However, the residential status is not always under the control of an individual and due to some unavoidable circumstances, the residential status can potentially change. In such cases, a person’s income from a single source may come under the taxable category of both countries.
To mitigate the above issue and to foster good economic relations, countries execute a double tax avoidance agreement (DTAA). In this guide, let’s explore how residential status can affect
Residential Status of an Individual
An individual’s residential status is determined mostly by his number of days spent in India during the relevant year as well as the previous 10 years. In general, there are three types of people: residents, non-residents, and residents who are not typically residents (RNOR). The scope of taxable income in India varies depending on residency.
For example, for an NRI doing business outside of India (even if he only qualifies as RNOR for a certain year), his income from that foreign firm may be liable to taxes in India if he operates it from India during his stay here.
Benefits Available under DTAAs
The Double Taxation Avoidance Agreement is a treaty that two nations sign to provide relief to the taxpayers from having to pay taxes several times. DTAA provides for the elimination of double taxation by:
(a) Granting one country the exclusive right to tax.
(b) Giving both countries the right to tax but with a provision limiting the rate of taxation.
(c) Granting a resident the right to obtain refunds/ credits for taxes paid in the source country.
NOTE: It should be noted that the DTAA only helps NRIs from paying greater taxes in both nations.
The DTAA specifies the rate at which tax must be deducted on income received by citizens of that country. This implies that if an NRI earns revenue in India, the TDS will be calculated using the rates specified in the DTAA with that nation. There are different rates with different countries; in general, it ranges between 7.50% to 15%.
Income Types under DTAA
NRIs don’t have to pay taxes twice on:
- Salary received in India
- House property in India
- Capital gains in India
- Fixed deposits in banks in India
- Savings bank in India
An individual who is residing in a nation with whom India has a DTAA can claim benefits under the treaty. His/her liability to taxation will be restricted to the extent of the treaty’s rules with the source country.
It should be noted that despite the scope of taxation under income tax law in our country is huge. NRIs and other RNOR individuals can benefit from the rules under section 90 IT Act, 1961, subject to the set procedure such as submission of the other country’s Tax Residency Certificate (TRC), etc.