DTAA on Foreign Income

What is DTAA?

DTAA or Double Taxation Avoidance Agreement is a treaty signed between two countries to avoid paying double taxes on the same income. The agreement ensures that the foreign income earned by an individual is not taxed twice i.e in home country & foreign country. This arises when a resident individual earns income from a foreign country, and the tax gets deducted both in that foreign country where it is earned and in the individual's home country. This results in the same income being taxed twice.

When two nations sign a double tax avoidance agreement, it increases a nation's potential as an investment destination and minimizes the taxpayer’s burden of paying taxes twice. Additionally, it helps reduce the number of tax evasion cases.

The DTAA agreements various types of incomes, including capital gains, dividends, interest, salary income, business profits, and royalties. These agreements specify which country has the right to tax each category of income. The primary authority to collect taxes lies with the country where the income is earned. However, the country of residence may also impose taxes, though at a lower rate.

Applicability of DTAA:

The applicability of DTAA largely depends on the residential status of the taxpayer & the type of the income earned. When a transaction is subject to taxes in both India and another country, the Double Tax Avoidance Agreement (DTAA) comes into effect. Additionally, a foreign firm or a non-resident individual must be at least one of the parties involved in the transaction. Put simply, the Double Taxation Avoidance Agreement (DTAA) is applicable when there is income being taxed twice, and when the parties involved in the transaction are not citizens of the country where the transaction occurs.

The Double Tax Avoidance Agreement (DTAA) between India and the country of residence applies if the party is not a resident of India.

Required documents to claim DTAA Benefit:

Below is the comprehensive list of the required documents to claim the benefit;

• Tax Residency Certificate (TRC) from the Resident country's government.
• The documents specifying the income earned and the tax deducted in foreign country.
• The declaration that the tax so deducted is not claimed as a refund in the foreign country.
• The copy of ITR filed in the foreign country.

Methods to claim DTAA benefits:

There are two types for claiming relief under DTAA:

• Bilateral Relief- The relief under this is available when there’s a DTAA agreement between two countries The relief can be provided through two methods;
• Exemption: Under this method, the tax is imposed only in one country.
• Tax Credit: Income is taxed in both the countries, but the resident country provides relief.
• Unilateral Relief- The resident country offers relief when there’s no DTAA agreement between two countries.

DTAA Computation Process:

• Assess Tax Liability under the Income Tax Act: Determine the source of income subject to DTAA and calculate its tax liability separately.
• Evaluate Tax Liability under the DTAA: Apply tax rates or laws, as per DTAA on such income.
• Conversion using Foreign Exchange rate: Convert, the foreign income & Tax paid, using Telegraphic Transfer Buying Rate(TTBR) on the last day of the month immediately preceding the month in which such income was earned or tax was paid.
• Determine Foreign Tax Credit: Ascertain the most favorable tax option between the Income Tax Act and DTAA. it is the lower of the tax payable on the foreign income under the Income tax act & the foreign tax paid.

Which types of income are excluded from the DTAA?

Non-resident Indians (NRIs) are exempted from double taxation on some kinds of income received from different sources in India under the Double Tax Avoidance Agreement (DTAA). This includes income from:

• Income earned on the Services rendered in India.
• Salaries received in India.
• Income from an Indian house property.
• The capital gains from transferring assets in India.
• Interest accrued on the bank's fixed deposits in India.
• Interest earned from savings bank accounts in India.

The benefits of the DTAA can be used by NRIs to avoid double taxation in cases when their income from these sources is subject to taxes in their country of residence.