Double Taxation Avoidance Agreement (DTAA) - Complete Details

Many individuals are citizens of a particular country, but they earn in different countries, and they need to pay taxes on their earnings as per the Income Tax Act. If your income is generated from a different country, then you may need to pay taxes to both your resident country and the country where you are earning. To prevent paying double taxes, the Double Taxation Avoidance Agreement (DTAA) was introduced by the Fiscal Committee of the League of Nations in 1927. 

In this guide, we have provided all the necessary details about DTAA. The DTAA rate is determined by the taxpayer's residency status under applicable laws. You will get to learn about the objectives, benefits, documents required, DTAA rates for different countries, and more. 

What is DTAA?

The DTAA full form is Double Taxation Avoidance Agreement. It is a treaty signed by two nations to prevent double taxation. India has signed DTAAs with over 100 countries to avoid taxation on the same income twice. This treaty includes the individuals living in one country and earning income from the other. There are three types of DTAA: bilateral treaties, tax credits, and exemption methods. 

DTAA encourages trade in goods and services, capital investment, and other economic activities between the two countries. Both nations agree upon a specific tax rate for the income generated in one country and earned by a resident of a different country. DTAA income tax may cover all the forms of income or some specific ones based on the business type or position held by the citizen of one country in the other country. 

Here are the categories of income that the DTAA covers:

• Property
• Capital Gains
• Salary
• Services
• Savings
• Fixed deposit accounts, etc. 

What are the Objectives of the DTAA Agreement?

The objective of DTAA is to make sure that the taxpayers do not pay the tax twice on the same income in two different countries. 

Here are some of the key objectives of DTAA:

1. Tax Relief: It provides mechanisms, such as tax exemptions, tax credits, or reduced tax rates, to prevent double taxation. 
2. Avoidance of Double Taxation: DTAA makes sure that the same income is not taxed twice, which helps in decreasing the tax burden on international transactions. 
3. Preventing Tax Evasion: DTAA helps prevent tax evasion by facilitating the exchange of information between countries to avoid fraud. 
4. Promoting International Trade and Investment: It encourages cross-border economic activities by mentioning clear tax rules and reducing tax burdens.
5. Clarity and Certainty: It establishes clear guidelines for the taxation of income and hence reduces disputes and ensures smooth tax administration. 

What are the Benefits of DTAA?

Signing a DTAA agreement has many benefits for both the taxpayer and the country. Here are some of the DTAA advantages: 

• The primary goal of signing a DTAA is to establish the country as a popular destination for business and investment. 
• Your relief can either be provided by exempting the foreign income from tax in the residence country or by providing a credit for the tax you have paid in the foreign country. 
• It also provides concessions on tax rates.
• DTAA reduces the chances of tax evasion by providing relief from tax.
• If withholding tax is lower, then it allows the taxpayers to pay lower TDS on their income from interest, royalty, or dividends. 

How can NRIs Claim the DTAA Benefits?

The NRIs who are living in a DTAA country can avail of the DTAA tax benefits by submitting the documents mentioned below:

• Tax Residency Certificate (TRC): If you want to avail of tax benefits, then the TRC is a mandatory document to submit. You can get a TRC by approaching the government authorities of your country of residence.
• Form 10F: Form 10F is another important document that needs to be filed by NRIs to get the benefits under DTAA.
• PAN Number: Along with the above documents, you also need to submit your PAN number. 

How to Apply DTAA?

You can apply DTAA either comprehensively or in a limited manner. Let's understand from the section below: 

• Comprehensive DTAA: Under a comprehensive DTAA, the tax benefits are provided on capital gains, income, and all sources of income.
• Limited DTAA: Under this DTAA, tax reliefs are available in certain areas, such as income from shipping, income from air transport, income from estate, gift, or inheritance.

Required Documents for Claiming DTAA Benefits

The NRIs can claim the benefits of the Double Taxation Avoidance Agreement (DTAA) by submitting the below-mentioned documents: 

• Self-attested copy of PAN card

• Self-attested visa

• Self-declaration form or indemnity form

• Self-attested Xerox copy of passport

• Tax residency certificate (TRC)

• A copy of the PIO proof

List of Countries Having a DTAA Treaty with India

India has signed a DTAA agreement with almost 85 countries that have agreed to different DTAA rates to remove the liability of double taxation in India for NRIs.

Here is the list of those countries:

What Services are Exempted Under DTAA? 

The income that you have earned from the following sources does not attract tax under DTAA:

• House property present in India
• Salary received in India
• Services provided in India
• Fixed deposits in India
• Savings bank account in India
• Capital Gains or transfer of assets in India

What are the Tax Reliefs under DTAA as per Indian Laws?

You can categorize the reliefs under DTAA as unilateral or bilateral tax reliefs.

Bilateral Relief Under Section 90 of the Income Tax Act, 1961

Bilateral relief is available in those countries with which India has signed a DTAA treaty. Currently, India has a DTAA treaty with almost 85 countries where bilateral tax relief is available. Under this tax relief, the tax benefit is provided in two ways: 

1. Exemption Method: Under this method, international income is either taxed in one country or a specific portion of the income is taxed in both countries.
2. Tax Credit Method: Under this method, income is taxed in both countries. After that, you get a tax credit in your tax liability payable in your resident country for the tax already paid in the income source country. 

The DTAA provisions would override the provisions of the Income Tax Act. It simply means that you can choose the provision that is more beneficial to you. 

Unilateral Relief Under Section 91 of the Income Tax Act, 1961

You get unilateral tax relief if there is no DTAA treaty between India and the country in which the income is earned. To avail unilateral relief, the following conditions would have to be fulfilled.

• You should be a resident of India 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 the unilateral method, the income would be taxed twice, and a deduction from the Indian income tax would be allowed. The deduction rate would be lower of the average tax in India or the average tax of the source country, whichever is lower. The average tax would be the tax paid divided by the total income multiplied by 100. If both taxes are equal, the Indian tax rate would be allowed as a deduction.

Final Thoughts

With the DTAA agreement, you can earn from your preferred country without affecting your citizenship or paying double taxes to both countries. However, the rule for the double taxation may change from one country to another. So, a country deducts TDS through an international tax credit document and shows it as paid tax. So, to get all the tax benefits under DTAA, you need to know the terms and the TDS rate between the two countries. 

You may also take assistance from the Visament experts as they have many years of experience in this field. They can guide you through the process of DTAA completely online and also help you in availing the NRI/visa related services.