How NRIs Can Avoid Double Taxation on Overseas Income

Double taxation means the same income is taxed in two countries. For NRIs, their income may be taxed in the country they live and the same income when brought to India may be taxed again, resulting in double taxation. This blog explains how NRIs can avoid double taxation. It breaks down what double taxation means, highlights tax treaties and relief options, and shows practical steps to keep more of your earnings.

What Is Double Taxation?

Double taxation arises when a single income is taxed in two different countries. 

For example,

• You are working for a company in the US. You draw a salary from there and pay income tax to the US.

• At the same time, India might view you as a tax resident and charge the same salary as part of your global income (when you bring that income to India).

In that case, your salary is taxed once in the US and again in India unless there is relief under the tax rules or a double taxation agreement.

What Is a Double Taxation Avoidance Agreement (DTAA)?

A Double Taxation Avoidance Agreement, also known as DTAA, is a treaty between two countries that determines which country has the taxation rights to specific income.

Under a DTAA, the two countries agree upon the tax treatment of earnings such as wages, interest, dividends, or royalties. These can consist of:

• One nation taxes the income while the other offers a tax break.

• Withholding tax rates are lower in the source country.

• Tax credits are provided so that the income is not taxed twice. It can be considered similar to an international tax credit framework designed to avoid duplicate taxation.

In the case of NRIs, DTAAs can reduce taxes payable on international income and also simplify tax planning. India has entered into DTAAs with over 85 countries, which include big trading nations like the United States of America, the United Kingdom, Germany, the UAE, and Singapore. 

How DTAA Works for NRIs

Here’s how DTAA works to avoid double taxation for NRIs:

1. Exemption Method

With the exemption method, a country exempts NRIs from paying tax on certain income. 

For instance, when you are living outside the country and are receiving a salary, the DTAA could declare this income tax-exempt in India, even though you must pay the tax in the country where you earn.

2. Foreign Tax Credit (FTC)

FTC is the most frequent form of relief for NRIs. Your home country grants you a credit for the taxes that you have already paid abroad. In essence, you deduct the foreign tax paid from your home tax liability.

The FTC cannot exceed the amount of tax due on this income in your home country. This is called the "lower-of-two" rule. 

For example, if you have already paid a tax of ₹100,000 abroad for income and tax in India for the same income is ₹80,000, then you get FTC of ₹80,000. You won't have to pay tax in India again for such income.

3. Reduced Withholding Tax Rates

Certain DTAAs ease withholding taxes (TDS) for specific types of income, such as interest, dividends, and royalty income. Tax for NRIs can be reduced to a treaty rate by submitting a “Tax Residency Certificate” (TRC). 

For example, TDS for different types of NRI income can be up to 30%. Under the DTAA, this may range between 10-15%, which lowers the total tax. 

The way DTAA applies to NRIs depends on the type of income and its taxation rules. 

Income Types Covered Under DTAA

DTAA treaties apply to different sources of income for NRIs. These agreements describe which country is to tax a particular source of income and to provide relief from double taxation.

• Salary: The country where you earn your salary taxes your income. 

• Interest: The source country can tax interest income earned on savings, fixed deposits, or foreign loans at a reduced withholding rate, even lower than the tax in the domestic country. The resident country offers a credit for tax paid.  

• Dividends: Dividends paid, either on shares or mutual funds, are also affected by DTAA. The DTAA generally fixes a ceiling rate of withholding tax, which the source country can charge. The country of residence can then credit this against its tax liability. 

• Capital Gains: Some tax treaties permit taxation by the source country for gains from assets in their jurisdiction, while others use residency or special circumstances. Taxation relief is achieved by credits or exemptions to prevent double taxation. 

• Rental Income: Typically, the nation where the property is located will have the first right of taxation of rental income from that property. However, the home nation can offer relief in order to avoid having to tax the same income twice. 

DTAA taxation for NRIs varies based on the DTAA treaty that India has with those countries. 

Critical Documents for DTAA Relief

In order to avail the benefits of DTAA to prevent the possibility of double taxation, the following documents must be provided by NRIs:

Tax Residency Certificate (TRC)

A TRC is an official document issued by the tax authorities in the country where you are a tax resident. It is necessary for NRIs to submit the TRC while applying for relief under the DTAA to the Indian government.

A valid TRC must contain the following:

• Your Complete Name

• Taxpayer type (person or organisation)

• Country of residence

• Tax Identification Number (TIN)

• Residency period

• Foreign address

Form 10F 

Form 10F is a self-declaration that is filed together with your TRC in case your TRC does not contain certain information. The filing of Form 10F is done online on the Indian Income Tax e-filing site. It is to be submitted prior to the filing for relief under the DTAA. 

Step-by-Step Process to Get DTAA Benefits in India

Here's a practical guide that will help NRIs avoid double taxation on cross-border income:

1. Determine your tax residence: Ensure you are a non-resident Indian under Indian rules and understand how your country of residence treats taxes. 

2. DTAA Availability: Major economies have DTAA with India, but check once whether it applies to your situation. 

3. Obtain a TRC from your resident country: Obtain a Tax Residency Certificate from your home country's tax authority. 

4. File Form 10F online: Upload the Form 10F via the Indian Income Tax e-filing portal. It provides additional details on residency that may not be reflected on the TRC. 

5. Provide documents to the Indian deductor: Provide your TRC and Form 10F to the Indian employer, bank, or institution before any tax deduction. 

Conclusion

Double taxation occurs when the same income is liable for taxation in multiple nations. This could result in NRIs getting taxed more for their income earned in foreign countries as well as in India. A Double Taxation Avoidance Agreement (DTAA) between India and foreign countries offers relief in the form of lower rates of taxes and tax credits. NRIs must submit TRC and Form 10F to claim DTAA benefits. 

Need professional support navigating foreign income and taxes? Download Rupeeflo today for expert NRI banking services. 

FAQs

1. What is double taxation definition?

Double taxation arises when two different taxation systems impose taxes on the same income, asset, or financial transaction. It normally arises in cross-border situations where the two countries lay claims to the right to tax the same income.

2. Why should NRIs submit a TRC?

A Tax Residency Certificate (TRC) is a statement given by a foreign tax authority, proving your tax residency. It's mandatory for NRIs to submit a TRC to claim DTAA taxation benefits. 

3. Can I avoid double taxation without DTAA?

Yes, NRIs can avoid double taxation without DTAA. You may claim unilateral relief under Indian taxation law (Section 91) to claim credit for taxes paid in foreign countries. 

4. Which documents are necessary to avail the benefits under the provisions of DTAA?

To be eligible for DTAA treaty benefits, NRIs are required to furnish a valid TRC. In case your TRC is not completed with information such as your TIN and residency period, you are required to fill out Form 10F.