Double taxation can significantly reduce post-tax returns for NRIs if not managed efficiently. This is where the Double Taxation Avoidance Agreement (DTAA) becomes important. DTAAs are treaties India has signed with various countries to help NRIs avoid paying tax on the same income in both India and their country of residence.

If you're an NRI investing in India or earning income from Indian sources, knowing how DTAA works can help you legally reduce your tax burden and improve your net returns.

What is DTAA?

A Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty signed between India and another country to eliminate the risk of the same income being taxed twice. It defines how tax will be levied on income such as interest, dividends, salary, property income, and capital gains earned across jurisdictions.

Without a DTAA, NRIs may be required to pay tax both in India (source country) and in their country of residence. With a DTAA in place, relief is granted either through tax exemptions or tax credits, depending on the treaty terms.

Under the Income Tax Act, there are two key sections- Section 90 and Section 91. They specifically deal with relief from double taxation.Here’s how they differ:

In both cases, the goal is the same - to ensure you're not taxed twice on the same income.

Why NRIs Need DTAA: The Tax Residency Rule

To determine tax liability in India, NRIs must first identify their residential status under the Income Tax Act. This is determined as:

• Resident and Ordinarily Resident (ROR)

• Resident but Not Ordinarily Resident (RNOR)

• Non-Resident (NR)

Who is considered a Non-Resident (NR)?
If you’ve stayed in India for less than 182 days in a financial year, you are classified as a Non-Resident.

As an NR:

• Income earned in India is taxable in India.

• Income earned outside India is not taxable in India.

This applies to sources such as:

• Interest from Indian bank accounts

• Capital gains on Indian mutual funds or stocks

• Rental income from property in India

However, even with this classification, double taxation may still occur if your country of residence also taxes global income.

How DTAA Works (And Why It Matters)

Every NRI faces this classic problem: You earn in India. Your country of residence taxes your global income. India taxes your India-based income. Do you end up paying tax twice? Possibly- unless DTAA steps in.

Here’s a simple example to understand how it plays out:

Let’s say an NRI earns ₹10 lakh in India and is a tax resident of the US.

• India deducts tax at 30% (₹3 lakh).

• Without DTAA, the US could also tax that ₹10 lakh.

• With DTAA, the NRI can claim a credit in the US for the ₹3 lakh already paid in India, potentially reducing their US tax liability by up to $3,600.

How DTAA applies depends on the treaty between India and your country of residence. Most agreements use one of two methods:

• Exemption Method - Income is taxed in only one country.

• Tax Credit Method - Tax is paid in both countries, but credit is given in the resident country for the tax already paid.

These two mechanisms help you avoid overpaying tax on the same income.

Benefits of DTAA for NRIs

No one likes losing money to avoidable tax, especially not NRIs sending remittances home or investing in Indian mutual funds or real estate. DTAA comes with tangible benefits:

• Lower TDS (Tax Deducted at Source) - Especially on interest, dividends, or royalties

• Tax credits - For taxes paid in India

• Less ambiguity - Knowing how much tax to expect improves financial planning

Quick wins under DTAA:

• With the India–US DTAA, dividends are taxed at 15% (instead of 20%)

• Interest income is often taxed at 10%

Some DTAAs even offer capital gains exemptions

Countries having DTAA with India

India has signed DTAAs with 94 countries as of today and below are the key countries where majority of the NRIs reside in:

Each treaty is different, so it’s worth checking the specific provisions relevant to your country of residence.

Clauses to watch out for (As an NRI)

Some of the most impactful DTAA clauses relate to the nature of income:

• Interest income – Usually taxed at a capped rate (e.g. 10%)

• Dividend income – Often reduced to 10–15%

• Capital gains – May be taxed only in India or exempt depending on the treaty

• Employment income – May be taxable in only one country depending on duration of stay and source of income

The fine print matters; especially if you’re earning rental income, selling property, or investing in Indian equity.

Documents needed to claim DTAA benefits

To take advantage of DTAA benefits in India, you’ll need to submit a few documents to the bank, fund house, or income source:

1. Tax Residency Certificate (TRC) – From the country where you pay tax

2. Form 10F – A self-declaration form

3. PAN Card – Required for any tax deduction or credit claim in India

4. Form 67 – For resident taxpayers claiming foreign tax credit in India

Tip: Apply for your TRC in advance so you’re not stuck at year-end.

How to actually claim DTAA benefits

Here’s how to simplify the process:

1. Check your residential status under Indian tax law

2. Refer to the applicable DTAA for your country of residence

3. Compare your tax liability under Indian law vs DTAA

4. Pick the more favorable option – Section 90(2) allows you to choose the one that reduces your tax burden

Submit your TRC, Form 10F, and PAN to whoever is deducting tax (e.g., your bank or broker)

The Double Taxation Avoidance Agreement is more than a legal document; it’s a tool NRIs can use to protect their income. Whether it’s mutual fund gains, rental income, or dividends, knowing your treaty rights helps you invest smarter.