Watch: DTAA Explained: How NRIs Can Avoid Double Taxation (India & Abroad)
Learn how DTAA prevents double taxation for NRIs. Discover exemption vs tax credit methods, required documents (TRC, Form 10F, Form 67), and step-by-step checklist.
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0:05 Have you paid tax abroad and in India on the same income? This is where DTAa double taxation avoidance agreement steps in. In this video, I will walk you through how DTAA works, the difference between tax exemption and tax credit, what incomes are included in the DTAA, and where to find these treaties. We also would walk you through a real life example on how DTAA works, especially when the family moves from abroad to England. Before we dive into today's topic, check out our course on how to plan financially, especially when you're moving from US to India. Also, we have a paid WhatsApp group where you can network with like-minded people and navigate the journey back to India seamlessly with a support group. Let's dive into today's topic.
1:05 DTAA is a treaty between India and another country to ensure you are not taxed twice on the same income. India has DTAA treaties with over 90 countries including US, Canada, Australia, Singapore, UK and much more. You can find the list of all these treaties on the income tax website. We will have a link for these list of treaties in the description below. DTAA is important for people who are living abroad, NRIs, returning Indians, freelancers and investors who have investments abroad. Without DTAA, the income is taxed where it is earned and also in India once you are a resident.
1:56 So the DDAA dictates which country can tax that income or provide a tax credit for the amount of tax that you paid in another country while you're filing taxes in India. Most treaties include income from employment or professional services. It covers interest income, dividends, royalties, business profits, capital gains. It talks about the tax reliefs, whether it's a tax exemption or a tax credit and the tiebreaker rules for tax residency status, especially if you are considered as a tax resident in two different countries. Exchange of information and mutually agreed procedures are all part of the DTAA treaties between the two countries.
2:53 Exemption method tax exempt from one country. Some incomes are taxed only in the source country or in the residency country according to the treaty rules. So the other country completely exempts tax on that income. For example, employment income might be taxed in the country where the work was done. Tax credit method. India taxes worldwide income for its residents but gives foreign tax credit FTC for the taxes that are already paid abroad. So the credit is lower of foreign taxes paid that are already paid or the Indian taxes attributable to that income. So practically India calculates the taxes for that foreign income and reduces the tax liability by the amount of taxes you
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3:55 Paid abroad already. But the credit is limited only to the tax liability attributable to that income. US also uses the same mechanism for its residents for the tax that was paid in India for any income that was earned in India while you are a US resident. Now let's review how the different income sources are taxed or withheld based on the treaty. Let's take an example of India, US DTA, capital gains. Often these are not taxed in US for Indian residents especially if the gains are coming from public traded securities. Interest income capped at 15% withholding instead of 30%.
4:49 Dividends usually taxed at 25% and not at 30%. These benefits can be claimed by filing W8 and form properly. We have video on how to file your WBN properly. Check out the link in the description below. To claim treaty relief in India, you need tax residency certificate TRC from a foreign country or from India. If it's a reverse claim and this document is mandatory, you need to file form 10F which declares your residency status and the applicable treaties. This is a supplemental to your TRC document and this form is mandatory when you are claiming the DTAA benefits. In addition, you need documents like proof of foreign taxes that you have paid W21099 form 16 and so on. These are required to
5:49 Claim the DTAA benefits when you are filing taxes without TRC and form 10F. Indian TDS applies at full rates. Even then you can claim refund while filing your tax returns by submitting these documents. Let's use an example on how [snorts] DTAA tax credit works. Let's say you moved from US and now you are a tax resident in India and you have a $10,000 rental income and US withholds at 15%. So you have paid $1,500 for that $10,000 in US and assume India taxes that same income at 30%. So the Indian tax liability is $3,000.
6:44 The foreign tax credit which is the minimum of 1,500 and 3,000 because that's the money that you have already paid in foreign and 3,000 is the liability in India. So the tax credit is going to be $1,500. So the net Indian tax that you have to pay is $3,000US $1,500 which is going to be $1,500. So effectively you have paid $1,500 to US $1,500 to India and total tax that you have paid is $3,000. You haven't paid double taxation. Effectively, you pay tax on the high country's tax. Here is a checklist for the return. Determine your tax residency status. A non-resident, resident but not ordinary resident, and finally a resident from a tax perspect. List all your foreign incomes and the taxes that you have paid. Check the specific treaty that is applicable for this income. Get TRC and
7:45 File form 10F. Maintain the proof of foreign taxes that you have paid. Use correct currency conversion and file your ITR with foreign tax credit especially the form 67. DTAA can save you from double taxation but only if you file it right. If you have returned to India from abroad and have income from your investments abroad, get your TRC, Form 10F and Form 67 ready to avail these benefits. If you have liked the content, please subscribe and share with others who can benefit from it. Until next time, take care.
