The DTAA, or Double Tax Avoidance Agreement, is an arrangement designed to help NRIs (Non-Resident Indians) avoid paying double tax on income earned in India. An NRI who earns income in India would be subject to tax on such income in India and in their country of residence as well. This results in a double tax payment on the same amount of income, thereby increasing the tax burden of the assessee.
This taxation requirement on the income earned in two countries arises from two basic rules that enable the country of residence, as well as the country where the source of income exists, to impose a tax on such income. And these rules are as given below:
Source Rule:
This rule states that the income earned should be taxed in the country of its origin, irrespective of the residential status of the taxpayer.
Residence Rule:
While this rule states that the power to tax should be vested in the country in which the taxpayer is residing.
What is DTAA?
The DTAA, or the Double Taxation Avoidance Agreement, is a treaty that is signed between two countries. This helps a country look attractive as a destination which enables NRIs to get relief from ending up paying any double tax on the same income. But it is to be noted that this does not allow any assessee to avoid total payment of taxes but only provides certain relief pertaining to the Income Tax Act and the clauses of the treaty being signed by two countries.
So, we can say that a Tax Treaty like DTAA is a tax treaty, and this is a formally concluded and ratified agreement between two independent nations (bilateral treaty) or over two nations (multilateral treaty) on matters that are concerned with taxation, normally in written form.
Rates of DTAA
India has signed the DTAA with many countries, which specifies a fixed rate at which tax should be deducted from the income that is earned in India and remitted to such NRIs. This shall be deducted in the form of TDS at the rate that has been pre-set in accordance with the DTAA that India signed with the country of residence of such NRI. Following are some examples of such DTAA rates set by India with other countries:
| COUNTRY | RATE OF DTAA (%) |
| United States of America (USA) | 15 |
| United Kingdom | 15 |
| Canada | 15 |
| Australia | 15 |
| UAE | 12.5 |
| New Zealand | 10 |
Types of Income included under DTAA
The following are the incomes that are included under the DTAA, on which NRIs would be provided relief from paying double tax:
– Services which are provided in India
– Salary received in India
– House property Income from HP located in India
– Gains, which is Capital Gains, that is made on the transfer of assets located in India
– Income earned from the fixed deposits in India
– Savings bank account in India.
Income Tax Provisions on DTAA
Section 90 of the Income Tax Act empowers the Government of India (GOI) to enter into a DTAA for avoiding double taxation.
Suppose a person who is an Indian resident during any relevant previous year, in respect of his income, which accrued or arose outside India, has paid tax on income in a foreign country that is a country located outside India. In that case, he shall be entitled to a deduction from the Income Tax payable by him of a sum that is computed on such doubly taxed income, under:
– Section 90, which states that if the foreign country in which tax is paid by the assessee has entered into a double taxation avoidance agreement with the Government of India.
– Section 91, which states that if the foreign country in which the assessee has paid the income tax has formed any agreement with the Government of India.
For calculating this, the relief should be taken as the lower of the following:
i) Tax paid on double-taxed income outside India, or
ii) Tax payable on double-taxed income under the Income Tax Act.
While in accordance with or referring to Section 90A, GOI can enter into an agreement that is entered into between specified associations in India and specified associations in the specified territory outside India.
There are mainly two types of DTAA Agreements, and these include:
– Comprehensive Agreements
– Limited Agreements
The comprehensive agreements are those, the scope of which is not limited and shall be addressing all sources of income, while in the case of the limited agreements ,the scope would only cover:
– Income derived from the Operation of aircraft & Ships
– Estates
– Inheritance
– Gifts.
Procedural Requirements
For earning a relief from payment of double tax, the following documents shall be furnished by the assessee:
- i) Tax statement from the country or a territory prescribed and is outside India, declared by the assessee for the relevant previous year and a copy of such evidence regarding the payment of foreign tax and deducted on such income in the form, namely, Form 67 prior to the due date of filing of ITR or the Income Tax Return.
- ii) A statement or certificate specifying the nature of income earned and the amount of tax deducted or paid thereof:
– From the department of tax or the tax authority of the country or the specified territory which is outside India,
– From the person who is responsible for such deduction
– Which shall also be signed by the assessee.
A signed statement by the Assessee is valid only if it is accompanied by proof of deduction of tax or online payment of tax made by him in such another country.
