“What is DTAA?”, “How NRIs can get Benefits Under DTAA?” And Double Tax Avoidance Agreement (DTAA) Rates 

Introduction

According to the Double Tax Avoidance Agreement (DTAA), NRIs can avoid paying double tax. Non-Resident Indians (NRIs) typically live overseas while making their living in India. In such circumstances, it is probable that the income made in India would be subject to tax in both India and the nation where the NRI resides. They would consequently be required to pay tax twice on the same income. The Double Tax Avoidance Agreement (DTAA) was modified as a precaution to prevent this. This article focuses on “How NRIs can get Benefits Under DTAA?” And DTAA Rates. Before going through the benefits let’s have a look at “What is DTAA (Double Tax Avoidance Agreement)?”

What is DTAA (Double Tax Avoidance Agreement)?

An agreement known as the Double Tax Avoidance Agreement was signed by two nations. The agreement is struck to reduce the burden of repeated tax payments for NRIs and to promote the country as a desirable travel destination. Although the DTAA does not allow for a complete tax avoidance by NRIs, it does allow them to avoid paying greater taxes in both nations. An NRI can lessen the tax consequences of their income made in India thanks to DTAA. Tax evasion cases are also decreased by the Double Tax Avoidance Agreement.

Budget 2021 introduced Section 89A of the Income Tax Act

In the Union Budget 2021 the finance minister announced a new regulation to alleviate hardship for NRI’s caused by double taxation on income accrued in overseas retirement accounts. In order to relieve NRI’s from taxation of income from retirement benefits accounts kept with designated nations, a new Section 89A was added to the Income Tax Act.

Specified person who opened a notified account in the nation (notified by the Central Government) while being both a non-resident of India and a resident of that nation are covered by this provision.

The term “notified account” refers to an account that has been opened in the notified country for the purpose of receiving retirement benefits and whose income is subject to receipt-based taxation by that nation rather than accrual taxation. According to the new clause, such income shall be taxed in the way and during the year that maybe specified.

How NRIs can get Benefits Under DTAA?

Below are the points on “How NRIs can get Benefits Under DTAA?”

• Elimination of dual taxation

An individual is given protection from double taxation by having money earned overseas exempt from taxation in the nation where they reside or by receiving a credit for taxes paid abroad.

• Profitable Investments

The agreement is signed to increase a nation’s appeal as a desirable location and to enable NRIs to invest freely and profit from their decisions.

• Pay less TDS (Tax Deducted at Source)

Reduced Tax Burden Due to the fact that they can pay less TDS (Tax Deducted at Source) on their income produced in India, NRI taxpayers will primarily benefit from lower tax rates.

• DTAA stops tax evasion

The DTAA permits the sharing of taxpayer data between two nations. The possibility of tax avoidance by an individual is therefore easily reduced. If someone is discovered to be dodging taxes, there is also increased collaboration for the recovery of taxes.

2 ways that NRIs can benefit from the double taxation relief

• Tax Exemption Method

The tax exemption approach involves taxing money in one nation while exempting it in another. For instance: Let’s say a country is subject to a source rule agreement. Wherever the revenue is obtained, dividend income must be taxed. Therefore, if a citizen of such a nation receives a dividend in India, only India will be taxed on it. Also. If a resident receives such income from a foreign source, only that nation will be taxed on it; India will not.

• Tax Credit Method

The Tax Credit Method is a popular strategy for benefiting from DTAA. Both nations tax income, and the resident country permits NRIs to claim a tax credit for taxes paid in the country where the money was generated. For instance, India and the USA have a DTAA. Mrs. A, an Indian citizen, received compensation from a USA company for work she performed there. In this instance, India is the resident country while the USA is the source country. As a result, when Mrs. A’s tax responsibility is determined, the tax that she paid in the USA will be deducted from her overall tax burden, but only to the extent that she still owes tax on the foreign income at the Indian income tax rate.

Income on which NRI’s do not have to Pay double tax

The following income received by NRIs is exempt from double taxation under the Double Tax Avoidance Agreement:

• Earned a salary from India.
• Gains on the transfer of property in India.
• Indian fixed deposit.
• Service provided in India.
• House property situated in India.
• Indian savings bank account.

If the NRI’s income from these sources is taxed in their home country, they can use the DTAA privileges to avoid paying taxes on such income in India.

Double Tax Avoidance Agreement (DTAA) Rate

The DTAA, which India has signed with other nations, establishes a set rate at which tax must be withheld from income received to citizens of that nation. This indicates that the TDS due when NRIs receive income in India will be in accordance with the rates established in the Double Tax Avoidance Agreement with that nation.

India has inked Double Tax Avoidance Agreement (DTAA) with the majority of the main countries where Indians live. Several of these nations include:

Conclusion

Actually, the DTAA only allows an NRI to avoid paying double tax; it does not exempt them from paying taxes in both countries. An NRI can lower their tax obligation on income earned in India thanks to the DTAA. It’s a fantastic move on the part of the government to cheer up Indians who have settled overseas and stand to gain the most from this arrangement.