How to avoid double taxation?

NRI’s who earn income in India needs to pay tax in India. Generally these taxes are deducted by way of TDS by the person making the payment. The same income earned in India also needs to be declared by the NRI in their home country as per law prevailing in their home country. The home country will again tax this income. This leads to double taxation.

This article will deal with as to what is double taxation and how to avoid the same under the ambit of laws.

Overview of double taxation:

Most countries adopt residential status as the basis of taxation, whether the taxpayer is a natural or juridical person. But at the same time the source principle is also adopted, so as to tax the non –resident with the source in its territories. This leads to double taxation.

Double taxation can be in two forms:

Juridical double taxation: It means taxation of the same income in the hands of a single tax payer in the two countries. For example, interest earned in India on fixed deposits held in India will be taxable in India on the basis of source taxation. The same interest will be taxable in the home country.

Economic double taxation: It means taxation of same income in more than one hand. For example, expenditure is not allowed in one country, but considered as taxable in the hands of the recipient leading to same income being taxed twice in two hands.

Double taxation Avoidance Agreement(DTAA) :

In order to avoid double taxation, countries enter into a DTAA with other countries. The DTAA is a form of agreement between contracting countries, the main purpose of which is to regulate matters concerning taxes and granting relief from double taxation to mitigate hardships caused by taxing the same income twice. It is important to note that DTAA provides relief against juridical double taxation. India has signed DTAA Agreements with many countries.

Let us illustrate how the DTAA can help avoid double taxation.

Say, Mr. A, NRI residing at Australia earns interest income on NRO account in India to the extent of say Rs.10000 and the tax rate on interest income as per local laws in Australia is 20%(assumed),whereas as per tax treaty with India it is 15%. Australia will give credit for the tax paid in India.

In such a scenario, the taxation works as under:

Interest income Rs.10000
Tax paid in India as per tax treaty Rs. 1500
Australian tax (as per local laws-assumed) Rs.2000
Less: Credit for Indian tax paid Rs.1500
Net tax payable in Australia Rs. 500

Depending on the clauses of tax treaty, relief from double taxation can be either claimed as per exemption method or tax credit method. The two methods are explained below:

1) Exemption Method – Under this route, either of the state has an exclusive right to tax the income arising in the source state. For instance, a UK national qualifying Resident in India during 2015-16 could be exempted to pay tax in India based on tie-breaker clause. Here a person would not be required to pay tax for his income earned in UK, provided a Tax Residency Certificate (TRC) is submitted along with certain information prescribed under Form 10F for claiming exemption.

2) Tax Credit Method – This method allows an individual to get foreign tax credit in the resident state in respect of tax paid in the source state on the doubly taxed income. For instance, an Indian resident in the year of deputation would be taxed both in India and the UK. But, as per tax relief clause of tax treaty , an individual will get tax credit in India for the tax paid in the UK for double-taxed income.
Few points to be noted:

#An NRI can avail the benefit of DTAA by submitting the Tax residency Certificate and certain other documents as required by Bank/Brokers to avoid being taxed at a higher rate. For instance, a US Resident would be taxed in India @ 30.9% on the interest income; however, after availing DTAA Benefit, the said interest income shall be taxed in India @15% only.

# DTAA overrides the provisions of Indian Income Tax Act, 1961.Thus, NRI can claim taxation in India as per Indian Income Tax Act, 1961 or as per DTAA whichever is more beneficial to him.

Content Source – Sanjeev Kamdar – KDP Accountants (NRI advising),

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