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NRI (non-resident indian)

All About DTAA (Double Taxation Avoidance Agreement)

DTAA DTAA or Double Taxation Avoidance Agreement is a tax treaty that India has with 65 other countries. In plain language, what this means for an NRI is, if he/she is a resident in any of those 65 countries and is paying taxes on the income earned in that country, then he/she is eligible for a lower deduction of tax on income earned in India in that financial year.

 

These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts without deduction of expenses.

 

Excerpts from the Indian Income Tax website: The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country

 

Today for an NRI, tax is withheld on the interest income on deposits and accounts at the rate of 30%. Under DTAA, basis the documentation that is submitted to the authorized dealer, the NRI can benefit from a lower incidence of tax on his interest income. This ensures that since he is paying taxes on the income in his resident country as well, the incidence of tax on the source country is lower, thereby encouraging investments in the source country viz. India.

 

Simplifying, this means that if you are a US resident paying taxes in the US and qualifying as an NRI/PIO as per the FEMA definition, then you can submit the requested documents by your bank/AD and avail a lower withholding of tax. You will be taxed @ 15% for the interest income earned on your NRO account/deposits rather than the standard 30%.

 

Each bank will have its own process and documentation that it seeks from the NRI to determine eligibility for the DTAA benefit. This is beneficial to ensure that the rate under DTAA is applied on your TDS withholding. In case you have not claimed for this benefit with the bank, you are eligible to seek a refund from the revenue authorities under this treaty.

 

If you have been eligible but have not claimed your benefit in this year, to get a refund for past periods, you may have to place a refund request with the Indian Income Tax authorities.

 

One important aspect for claiming DTAA, is that the Permanent Account Number (PAN) has been made mandatory to avail the benefit of lower withholding under DTAA. Also important to note, there is an expiry date on the documentation and the same needs to be refreshed every financial year with the bank/AD to ensure validity.

 

With the current financial year ending on Mar 31st, it will be a good idea to connect with you bank and check on the requirements/renewal of the DTAA facility for your NRO accounts/deposits.

 

One important thing to keep in mind is that with the Direct Tax Code coming into picture, effective April 2012, submission of a TRC (Tax residency Certificate) issued by the revenue authority in the country of tax residency has been made mandatory. While this will make the documentation process uniform across banks, it will be cumbersome process for the customer.

 

Details on the treaty with the countries can be referred to on the link below.

  

http://finmin.nic.in/the_ministry/dept_revenue/index.html

Name of the Country

Tax withholding Rate (%)

Armenia

10

Australia

15

Austria

10

Bangladesh

10

Belarus

10

Belgium

15

Botswana

10

Brazil

15

Bulgaria

15

Canada

15

China

10

Cyprus

10

Czech Republic

10

Czechoslovakia

15

Denmark

15

Finland

10

France

10

Germany

10

Hungary

10

Iceland

10

Indonesia

10

Ireland

10

Israel

10

Italy

15

Japan

10

Jordan

10

Kazakhstan

10

Kenya

15

Korea

15

Kuwait

10

Kyrgyzstan

10

Luxembourg

10

Malaysia

10

Malta

10

Mongolia

15

Montenegro

10

Morocco

10

Myanmar

10

Namibia

10

Nepal

15

Netherlands

10

New Zealand

10

Norway

15

Oman

10

Philippines

15

Poland

15

Portugal

10

Qatar

10

Romania

15

Russia

10

Saudi Arabia

10

Serbia and Montenegro

10

Singapore

15

Slovenia

10

South Africa

10

Spain

15

Sri Lanka

10

Sudan

10

Sweden

10

Switzerland

10

Syria

10

Tajikistan

10

Tanzania

12.5

Thailand

25

Trinidad & Tobago

10

Turkey

15

Turkmenistan

10

Uganda

10

Ukraine

10

United Kingdom of Great Britain

15

United Arab Emirates

12.5

United States of America

15

Uzbekistan

15

Vietnam

10

Zambia

10

            

Written by Daisy Fernandes

        

More NRI investment and tax articles

Published Mar 28 2011




Comments

Comments

 

Charles said:

Hello. This double taxation is a serious issue for me. My situation is reverse of NRI. I PIO born in US here in India working for my uncle. However as I am also an employee of a US corporation for whom I work part time (over the internet maybe 10 hours a week), I will pay taxes to the US for that income fully as they consider me a US based employee and are accruing the money in my name in a US bank (i have not gotten the money myself yet but its just a matter of remitting to india).

The double taxation with US was written in 1990 before the internet age. I have no idea and most tax professionals I talk to don't either on how to deal with the situation. at first I was told by them, that i should just focus on making money and they will take care of the research. now they haven't and are saying, maybe I should have gotten permission from RBI for this or gotten a pre-decision decision from the income tax office for that.

and its not truly double tax avoidance with US. US taxes are broken down into:

Federal income tax (about 15% of total for me)

State income tax (about 10% for california)

Federal Social Security tax (4.2% this year)

Federal Medicare tax (1.45%)

and only the first is apparently part of the double tax avoidance agreement (15% of a total of 30%)

June 16, 2011 3:24 PM
 

Seshadri said:

Charles -

First, you are right that DTAA only covers Federal Income tax.

Second, your residence status is complicated.  Assuming that you are in India for more than 182 days, you become resident in India and since you are a US naitonal, you automatically are treated as a resident in US for tax purposes.  DTAA provides for a tie-breaker rule in these cases - Article 4 (2) -

(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

(b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;

(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Obviously, residence status depends on whether you own a home in either US or India in your name and other specific factors of your case.  And residence status decides your tax liability for each income including your salary received in India.

Third, assuming that you end up being taxed in US, you may be able to avoid CA tax by shifting your US address to a tax-free state such as NV or TX.

Anyway, the best course of action for federal income tax is probably to claim foreign earned income tax exclusion for your salary in India after paying taxes in India.  This benefit is available to you after spending 330 days away from US during 12 consecutive months.  Refer Publication 54 from IRS for details.

Regarding the US service, you may qualify to be considered a contractor rather than employee.  It may help your tax situation.

Also, if it is your first year in India as resident (i.e. 183 days plus during Apr-Mar), your foreign income will not be taxed if you qualify as not ordinarily resident.  

These are some of the options available to you.  A lot depends on the nature of your relationship (employee or independent contractor) with your uncle and the CA company that pays you salary.

October 18, 2011 3:22 AM

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