The “Double Tax Avoidance Agreement (DTAA)” or “Tax Treaty” is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid taxation of income in both the countries (i.e. Double taxation of same income). Currently India has comprehensive DTAA or Tax Treaty with 84 other countries.
Let’s take an example to understand how DTAA works; An NRI residing in ABC country is maintaining NRO Account with a bank in India. The interest earned on balances in this account is considered as the NRIs income originating in India. If India has DTAA with country ABC, this income will be taxed at the rate prescribed in the agreement. Else, it will be taxed at 30.90 % (the existing withholding tax).
The Non Resident can certainly take the benefit of the provisions of DTAA entered into between India and the country, in which he resides, more particularly in respect of Interest Income from NRO account, Government securities, Loans, Fixed Deposits with Companies and dividends etc.
How to avail benefits under the DTAA
Any NRI can avail benefits under the DTAA by timely submission of documents listed below to the deductor.
- Tax Residency Certificate (TRC)
- Self-attested copy of PAN Card
- Self-declaration cum indemnity format (formats of such letter are availabe in the bank website)
- Self-attested copy of Passport and Visa
- Copy of PIO Proof (applicable if the passport has been renewed during the Financial Year)
Mandatory details to be included in the TRC
- Name of the assessee
- Status (individual, company, firm etc.) of the assessee
- Nationality (in case of individual)
- Country or specified territory of incorporation or registration (in case of others)
- Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then a unique number on the basis of which the person is identified by the Government of the country or the specified territory
- Residential status for the purposes of tax
- Period for which the certificate is applicable
- Address of the applicant for the period for which the certificate is applicable
The certificate containing above details should be duly verified by the Government of the country or the specified territory of which the NRI claims to be a resident for the purposes of tax.
Update May 21, 2013: You may read the Finance Bill Amendment on “TRC – Can be a conclusive evidence but has to be supported by prescribed documents“
How to obtain the TRC
You can approach the tax/government authorities of the overseas where you reside to obtain the TRC. You may also check with your Chartered Accountant / Tax Consultant abroad on the procedure to obtain the same. Remember! No other document in lieu of the TRC is considered for availing the benefits under DTAA.
Now the question may arise, whether you need to submit these documents every year to avail benefits under the DTAA? Answer is; Yes! DTAA benefit is extended on an annual basis. Therefore, any NRI is required to provide all the requisite documents every year to continue availing the benefit under DTAA.
Also what happens if one (here NRI) doesn’t submit TRC and other documents to the bank within stipulated timelines? In such case, the bank will have to deduct interest earned on NRO deposits at the presently applicable rate of 30.90%.