Non-Resident Indians, or NRIs, who stay abroad for at least 182 days a year can claim tax exemption in their country of residence if they have already paid taxes in India. To avoid double taxation, India has entered into Double Taxation Avoidance Agreements (DTAAs) with several countries.
In other words, this means that NRIs can claim exemption from tax paid in India while filing tax return in the other country to avoid paying double tax.
READ MORE: Back from overseas? This is how taxation works in case of NRI
Let’s understand how DTAA prevents double taxation.
For example, if Mr. Ajay Kwatra who remains in the UK has interest income in India of ₹50,000. Due to different tax rules, assume the tax rate is 10% in India and 15% in the UK. Due to the tax treaty, the UK will give a tax credit for the tax he has paid in India.
In this case, his tax payable will be calculated as follows:
Interest income: ₹50,000
Tax paid in India: ₹5,000
Tax payable in the UK: ₹7,500
Less: Credit for tax paid in India: ₹5,000
Total tax due in the UK: ₹2,500
However, it should be noted that an NRI can apply for DTAA benefits after submitting the Tax Residency Certificate (TRC) and other relevant documents.
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Although tax is levied at the rate of 20% (plus surcharge and deductible) on interest income received by an NRI in India, it will be charged at a lower rate if India has signed the treaty with that country.
However, to become eligible to pay tax at a lower rate, the taxpayer must submit a certificate of tax residency, Form 10F and PAN (permanent account number).
Form 10F is a self-declaration of an assessee, stating that he has resided for more than 182 days during that year in a country with which India has signed a DTAA and is therefore eligible for a lower tax rate.
Further, the taxpayer can claim a tax credit for taxes paid in India while eliminating their tax payable in the country of residence.
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So, we can summarize that an NRI is supposed to pay taxes in India for the income accrued here, but he can claim an exemption and can be eligible for a lower rate of tax if there is a tax avoidance treaty. double taxation between India and the other country. The idea behind it is to prevent taxpayers from paying double income tax on the same income.
This story was first published on MintGenie and accessible here.
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