Living abroad yet earning income in India, or vice-versa? The risk of being taxed twice on the same income is real. For many Non-Resident Indians (NRIs), navigating cross-border income tax can be complex and costly. The good news: India has entered into a comprehensive network of tax treaties—known as Double Taxation Avoidance Agreements (DTAAs) — which are designed to minimise double taxation and provide relief.
In this article, we provide a one-stop, in-depth guide to understanding DTAA for NRIs: how it works, how you qualify, what the major provisions are, and how to claim benefits. Whether you earn rental income, interest, dividends, capital gains or salary abroad, this guide will help you structure your tax position efficiently and compliantly.
What is a DTAA and Why It Matters for NRIs
A DTAA is a bilateral treaty entered into between two countries (for example India and another country) that allocates taxing rights and provides relief from paying tax twice on the same income.
Key functions for NRIs:
- Avoiding double taxation — paying tax in both the country of residence and the country of source.
- Claiming foreign tax credit for tax already paid abroad.
- Using reduced withholding tax rates for certain income types (dividends, interest, royalties) under treaty provisions.
- Providing certainty and stability for cross-border income flows and investments.
For example, if you reside in a country that has a DTAA with India, and you earn interest from India, the treaty may specify a lower rate of tax in India on that interest. This can reduce the overall tax burden significantly.
Applicability: Who Qualifies & When?
1 Tax Residence
To benefit from DTAA relief, you must be a tax resident of one of the contracting states. Each DTAA includes a “Residence” article which defines how residence is determined (e.g., domicile, place of effective management, habitual abode).
If you are deemed resident in both countries, the treaty’s tie-breaker rules determine which country is your residence for DTAA purposes.
2 Type and Source of Income
DTAAs cover various categories of income: salary, business profits, dividends, interest, royalties, capital gains, rental income, etc. Each treaty spells out which country has taxing rights and how relief is given.
3 Contracting States
India has DTAAs with over 90 countries. You must check whether your country of residence is a treaty partner.
4 Residency Certificate & Documentation
To claim treaty benefits you generally need:
- A Tax Residency Certificate (TRC) from your country of residence.
- Form 10F (India) if certain details are not covered in the TRC.
- Proof of income and tax paid in both countries.
Failure to furnish proper documentation may lead to denial of treaty benefits.
Key DTAA Provisions NRIs Should Know
1 Dividends
Most treaties limit India’s withholding tax on dividends paid to a resident of the other state to a specified maximum-rate (often 10-15 %).
2 Interest
Similarly, interest arising in India and paid to a non-resident may be taxed in India, but at a reduced rate under the treaty (for example 10-15%) instead of the domestic rate.
3 Royalties & Fees for Technical Services
Many treaties cover royalties and technical service fees with preferential tax treatment in India (often 10-15%) instead of higher domestic rates.
4 Business Profits
If you have a permanent establishment (PE) in India, business profits may be taxed in India; otherwise the profits may be taxed only in the country of residence. The PE definition is critical.
5 Capital Gains
Capital gains treatment under DTAAs can vary widely—some treaties allocate taxing rights to the country of source or residence and may provide exemptions or lower tax rates.
6 Relief Methods
Relief under treaty may be offered through:
- Exemption method – one country exempts the income.
- Credit method – residence country allows credit for tax paid in source country.
Practical Steps for NRIs to Claim DTAA Benefits
- Establish your tax residence under the treaty.
- Obtain TRC from your home tax authority.
- Ensure your income type qualifies under the treaty provisions (dividend, interest, salary, capital gains, etc.).
- Check the applicable withholding tax rate for your income under the treaty vs domestic rate.
- File Indian ITR declaring income and claim treaty relief (use Schedule TR or relevant tax relief schedule).
- Maintain documentation– TRC, Form 10F, proof of tax paid abroad, computation of foreign tax credit where applicable.
- Review investment structure – For example, ensure you’re not inadvertently creating a PE in India or losing benefit due to residence tie‐breaker rules.
- Consult a qualified tax advisor especially for complex cross-border income (e.g., business profits, sale of foreign assets, dual residence).
Common Mistakes & Risks to Avoid
- Assuming a DTAA applies without verifying your country has a treaty with India.
- Not obtaining a TRC – treaty benefit may be denied.
- Mis-interpreting residence status under the treaty – tie-breaker rules matter.
- Ignoring PE risk – if you have a PE in India, you may be taxed on business profits.
- Inadequate record keeping – you must be able to prove TRC, tax paid abroad, eligible income.
- Blindly applying domestic rates – treaty may offer lower rates or exemption.
- Not accounting for treaty change or amendment – always check effectiveness dates.
Impact on NRIs: Typical Scenarios
Scenario A: Rental Income in India
An NRI resident in country X earns rental income from a property in India. Under the DTAA (between India and country X), India may tax the rental as “income from immovable property,” while country X gives credit for Indian tax paid.
Scenario B: Dividend from Indian Company
An NRI resident in country Y receives dividends from an Indian company. The DTAA between India and country Y limits India’s withholding tax (for example 10-15%). The foreign country may provide tax credit for Indian tax paid.
Scenario C: Salary or Service Income Abroad
An Indian resident working abroad may earn salary in country Z, pays tax there. Under DTAA with India, India may allow credit for tax paid abroad or exempt the income (depending on treaty provision).
How Recent Changes & BEPS Considerations Affect DTAAs
The global tax landscape has evolved with Base Erosion and Profit Shifting (BEPS) standards and anti‐avoidance rules. India’s treaties now emphasise Limitation of Benefits (LOB) clauses and Mutual Agreement Procedure (MAP) provisions.
NRIs should be aware that benefiting from a treaty requires genuine substance and compliance—not merely form.
Frequently Asked Questions (FAQs)
Q1. Does DTAA mean NRIs pay no tax in India?
A: Not necessarily. DTAA means you may get relief from double taxation or a reduced rate, but tax may still be payable in one or both countries depending on the treaty.
Q2. What if my country does not have a DTAA with India?
A: In that case you cannot claim treaty relief; you may still use domestic foreign tax credit provisions under Indian law (Section 91) but benefits are more limited.
Q3. Is a Tax Residency Certificate (TRC) mandatory?
A: Yes – most DTAAs require a TRC to claim the benefits and if you don’t submit it your claim may be rejected.
Q4. Can I claim DTAA relief for capital gains?
A: Yes—but only if the treaty covers capital gains and you satisfy the conditions. Each treaty differs in how it treats capital gains.
Q5. Does DTAA cover past years of income?
A: Relief is typically claimed for the relevant assessment year and you must adhere to documentation timelines. Past years may be subject to limitation rules under the treaty or domestic law.
For NRIs and those with cross-border income, understanding and using DTAA provisions can lead to significant tax savings and clearer compliance. However, it is not automatic: you must qualify, apply, maintain documentation and ensure your structuring aligns with both domestic law and treaty provisions.
At PGACA (PGA&CO.), our team of Chartered Accountants specialises in international tax, NRI income structures, DTAA advisory and compliance. If you have overseas income, invest in India, or reside abroad but hold Indian assets, let us review your position, optimise your tax liability legally and keep you audit-ready.
Contact us today to ensure your cross-border income is structured for maximum efficiency, transparency and compliance.