The Double Taxation Avoidance Agreement (DTAA) in India, governed by the Income Tax Act, 1961, protects taxpayers from being taxed twice on the same income in two countries. DTAA is critical for NRIs, foreign investors, and businesses with cross-border income. What is DTAA in India, and how does it work? Let’s break it down.
What is DTAA and how does it work?
DTAA is a bilateral agreement between two countries that allocates taxing rights for income-flows and avoids double taxation. In India the treaty network allows reduction in withholding tax rates for dividends, interest, royalties and fees for services. For instance, under many treaties India caps tax on interest or royalties at between 10%-15% rather than domestic higher rates.
Moreover, the DTAA provides two main relief methods: (a) Exemption of income in one country or (b) Credit of tax paid in one country against tax liability in the other. In addition, India has signed over 94 comprehensive DTAAs and about eight limited DTAAs, giving one of the largest global treaty networks.
Key benefits of DTAA for Indian residents and investors:
One major benefit of the DTAA is reduced tax burden. For example, instead of default Indian tax rates you may pay just 10 %-15 % on interest or dividends under the treaty. Another benefit is the foreign tax credit or exemption method — the treaty may allow tax paid abroad to be credited against Indian tax liability, avoiding double taxation.
In addition, the DTAA provides legal certainty and dispute resolution pathways (such as the Mutual Agreement Procedure, MAP) which makes cross-border investment easier and more predictable. Moreover, beneficiaries like NRIs, foreign businesses or Indian residents with overseas income stand to gain from clear allocations of taxing rights and reduced risks of being taxed twice.
Major provisions and how they apply in India:
Under section 90 of the Income-tax Act, when India enters a DTAA, the treaty provisions override domestic law if they are more beneficial to the taxpayer. Typical provisions include:
- Withholding tax limits on dividends, interest, royalties and fees for technical services.
- Exchange of information between tax authorities to prevent evasion.
- Limitation of Benefits (LOB) clauses to prevent misuse of treaty benefits.
For example, the revised DTAA between India and Kenya in 2018 reduced withholding tax rates from 15 % to 10 % for dividends and interest.
Practical considerations and tips for NRIs or foreign investors:
If you’re living outside India (or investing across borders) and you come under the DTAA with India, here are some practical tips:
- Ensure you obtain a Tax Residency Certificate (TRC) of your resident country to claim treaty benefits.
- File for relief under DTAA while submitting your Indian tax return (for example, by using Form 67 if applicable).
- Check the applicable withholding tax (TDS) rate under the treaty rather than default domestic rate; in many DTAAs India applies 10-15 % instead of 20 % or more.
- Keep proper documentation: proof of tax paid abroad, residency certificates, treaty-text benefit clause etc.
- Note that treaty benefits may change: India has updated many DTAAs to include PPT (Principal Purpose Test) and other BEPS-compliant clauses.
For example, high levels of NRI claims involve the UAE-India treaty, indicating practical benefits for interest income on Indian FDs.
Conclusion:
The Double Taxation Avoidance Agreement (DTAA) in India offers a valuable framework for individuals and companies engaged in cross-border income to avoid being taxed twice. By understanding the specific treaty provisions, submitting the correct documentation, and staying compliant, you can benefit significantly. Explore more financial insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Double Taxation Avoidance Agreement (DTAA) here – https://cleartax.in/dtaa