DTAA can be availed by NRIs to lower their tax incidence
India has entered into DTAAs with around 85 countries till date.
Q. I have a couple of fixed deposits in India. How is tax deducted at source calculated for a non-resident Indian (NRI)?
Expert Comment: Interest earned by an NRI from non-resident ordinary deposits is taxable in India as per the provisions of domestic tax laws. The current rate at which tax is withheld at source is 30% plus applicable surcharge and cess. However, if you are a tax resident of a country with which India has entered into a double taxation avoidance agreement (DTAA) and the rate of tax on interest in the source country is lower, you may take the benefit of the same. For that purpose, you need to furnish a copy of the tax residency certificate (TRC) obtained from the revenue authorities of that country along with a self declaration in Form 10F to the bank. Thereafter, the bank with withhold tax as per the DTAA rates.
However, if you have any deposits in non-resident external account, interest is exempt from tax and hence the question of tax deduction at source does not arise.
Q. I want to understand DTAA. As an NRI, how can I benefit from this Act?
Expert Comment: DTAA are bilateral agreements entered into between the governments of two countries with a view to avoid taxation of the same income twice as well as to encourage and foster economic TRADE and investment between the respective countries. India has entered into DTAAs with around 85 countries till date.
You can take the benefit of the provisions of DTAA entered into between India and the country in which you are a tax resident, provided such an agreement exists. The benefits of DTAA are: lower withholding taxes on income, exemption from taxes in certain cases and credits for taxes paid on income accruing in the source country.
The provisions of DTAA override the provisions of domestic tax laws. As an NRI, you have the option to choose to be governed either by the provisions of a particular DTAA or the provisions of the Indian Income-tax Act, whichever is beneficial. However, in order to claim the benefit of DTAA, you would need to furnish a TRC of the country where you are a tax resident along with a declaration in Form 10F. To give an example, in case of interest from banks, the withholding tax as per the domestic laws would be 30.9%; whereas the rate as per DTAA with most countries would be 15%. Thus by opting for DTAA rates, the tax incidence in India can be reduced.