A person who earns his salary from a foreign company could be taxed in the home country and the country where the employer is located. Many countries have signed Double Taxation Avoidance Agreements (DTAA) to avoid this situation for their citizens and entities.

What Is Double Taxation Avoidance Agreement (DTAA)?

Section 90 of the Income-tax Act, 1961 defines double taxation avoidance agreements. The section pertains to tax provisions for incomes, like salary, capital gains, interest and dividend income, etc., earned from a foreign country. The agreements provide guidelines about the types of income and the rates to be levied. These pacts agree on the tax rates, such as the rate for income earned from sources in India and the tax in another country on the income earned there. Note that the DTAA rates and rules are different from one to another. As per the State Bank of India website, India has signed DTAA agreements with more than 90 countries, including the US, UK, UAE, Germany, France, Singapore, Canada, and Australia.

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Who Does It Apply To?

It applies to Non-Resident Indians (NRIs). DTAA agreements help people earn income outside India without facing double taxation. However, in some instances, the provisions do not apply. DTAA is not applicable in the case of:

1. Salary income earned in India
2. Services provided in India
3. Savings Bank Account in India
4. Fixed deposits in India
5. House property in India
6. Capital gains on property transfer in India

A Taxpayer Can Claim DTAA Benefits In Three Ways: 

• ‘Special Deduction’ is when they pay tax in one country but can claim a deduction in another country for specific incomes, like interest income.
• ‘Exemption’, where they can claim tax exemption in one of the two countries where certain income may be tax-free. Note that the exemptions may vary for different countries and types of income, and
• ‘Foreign Tax Credit’, where they can claim the tax credit as per applicable law in their country of residence if tax is paid already in the source country.

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DTAA Benefits:

Straightforward taxation and avoidance rules help NRIs save taxes and avail of other allied benefits. For example, lower tax rates in a country result in tax savings. Clarity on tax norms and rates offers opportunities for better financial planning for various types of income, including business and investment planning. It strengthens the taxation space, and clear rules help curb tax evasion. A well-defined DTAA helps people take up foreign endeavours, improve their economic conditions, and grow. To benefit from these provisions, NRIs should know the DTAA rules.