Double Taxation Relief - How to Avoid Double Taxation Relief?

Written by : Knowledge Centre Team

2024-08-02

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Double taxation can happen in two ways - juridical and economic. In juridical, the income you earn outside India is taxed twice. Once abroad and once in India.

Economic double taxation occurs if your income or a part of your income is taxed twice in India.

Economic double taxation can be part of the law. However, juridical double taxation can put a lot of burden on you as an individual. If your income is double taxed, you need to know about the Double Taxation Avoidance Agreement (DTAA).

You may have moved out of India to earn a living in a new country. You must be paying taxes in the residing country as per the country's tax law. Being an Indian (NRI), you must be investing in India. You are liable to pay taxes on the gains you make on your Indian investments. It makes sense, and you must be fine paying the taxes on the capital gains.

However, there could be a situation in which your income gets taxed in both countries. Assume you have to pay a tax of 20% on your income both in the residing country and India. Double taxation occurs.

Double Taxation Avoidance Agreement

The Double Taxation Avoidance Agreement is a treaty signed between the two countries. The treaty ensures that NRI can go outside India and earn a living without the need to pay taxes multiple times. You cannot avoid taxes using DTAA. However, you can use the provisions to reduce your taxes.

The DTAA can be different in different countries. With a few countries, India has signed an agreement covering all income types. It is known as a comprehensive treaty. With others, only certain income types are included in the agreement, known as specific treaties.

Under DTAA, the two countries decide upon a fixed tax rate. Based on the rate set, the tax is deducted from the income earned. The format used for it is Tax Deduction at Source (TDS). If you have already paid taxes in your residing country, you do not have to pay taxes in India. Currently, India has DTAAs with more than 80 countries.

Some prominent countries India has signed DTAA with are:

United States of America	South Africa
United Kingdom	Saudi Arabia
Ukraine	Italy
UAE	Japan
Thailand	China
Sweden	Australia

How does DTAA Work?

Your tax obligation depends on your source of income and residential status. DTAA not only benefits NRIs but also resident Indians earning income from a foreign country. You can benefit from DTAA in two different ways:

1. Exemption System

Under the exclusion framework, you do not have to pay taxes in India. You only have to pay taxes in the country where you are working. In other words, you only have to pay taxes in one of the two countries. However, you need to submit a Tax Residence Certificate (TCS).

You are an Indian resident, but you receive interest income from UAE. Such income will be taxable in the UAE. You don't have to pay any taxes in India.

2. Credit System

It permits tax paid in one country to be utilized as a credit in other countries. It can be a direct or indirect credit. You pay taxes in both countries, but the country of residence allows you to claim a tax credit.

For example, you are an Indian resident and receive a salary from the US company for the job you did for them. The US follows the source rule. Hence, it will deduct taxes as per the applicable tax rates. Since you reside in India, you have to pay tax on your global income. However, when you file your income tax return, you can set off the claim tax credit against your total tax liability.

Can NRI Invest for Tax Saving in India?

NRIs are eligible to claim various exemptions and deductions on their total income. They can also invest in different tax savings options. Some of the popular ones are:

Term Insurance

NRIs can buy the term insurance in their name, spouse's name, or children's name. The premium they pay towards the term insurance is eligible for tax deduction under Section 80C.

iSelect Smart360 Term Plan from Canara HSBC Life Insurance offers additional features and benefits. You get a return of premium and in-built coverage for critical illnesses with the life cover.

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plan offers you combined benefits of investment and insurance. The premium paid towards the ULIPs is eligible for tax deductions. NRIs can avail of tax deductions on the interest earned towards the investment U/S 10(10D) of the IT Act.

Invest 4G ULIP from Canara HSBC Life Insurance gives you loyalty additions and wealth boosters with capital growth and tax benefits.

Equity Linked Savings Scheme (ELSS)

NRIs can claim tax deductions up to Rs 1.5 lakhs under Section 80C of the IT Act by investing in ELSS. Your investment in ELSS, the interest earned, and the returns are all tax deducted.

Health Insurance

NRIs can claim a tax deduction on the premium paid towards health insurance. NRIs can claim deductions up to Rs 50,000 for senior citizens and Rs 25,000 for self, spouse, and children (dependent).

Canara HSBC Life Insurance iSelect Smart360 Term Plan gives you the option to cover yourself and your loved ones against 40 listed critical illness. You can also avail increased cover options to take care of increasing medical needs.

As an NRI you should know the tax rules and the tax you need to pay in India and the country of your general residence. Wherever required, they should report the income earned from the foreign source. Avoid paying dual taxes with DTAA on your income.

You can also invest in tax saving plans to have financial safety and investment benefits in India along with tax saving.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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