Navigating double taxation: How NRIs can minimise tax implications on their incomes

Tax-payers who miss ITR filing due dates can file updated returns, subject to multiple conditions

Prashant Mishra

Managing taxes can be complex for Non-Resident Indians (NRIs), especially when they earn income in one country while residing in another.

Double taxation—where the same income is taxed in two countries—can significantly reduce earnings. A Double Taxation Avoidance Agreement (DTAA) helps prevent this issue, allowing you to maximise your investment returns.

What is double taxation?

Double taxation happens when your income is taxed both in the country where it is earned and in the country where you live during the same financial year. For example, if you earn interest on a fixed deposit in India while residing in the United States, both countries might tax that income. This means you could end up paying taxes twice on the same income, which reduces your net earnings.

Also read: ITR filing 2024: Avoiding double-taxation: How Form 67 can help you claim foreign tax credit

How DTAA helps

DTAA is an agreement between two countries aimed at avoiding the double taxation of the same income. It offers several benefits:

●     Avoiding double taxation: Ensures your income is taxed in only one country or provides credit for taxes paid in another.

●     Reducing tax rates: Lowers withholding tax rates on earnings like interest or dividends.

●     Improving investment returns: This helps you retain more of your income by reducing tax liabilities.

●     Encouraging cross-border investments: Facilitates easier investment across countries.

India has signed comprehensive DTAAs with over 90 countries, including the US, UK, UAE, Canada, Australia, and Singapore. Each treaty has specific provisions for different types of income, such as salaries, interest, dividends, and capital gains.

Incomes covered under DTAA

Salaries: Taxation rules vary depending on where the income is earned and your country of residence.

Interest income: Many treaties lower the withholding tax rate on interest earned from fixed deposits or other investments in India. For example, under the India-US DTAA, interest income is taxed at 15 percent.

Dividends: Reduced tax rates often apply to dividend income under DTAA.

Capital gains: Short-term and long-term gains from the sale of assets like shares may be taxed differently under specific treaties.

Rental income: DTAA may allow credits or exemptions on rental income earned in India.

Also read: What NRIs need to know about Indian income tax rules

Make effective use of DTAA

Check your residency status: Indian tax laws categorise individuals as Resident, Non-Resident (NRI), or Resident but Not Ordinarily Resident (RNOR). Your residency status determines your tax obligations. Pay attention to the number of days you spend in India, as this affects your residency status.

Obtain a tax residency certificate (TRC): To claim DTAA benefits, secure a TRC from your country of residence. In India, you may also need to submit Form 10F and other supporting documents.

File the appropriate documents: Ensure all paperwork is complete and accurate. Incomplete or incorrect forms can lead to denied benefits or penalties.

Consult a tax expert: Cross-border taxation rules are complex. Engaging a tax professional familiar with both Indian and international tax laws is crucial. Many Indian tax advisors collaborate with experts in other countries to provide comprehensive advice.

Plan your investments: Review all income sources—salaries, dividends, rental income, and capital gains—and understand how DTAA applies to each. For instance, under certain treaties, you can benefit from lower withholding taxes on interest income or claim refunds if the tax deducted at source (TDS) exceeds your actual tax liability.

Common mistakes to avoid

●     Ignoring residency rules: Miscalculating the number of days spent in or outside India can lead to errors in your tax filings.

●     Missing deadlines: Late or incorrect filing of forms and returns can result in penalties or loss of tax credits.

●     Overlooking professional assistance: Without expert guidance, you might miss key DTAA benefits and end up paying more taxes than necessary.

Double taxation can be burdensome, but with the right approach, you can avoid unnecessary taxes and enhance your earnings. By understanding DTAA provisions, maintaining accurate documentation, and consulting experienced professionals, you can simplify the process and focus on growing your investments. Don't let complex tax rules impede your financial goals—leverage DTAA benefits to secure your financial future.

The writer is founder and CEO of Agnam Advisors, a SEBI-registered investment advisor.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.