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𝐈𝐧𝐜𝐨𝐦𝐞 𝐓𝐚𝐱 𝐑𝐞𝐟𝐮𝐧𝐝: 𝐇𝐨𝐰 𝐭𝐨 𝐂𝐥𝐚𝐢𝐦

Determining the taxation of an individual's income in India depends on their residential status for that particular year. Non-resident Indians (NRIs) and persons of Indian origin (PIOs) often plan their stay in India to avoid being taxed in both countries.

However, an individual's residential status is not always within their control, and circumstances may change it. In such cases, the individual's income from a single source may become subject to taxation in both countries.

To address this issue and promote positive economic relations, countries enter into double tax avoidance agreements (DTAAs). This article explores how residential status can impact taxation and explains the benefits provided by the DTAA for NRIs in India.

Understanding Residential Status:

An individual's residential status is primarily determined by the number of days they spend in India during the relevant year, along with the preceding 10 years. Generally, there are three categories: residents, non-residents, and residents who are not typically residents (RNOR). The scope of taxable income in India varies based on residency.

For example, even if an NRI qualifies as an RNOR for a particular year, their income from a foreign business may still be subject to taxes in India if they operate it from India during their stay.

Benefits Provided by DTAAs:

A Double Taxation Avoidance Agreement is a treaty signed by two nations to alleviate taxpayers' burden of paying taxes multiple times. DTAAs achieve this through the following measures:

Granting exclusive taxation rights to one country.

Allowing both countries to tax the income but with a provision that limits the tax rate.

Granting residents the right to seek refunds or credits for taxes paid in the source country.

It is important to note that the DTAA solely aims to prevent NRIs from paying excessive taxes in both countries.

DTAA Rates:

The DTAA specifies the rate at which tax should be deducted from the income received by citizens of each country. Therefore, if an NRI earns income in India, the tax deduction will be based on the rates outlined in the DTAA with that specific country. The rates may vary between countries, typically ranging from 7.50% to 15%.

Income Categories Covered by DTAA:

Under the DTAA, NRIs are exempted from paying taxes twice on the following types of income:

Salary received in India

House property in India

Capital gains in India

Fixed deposits in Indian banks

Savings bank accounts in India

The Bottom Line:

An individual residing in a country that has a DTAA with India can avail themselves of the benefits outlined in the treaty. Their tax liability will be limited according to the rules specified in the DTAA with the source country.

While the scope of taxation under the income tax laws in India is extensive, NRIs and RNOR individuals can benefit from the provisions under Section 90 of the Income Tax Act, 1961, subject to fulfilling the requirements, such as providing the Tax Residency Certificate (TRC) of the other country.

Please note that the information provided here is based on general principles, and it is advisable to consult with a tax professional for specific guidance related to individual cases.

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