• Sagar Rathi

NRI Property Buyer - Understanding Double Taxation Avoidance Agreements (DTAA)

Credits: Vishal Creative Solutions

While purchasing a real estate property in India, NRIs operate and transact in two different jurisdictions, and thus are liable for paying taxes in both the jurisdictions. This phenomenon of being taxed or being eligible for being taxed twice is known as Double Taxation, which refers to ‘income taxes paid twice on the same source of income’. To avoid double taxation, many countries sign Double Taxation Avoidance Agreements’ (DTAA), which helps the buyers or the seller avoid exorbitant taxation.

What is ‘Double Taxation Avoidance agreement’? Double Taxation Avoidance Agreement is an agreement between two countries to avoid levying high tax by two or more jurisdictions on the same income (for income tax), asset transaction (capital taxes) and financial transaction (sales taxes). This agreement is signed between countries to make them attractive destinations and to provide NRIs with relief from paying taxes multiple times. While the DTAA does help NRI completely avoid taxes in any country, they ensure avoidance of higher tax implications in both the countries.

Double Tax Avoidance Agreement with countries around the world If the NRI earns in India, there is a chance that his/her earning may get taxed in India as well as his country of residence. To avoid this, India has a DTAA with most major countries where Indians reside including,  the US, UK and Gulf countries. With this agreement, these countries have fixed a specific rate at which tax has to be deducted on the income paid to these NRIs. 

The list of countries, along with the DTAA TDS rate, are listed as follow: 

Source: Income Tax Website, SBI Website

How NRIs can claim benefits under DTAA? Generally, NRIs utilizes ‘Double Tax Avoidance Agreement’ to fix a specific rate at which tax has to be deducted on income earned in India. For instance, if an NRI has earned an income in India, the TDS on that income would be applicable in accordance with the set rate of DTAA Agreement with that country. By availing DTAA, the NRIs or PIOs can avoid paying taxes (on these sources) in the NRI’s country of residence in case these sources are taxable in that country as well.

Benefit of DTAA can be availed in two ways:

  • Tax credit: Can be claimed in the country of residence

  • Exemption: Can be claimed in India or the country of residence

The person is supposed to fill a DTAA application form and submit relevant documents to claim the tax exemption (or tax credits), including tax residency certificate and self-attested copy of the PAN card. Other documents to be submitted may vary from country to country (of residence). 

What is covered under DTAA? While the agreement is signed between India and various countries, its scope is limited to a few incomes, where double taxation can be avoided. This includes services (provided in India), salary (received in India), house property (in India), capital gains on transfer of assets (in India) and a fixed deposit or savings bank account in India.

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