Double taxation occurs when the same income is taxed twice in two different countries. One where you earn the income (source country) and the other where you reside (resident country).
For NRIs earning rental income or capital gains from property in India, this can be a major financial burden. That’s where the Double Taxation Avoidance Agreement (DTAA) comes in. This guide simplifies how DTAA works, its impact on your rental income and capital gains, and steps to claim tax relief effectively.
Understanding DTAA and Its Application
DTAA ensures that your rental or capital gains income from the property isn’t taxed twice, both in India and the NRI’s country of residence. Instead, it reduces the tax burden by allowing tax exemptions, deductions, or credits.
India has DTAA treaties with 90+ countries. This includes the USA, UK, UAE, Singapore, Canada, Australia, and Germany. This means NRIs residing in these countries can avoid or reduce double taxation on their Indian income.
Each treaty specifies:
- Which country taxes specific incomes (e.g., rental income may be taxed only in India)?
- Reduced tax rates for dividends, interest, or capital gains.
Example: Under the India-US DTAA, capital gains from property sales are taxed only in India if the property is located there.
- NRIs can claim DTAA benefits via three key methods under the DTAA:
- Foreign Tax Credit (FTC):
Your resident country may allow you to offset the tax paid in India against your total tax liability. For example, Indian residents can claim a credit for foreign taxes paid by filing Form 67 with the Indian Income Tax Department.
- Exemption Method:
Some types of income may be completely tax-free in one of the two countries. This depends on the DTAA clauses between them.
- Reduced Tax Rate:
Instead of paying the standard tax rate, you may qualify for a lower tax rate under DTAA. For example, US tax residents can claim a 15% concessional tax rate on interest income earned in India.
Read Also: Tax on Rental Income in India for NRIs: What You Need to Know
Tax Implications on Rental and Capital Gains
Under DTAA, rental income earned by NRIs from Indian properties is typically taxed in India, but the treaty ensures relief from dual taxation in the resident country. Here’s how it works:
Tax Deducted at Source (TDS) on Rental Income
In India, tenants renting property from an NRI are required to deduct Tax at Source (TDS) at a standard rate of 31.2% (which includes tax, surcharge, and cess).
For example, if the monthly rent is ₹50,000, the tenant deducts ₹15,600 as TDS and pays ₹34,400 to the landlord’s account.
DTAA Benefits:
If the NRI’s resident country has a DTAA with India, they can claim relief by providing a Tax Residency Certificate (TRC) to their tenant. This reduces the TDS rate significantly based on treaty terms. For example:
Under the India-US DTAA, the TDS rate on rental income drops to 15%.
Similarly, NRIs residing in UAE or Mauritius enjoy lower rates as per their treaties, ranging between 7.50% to 15%.
Tax Liability in Resident Country
What happens if your resident country also taxes rental income? DTAA allows you to claim credit for taxes already paid in India. For example, an NRI in the USA can offset Indian taxes against their US tax liability, ensuring they don’t pay twice.
By leveraging DTAA provisions, NRIs can reduce their tax burden and ensure compliance without overpaying taxes. Here’s how:
- Exemption: Countries like the UAE (no income tax) exempt rental income taxed in India.
- Tax Credit: Countries like the USA allow NRIs to claim credit for taxes paid in India.
Tax Relief on Capital Gains from Property Sales
Selling a property in India can be a lucrative investment for NRIs. Without DTAA, capital gains could be taxed both in India and your resident country. Here’s how DTAA can provide you the relief:
- Taxation Rights:
Most treaties allocate taxing rights for immovable property sales to the country where the property is located. This means capital gains from selling Indian property are taxed only in India under treaties like India-US or India-UK DTAA.
- Tax Rates in India:
- Short-Term Capital Gains (STCG): If you sell property within 24 months of purchase, gains are taxed at 30%.
- Long-Term Capital Gains (LTCG): For sales after 24 months, gains are taxed at 20.8% (including health and education cess @ 4%) with indexation benefits.
Example: Suppose Shyam, an NRI, sells a property for ₹1 crore. He held it for three years. After applying for indexation benefits, the taxable gain is ₹40 lakhs. Then, the tax liability would be ₹8 lakhs (20% of ₹40 lakhs).
How to Claim DTAA Benefits as an NRI
The documents you’ll require include the following:
- Tax Residency Certificate (TRC) from the resident country.
- Form 67.
- Self-declaration Form – Form 10F (electronically filed with PAN and TRC details).
- PAN Card.
- Proof of your NRI status (visa, passport).
- Proof of taxes paid in India (e.g., TDS certificates, ITR acknowledgement).
Now, here’s the process of applying for tax relief in India as an NRI:
- Determine Your Residential Status Under DTAA:
Confirm whether you qualify as a resident or non-resident under the DTAA agreement between India and your country of residence.
This is outlined in the ‘Residence’ Article of the DTAA treaty. Your tax status determines the benefits you can claim under the agreement.
- Obtain a Tax Residency Certificate (TRC):
A Tax Residency Certificate (TRC) is a mandatory document. This proves you are a tax resident of another country. You need to get this from the tax authorities in your resident country before claiming DTAA benefits in India.
When filing your Income Tax Return (ITR) in India, you must disclose whether you have obtained a TRC.
For example, if you are a tax resident of the United States, you can claim tax relief under the India-US DTAA. You can do this by obtaining a TRC from the US Internal Revenue Service (IRS) and submitting it along with Form 10F in India.
- Know What Tax Benefits You Can Claim:
As an NRI, you may earn rental income, capital gains (from property or stock market investments), bank interest, or other earnings from India.
Under DTAA, you may be eligible for:
- Foreign Tax Credit (FTC).
- Tax Exemptions.
- Lower TDS (Tax Deducted at Source).
- Seek Professional Guidance:
Tax rules under DTAA can vary based on your country of residence and the type of income earned.
Consulting a qualified tax expert ensures you maximise tax savings and stay compliant with both Indian and foreign tax laws.
Read Also: How to Obtain a Tax Residency Certificate: A Step-by-Step Guide
Final Checklist for NRI Investors
- Verify DTAA terms between India and your resident country.
- Obtain TRC annually from your tax authority.
- Share TRC with tenants/buyers to apply the correct TDS rates.
- File ITR in India to claim exemptions/credits.
- Consult a tax expert for complex scenarios like inherited property or multiple income sources.
Takeaway
If you are an NRI, DTAA is a powerful tool for optimising taxes on Indian real estate investments. You can avoid overpaying taxes and maximise returns by understanding treaty provisions, maintaining proper documentation, and filing returns accurately.
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FAQs
- How are dividends taxed under DTAA?
Under a Double Taxation Avoidance Agreement (DTAA), dividends are typically taxed at a reduced rate in the source country, often ranging between 5% and 15%, depending on the specific treaty provisions.
The resident country may then allow a tax credit for the taxes paid abroad, thereby preventing double taxation.
- What is Form 67, and why is it required?
Form 67 is needed to claim foreign tax credits. You must file it before submitting the income tax return in India.
- What does Article 6 of the DTAA state?
It states that income from immovable property is taxable in the country where the property is located.
