A key regulation that enables Non-Resident Indians (NRIs) to reduce their tax burden in India is the Double Taxation Avoidance Agreement (DTAA). To utilise the benefits and possible foreign tax credits, NRIs must be aware of the DTAA policy and their residential status for tax payment. Vakilsearch makes an effort to go into great detail about the policy, including topics like the advantages of DTAAs, foreign tax credits, and strategies to help NRIs pay less in taxes.
NRI Tax Policy in India
According to Indian Income Tax law, a person’s tax liability is determined by where they lived during the applicable financial year. The number of days spent in India throughout the course of the relevant year and the previous ten years is the main factor used to determine a person’s residency status. Resident, non-resident, and resident but not ordinarily resident (RNOR) are the three main types. Depending on one’s place of residence, different types of income are taxed in India. It is widest for residents and narrowest for non-residents. This is due to the non-resident income’s international source.
NRIs are required to pay taxes in India on income earned or accrued in the country. The NRI tax policy is governed by the Income Tax Act of India and the Double Taxation Avoidance Agreements (DTAAs) signed between India and other countries. The policy is crucial for NRIs to understand the residential status for tax payment and the benefits available under DTAAs. DTAA for Saving Tax for NRI can help avoid the burden of double taxation by ensuring that income is only taxed in one country.
What is DTAA?
DTAA, or Double Taxation Avoidance Agreement, is a treaty between nations designed to prevent the same income from being taxed twice internationally. India has signed DTAAs with 85 countries to avoid double taxation on the same income. This treaty applies to individuals who reside in one country but earn income in another.
There are three main types of DTAAs: Bilateral treaties, exemption methods, and tax credits. DTAA facilitates trade in goods and services, capital investment, and other economic activities between countries. It establishes specific tax rates for income earned in one country by residents of another. Depending on the business type or the individual’s role, DTAA income tax provisions may apply to all forms of income or only specific ones.
- Capital gains
- Property
- Salary
- Services
- Fixed deposit accounts
- Savings.
Residential Status for Tax Payment
The residential status of NRIs determines their tax liability in India.
NRIs are classified as Resident, Non-Resident, or Not Ordinary Resident, based on their physical presence in India and other factors.
The residential status determines the tax rate, exemptions, and benefits available to NRIs.
Benefits to Enjoy Under DTAAs
- Tax Credit: Taxpayers can claim a credit for taxes paid abroad against their domestic tax liabilities, preventing double taxation. This facilitates smoother international business operations and revenue transfers by avoiding tax duplication
- Legal Certainty: DTAA provides clear guidelines on the taxation of international income, fostering legal certainty and encouraging foreign investments in developing countries
- Reduced TDS Rates: The DTAA often results in lower withholding tax (TDS) rates. For instance, interest, dividends, and royalties paid to Indian residents from other countries may be taxed at reduced rates, benefiting service providers and investors.
Strategic financial decisions start here – Explore the benefits of our user-friendly Income Tax Calculator.
The Role of DTAA in NRI Taxation
A Double Taxation Avoidance Agreement (DTAA) is a bilateral pact between India and other countries designed to prevent the same income from being taxed twice. India has signed DTAAs with over 90 countries, including the USA, UK, Canada, and Australia. These agreements are important for NRIs as they specify how income from government securities is taxed in India.
Tax Implications on Government Securities for NRIs
Government securities are a popular investment choice for NRIs, but it’s important to be aware of their tax implications. Typically, interest earned on these securities is taxable in India. However, for NRIs from countries with a Double Taxation Avoidance Agreement (DTAA) with India, the tax treatment may vary considerably.
Exemption Method Under DTAA
Under the exemption method, NRIs can avoid paying tax in India on their income from government securities if they are taxed on that income in their country of residence.
Foreign Tax Credits
- NRIs are eligible to claim foreign tax credits for taxes paid abroad on income received from India.
- Subject to a few restrictions, overseas tax credits may be claimed in accordance with DTAA requirements.
- The credits eliminate double taxation and lower NRIs’ tax obligations in India.
Tips for Reducing the Tax Amount
- By investing in tax-saving vehicles like the National Pension System (NPS), Public Provident Fund (PPF), and Equity-Linked Savings Schemes (ELSS), NRIs can lower their tax burden in India.
- Taxes can be decreased by claiming deductions for insurance premiums and charitable contributions.
- NRIs should also understand the tax ramifications of their investments and make the necessary plans. For any guidance you can always contact a tax expert and we at Vakilsearch are always ready to help!
Click Now: Income Tax Return Online
FAQs
The tax rate for NRIs in India depends on their residential status and the income earned in the country. For NRIs classified as Non-Resident, the tax rate ranges from 0% to 30%, depending on the income slab. For NRIs classified as Resident or Not Ordinary Resident, the tax rates are the same as for resident Indians.
Yes, NRIs can claim deductions for home loan interest paid on a property in India under certain conditions. The deductions are available under Section 24 of the Income Tax Act and are subject to a maximum limit of Rs. 2 lakhs per financial year.
There is no limit on the foreign tax credits that can be claimed by NRIs in India. However, the credits cannot exceed the amount of tax payable in India on the same income. Any excess credits can be carried forward to subsequent years.
Yes, NRIs can file tax returns online using the e-filing portal of the Income Tax Department of India. NRIs are required to file tax returns in India if their taxable income exceeds the threshold limit, which is currently ₹2.5 lakhs.
Yes, NRIs are required to have a Permanent Account Number (PAN) for tax purposes in India. The PAN is a unique 10-digit alphanumeric code issued by the Income Tax Department and is used to identify taxpayers in the country. What is the tax rate for NRIs in India?
Can NRIs claim deductions for home loan interest?
Is there a limit on foreign tax credits that can be claimed?
Can NRIs file tax returns online?
Is it mandatory for NRIs to have a PAN card for tax purposes?
Conclusion
By understanding and utilizing DTAA for Saving Tax for NRI, NRIs can potentially reduce their tax burden and maximize their income from foreign sources. To benefit from the DTAA’s benefits, it is essential to comprehend the policy on NRI tax savings in India. NRIs’ tax obligations are based on their residency status, and foreign tax credits for taxes paid abroad may be claimed. By using tax-saving investments, seeking deductions, and carefully managing their investments, NRIs can also lower their tax burden. NRIs can reduce their tax burden in India by being informed of the policy and making the appropriate plans. Like mentioned before, for any queries and clarifications, Vakilsearch legal experts are always ready to help!
Also, Read;
