The non-resident Indians (NRI) lives abroad but also earn an income in India. In this case, there is a possibility that the income arise in India would attract tax in India as well as in the country of the NRI’s residence. This means that taxpayer would have to pay tax twice on the same income. To avoid this twice payment of tax something called Double Tax Avoidance Agreement (DTAA).
The benefits of DTAA are lower withholding tax (tax deducted at source or TDS), exemption from tax, and credits for taxes paid on the doubly-taxed income that can be en-cashed at a later date.
India has DTAA with over 80 countries. The major countries with which it has signed the DTAA are the United States of America (USA), the United Kingdom (UK), the United Arab Emirates (UAE), Canada, Australia, Austria, Belgium, Colombia, Denmark, Finland, France, Germany, Hong Kong, Iceland, Ireland, Italy, Israel, Japan, Korea, Malaysia, Netherlands, New Zealand, Norway, Philippines, Poland, Qatar, Saudi Arabia, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand to name a few.
DTAA is calculated in 2 ways:
- Tax Credit method
- Exemption Method
1. Tax Credit Method:
An example calculation from such method is
| Income in Source Country | 1000 |
| Income in Resident Country | 1000 |
| World Wide income | 2000 |
| Tax paid in source country @20% | 200 |
| Tax paid in Resident country on worldwide income @30% | 600 |
| Less: Tax credit on Tax paid in source country | 200 |
| Tax paid in resident country | 400 |
| Total tax paid | 600 |
2. Exemption Method:
An example calculation from such method is
| Income in Source Country | 1000 |
| Income in Resident Country | 1000 |
| Worldwide Income | 2000 |
| Tax paid in source country @20% | 200 |
| Tax paid in Resident country @30% | 300 |
| Total Tax Paid | 500 |
