DTAA (Double Tax Avoidance Agreement)

What it means

A Double Tax Avoidance Agreement (DTAA) is a tax treaty between India and another country. It decides which country can tax a particular income, and how much, so that the same income is not fully taxed twice. India has DTAAs with more than 90 countries, including the USA, UK, UAE, Singapore, Canada and Australia. They matter for NRIs, residents with foreign income, and businesses dealing with foreign clients.

How it works

• Exemption method: the income is taxed in only one country and is exempt in the other.

• Credit method: both countries may tax, but your country of residence gives credit for the tax paid abroad. This is how most of India’s treaties work for Indian residents.

• Lower withholding rates: treaties often cap tax on dividends, interest, royalties and technical fees, typically at 10% to 15%, against higher domestic rates.

• Choice: you can apply the treaty or Indian law, whichever is more beneficial.

• Documents: a Tax Residency Certificate (TRC) from your country of residence, plus the prescribed self-declaration (Form 10F under the old rules). Indian residents claiming foreign tax credit must file the prescribed form (Form 67 under the old rules) with proof of foreign tax paid, on or before the return due date.

Where there is no treaty, Indian residents can still get unilateral relief under Indian law (section 91 of the old Act).

Example

Ankita lives in Mumbai and is a resident of India. She holds US shares and receives a dividend of $1,000, which is about ₹85,000 at ₹85 per dollar.

• US tax withheld at the treaty rate of 25%: ₹21,250

• Indian tax at her 30% slab: ₹25,500, plus 4% cess = ₹26,520

• Foreign tax credit allowed: the lower of the foreign tax (₹21,250) and the Indian tax on that income (₹26,520) = ₹21,250

• Net tax payable in India: ₹26,520 minus ₹21,250 = ₹5,270

Without the credit, she would have paid ₹47,770 in total on a ₹85,000 dividend.

Key points to remember

• Missing the foreign tax credit form before the due date is the most common reason the credit is denied.

• Get the TRC early. Some countries take weeks to issue it.

• NRIs should give their Indian bank a TRC to get lower TDS on NRO interest where the treaty allows.

• Each treaty is different. Always check the specific article for the type of income.

• Report foreign assets and income in your Indian return even if a treaty exempts the income.