NRI Tax Services

Double Taxation Avoidance Agreements (DTAA)

The Double Tax Avoidance Agreements (DTAA) are essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to promote and foster economic trade and investment between two countries by avoiding double taxation.

The advantage of DTAA are as under,

Lower Withholding Taxes
Complete Exemption of Income from Taxes
Underlying Tax Credits
Tax Sparing Credits
Determination of Residential Status

The Provisions of DTAA override the general provisions of taxing statue of a particular country. It is now well settled that in India the provisions of the DTAA override the provisions of the domestic statute. Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee have an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act, whichever are more beneficial.

The NRI can certainly take the benefit of the provisions of DTAA entered into between India and the country in which the he resides, more particularly in respect of Interest Income from NRO account, Government securities, Loans, Fixed Deposits with Companies and dividends etc. This is explained here under: -

For the Assessment Year 2003-2004,

Withholding Tax Rate under Indian Income Tax for Interest Income - 31.5% whereas,

Rate of Tax prescribed in the DTAA with the country where NRI resides e.g. Singapore - 15%

Therefore, chargeable rate will be 15%(Lower of the Two)

Every NRI should choose lower of the tax rate prescribed in DTAA with the country where he resides and the tax rate prescribed under the Indian tax laws.