Double Taxation Avoidance

Double Taxation Rules

One of the most legitimate and pressing concerns any Non-Resident has is the question of double taxation. It is not an easy feat to move from the familiarity of your home country and create a new life in a different world. All this effort has gone into generating some hard-earned and well-deserved wealth, and nobody should have to go through double taxation for their hard-earned income. As an NRI, it would help you to learn about the income tax rules for NRI so that you will not be taxed twice for the same income. So, we have curated all the essential income tax rules for NRIs that you must know before you pay your taxes.

What is Double Taxation?

Before going into detail about the nitty-gritty of the tax laws, we should first become clear on what exactly double taxation is. You may have heard this term thrown about by friends, or may have come across it some newspaper or magazine. As you know, when you migrate to another country, you will be required to pay your taxes to that country, as per the requirements of the law. But, if you are also taxed for this income in your home country, then, in effect, it means that you have been taxed twice for the same income. This problem is particularly difficult for people who reside in one country but have a source of income from another country. But rest assured that there are certain international laws and agreements in place that will ensure that you are not taxed twice.

What Is Your Residential Status For The Year?

If you are of Indian origin, then before going into the details, you will first need to understand what your residential status for the year is. You are considered an Indian resident for a financial year if:

  • You have been in India for at least 6 months (or 182 days) during the financial year
  • You have been in India for 2 months (60 days) for the year and have lived for one whole year (365 days) in the last 4 years.

If your status is NRI, then the above will not apply to you.

Is Your Income From Abroad Taxable In India?

This depends on your residential status for the current financial year. If you are considered a “resident” of India for the current year, then your global income is taxable in India. If your status is NRI, then only the income that is generated by you in India is taxable in India. Your income from abroad cannot be taxed in India, but if you have received salary or income from a house in India, then this income will be taxed.

What Are The Prevalent Tax Laws In India?

The Income Tax Act, 1961 (IT Act) governs taxation in India. Under this act, taxation depends upon your residential status for the current financial year, as we have discussed above. Every person who is a resident of India is liable to pay taxes on their global income. However, non-residents will have to pay taxes only for that income which is earned in India.

The Double Tax Avoidance Agreement (DTAA) is an international agreement, wherein two countries agree to avoid double taxation. The specific instances and requirements are laid down. This was done in order to foster economic trade and investments between the two countries concerned.

How To Avoid Double Taxation Under DTAA?

There are two methods by which one can avoid double taxation under the DTAA.

The Exemption Method

Under this method, your income will be exempted from taxation in one of the countries. For example, as per DTAA agreement India has with the United Arab Emirates, any income from rent, interest, dividends earned in India will be taxed in India. This applies to any citizen of the two countries. Similarly, such income earned in the UAE will be taxed only in UAE for a citizen of either country.

The Deduction Method

As per this method, the global income earned by you is first calculated. This includes your earnings from both the countries in question. Then, the income generated from the country of residence is taxed in the country of your residence. This income is then deducted from your global income, and the remainder can be taxed by the other country (usually the home country). Thus, you are only taxed once in each country and not for the same income. These are the key rules you should know before you pay taxes. Knowing the income tax rules for NRIs can definitely help you plan ahead and avoid double taxation.