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How can NRIs prevent double taxation in India?

Double taxation is a matter of concern for the NRIs as they are compelled to pay double tax on their income in both their country of residence and country of earning until they apply for tax exemption.

  • 5,396 Views | Updated on: May 24, 2024

Is it justified to compel anyone to pay double tax? No, right, but it can happen with the NRIs. So, let’s move forward with the blog to understand double taxation in India and see how we can resolve it with the help of tax saver plans.

What is Double taxation?

The people migrating to other countries to make a living must comply with the country’s vital tax laws and pay taxes in their country of residence. However, it is pretty standard that they have certain significant investments in their home country, India, and thereby they become liable to pay taxes on profits acquired from those investments in India.

Paying tax on gains from their investments makes sense. It is acceptable, but the difficulty arises when the NRIs are asked to comply with the globally accepted norms that say if a taxpayer is a resident of one country but has an income source in another country, they are suggested to pay tax on his income and gains in both the countries.
This whole concept is termed double taxation. But we do have a solution to it, and that is through tax saver plans and legal agreements.

What is DTAA?

India has entered into legal terms with multiple countries based on Double Taxation Avoidance Agreements (DTAA) to avoid double taxation. Specifically, this means that NRIs can seek their position in the income tax exemption list and will be exempted from paying tax in India while paying the tax return in the other country. DTAA helps them attain freedom from paying the tax twice.

For instance, if there is a Double Taxation Avoidance Agreement between Singapore and India under which, as per the taxation policy, the income tax is levied based on the residential status of an individual. This ensures that no individual is subjected to double taxation. Until now, India has had these agreements with about more than 80 countries.

Most people fall into this trap and start believing that DTAA’s will allow them complete exemption from tax paying, but that does not hold true, as these legal agreements provide rebates and not total deductions. NRIs can lower their tax implications when they earn a living in India.

How can NRIs avoid double taxation in India?

You can seek the help of tax saver plans and income tax saving schemes to eliminate unnecessary double taxation.

The mechanism of double taxation as per the Double Taxation Avoidance Agreement can take place for the benefit of NRIs in the following ways.

Exemption Method

As per the exemption method, the country of residence exempts tax on income earned in a foreign country. Under this, the income is taxed only in one of the countries. However, according to the conditions of legal treaties with countries like the United Arab Republic, Libya and Greece, the fees for technical services, income from Dividends, Interest and Loyalty are chargeable.

Deduction Method

As per the method, the tax paid in the source country is deducted from the Global income and the income tax is paid on the residual income. Some standard deductions include mortgage interest, retirement policy contributions, medical losses, education loan interest, etc.

Tax Credit Method

The residential country includes income from the source country in the total taxable earnings of the taxpayer, and tax based on such taxpayer’s total revenue is then computed. A deduction is allowed from its taxes for taxes paid in the country where earning occurred. Here are a few types of the Credit method.

  • Ordinary credit method
  • Underlying Tax Credit method
  • Tax Sparing credit

Income types under DTAA

As per the Double Tax Avoidance Agreement, the NRIs are not obliged to pay tax on the following incomes.

  • Providing Services in India
  • Salary received in India
  • Residential property located in India
  • Profits made on transferring assets in India
  • Fixed Deposits and Savings bank accounts in India

Conclusion

So, we can summarise that the NRI is supposed to pay tax in India for the income made, but he can seek an exemption. He may be eligible for a lower rate of tax in case the two countries have signed a treaty under the Double Taxation Avoidance Agreement. Understand the rules and regulations of double taxation in India, as the underlying idea is to prevent taxpayers from paying the tax twice.

Key takeaways

Ways to avoid double taxation are as follows
As soon as someone mentions double, we get excited about what we are getting double, the double benefit, the double raise or the double perks. But sadly, the topic of concern is double taxation, which makes no one excited, but instead worried about how they will pay the double tax in such times of inflation.

  • Exemption Method
  • Deduction Method
  • Tax Credit Method
  • Ordinary credit method
  • Underlying Tax Credit method
  • Tax Sparing credit

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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