One of the most common questions amongst NRI is that “Do I have to pay taxes in both the countries i.e. country of resident and India?”
Accordance to that DTAA comes into the picture for NRIs working in other countries.
Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that aims to avoid double taxation of income earned by residents of India and the USA.
Essentially it will be taxed in both countries USA and India, but tax relief will be claimed in the country of their residence.
One of the key provisions of the India-USA DTAA is the provision of tax residency. An individual or entity will be considered a resident of the country where they are permanently residing or where they are liable to pay taxes. This provision is important as it determines which country has the right to tax the income earned by the individual or entity.
DTAA between India and USA – Taxes on Income
Under this agreement, the taxation of various types of income, such as income from dividends, interest, royalties, and capital gains, is provided for.
Income from Immovable Property: Under the DTAA between India and USA, income from immovable property, such as rental income, is taxed in the country where the property is situated. For example, if a USA resident owns a property in India and earns rental income from it, then it will be taxed in India.
Dividend: If a resident company pays a dividend to a resident of another country, the dividend income is taxable in the country in which it is received.
Let’s say, Mr. Patel, who is a resident of India, owns shares of a US-based company and receives dividends from the company. As the dividend is received from a US company it will be taxed there and as Mr. Patel is a resident of India it will be taxed in India as well. So, now, to avoid double taxation, Mr. Patel can claim a tax credit for the taxes paid in the USA against his tax liability in India.
Interest Income: If interest income is earned in India and the amount belongs to a US resident, the amount is taxable in the US. However, according to the Income Tax Act, such interest may be taxed in India as well.
So, now if it has to be taxed in India then the dividend cannot exceed the following:
- 10% of the gross amount – If the interest is paid on a loan granted by a bank or a financial institution.
- 15% of the gross amount – in any other case.
Income of professors, teachers, and research scholars: Income earned by a resident of one country who is temporarily present in the other country for the purpose of teaching, lecturing, or conducting research is exempt from tax in the other country for up to 2 years and subject to certain conditions.
For example, if an Indian professor visits a US university to teach for a period of six months, the income earned by the professor in the USA will be exempt from tax in the USA.
DTAA between India and USA – Reporting in ITR:
If an individual or entity is eligible for relief from double taxation under the DTAA between India and USA, they need to disclose the foreign income and taxes paid in the ITR and as well needs to report the foreign income and taxes paid in the schedule FSI of the ITR form.
To claim the foreign tax credit, the taxpayer should file Form 67 online on the income tax website and can also claim a tax credit u/s 90.
Overall, the DTAA between India and USA is an important agreement that provides clarity on the taxation of various types of income and helps in promoting cross-border trade and investment.
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