Impact of Double Taxation Avoidance Agreement (DTAA) on NRI Property Income

As an NRIs the double taxation avoidance agreement (DTAA) of India with around 90+ countries can save you thousands. Double taxation occurs when on the same income, you pay taxes twice in two different countries. One where the income is generated, i.e., source country, and the other where you reside currently, i.e., resident country.

Considering this, for NRIs who have capital gains from property and rental income in India, it creates a big financial burden. It is where DTAA comes in role. Confused? To help you out, this blog explains the impact of DTAA on NRI property income and steps to claim tax refunds effectively. So read on and get all the information associated with it.

What Is the Double Taxation Avoidance Agreement (DTAA)?

As its name states, the Double Taxation Avoidance Agreement ensures that your capital gains and rental income from property are not taxed twice, both in India and your resident country. In simple words, you can say that it reduces your tax burden by allowing tax deductions, credits, or exemptions.

Considering this, to help NRIs and other individuals from paying taxes twice on the same income, India has signed the DTAA WITH 90+ countries. This includes the USA, UAE, UK, Canada, Germany, and Singapore. It means that NRIs residing in any of these countries can reduce or avoid double taxation on income from India. Further, each treaty specifies:

• Specific income taxes by which country? For instance, rental income from India may be taxed in India only.
• Reduced tax rates for capital gains, interest, or dividends.

For example, under the India-US DTAA treaty, if the property is located in India, capital gains generated from the property sales will only be taxed in India.

Additionally, under the DTAA, via three key methods, NRIs can claim the DTAA benefits. These are as follows:

• Foreign Tax Credit (FTC): In this method, your resident country may allow you to offset your paid taxes in India against your total tax obligation. For instance, Indian residents, by filling out Form 67, with the tax department of India, can claim tax credit for paid foreign taxes.
• Exemption Method: In one of the two countries, some types of income are exempt from all taxes. Considering this, it completely depends on the DTAA clause signed between the two countries.
• Reduced Tax Rate: Under this DTAA method, instead of paying the standard tax rate, you may qualify for a lower tax rate. For instance, on interest income earned in India, US tax residents under DTAA can claim up to 15% concessional tax rate.

This was all about the double taxation avoidance agreement (DTAA). Moving ahead, let's know how it applies to NRI property income.

How DTAA Applies to NRI Property Income?

When an NRI earns income from an Indian property, such as rent or capital gains from selling a house, he/she is liable to pay tax in both India and the country where he/she resides. Considering this, to avoid paying double taxes on the same income, the DTAA comes into play. Here is how DTAA applies to NRI property income.

• Taxation in India Comes First: If the property is situated in India, the primary right to tax the income from that property is in India. Considering this:
  • Rental income, as per the income tax slab rate, is taxed in India.
  • Based on the holding period, i.e., short-term or long-term, you are liable to pay capital gains tax on selling the property in India.
• Taxation in the Resident Country: On the same income, the taxes may also apply in the country where you are tax resident. It depends on the local tax laws of your resident country.
• DTAA Prevents Double Tax: DTAA certifies that an individual with the same income does not pay tax twice. This is generally done through the following ways:
  • Foreign Tax Credit (FTC): Under this, you can claim tax credits in your resident country on the taxes that you already paid in India.
  • Tax Relief or Exemption: In some countries, you do not need to pay tax on your Indian property income or pay taxes at a lower rate.
• TDS on Rent and Capital Gains: TDS on capital gains and rented income is imposed as follows:
  • Generally, NRIs are liable to pay 30% TDS on their rental income.
  • Through DTAA, NRIs can reduce the TDS rate. However, for this, they need to submit documents like Form 10F and a tax residency certificate (TRC).
• DTAA Does Not Eliminate Indian Tax: It is the common misconception among many NRIs. However, DTAA does not eliminate Indian taxes. In reality, it ensures you do not pay taxes twice on the same income without a tax relief.

So, here is how DTAA applies to NRI property income. Moving further, let's know the impact of it on rental income from property in India.

DTAA Impact on Rental Income from Property in India

As an NRI, according to the income slab rate as a resident Indian, your rental income from an Indian property is taxable. Considering this, tenants renting property from NRIs need to deduct TDS at a standard rate of 31.2%. It includes tax, surcharge, and cess.

For instance, if the monthly rent is INR 50,000, the tenant is liable to deduct INR 15,600 as TDS and pay the remaining amount, i.e., INR 34,400, to the NRI landlord.

However, if the resident country of the NRI has a DTAA with India, he/she can claim tax relief by providing a TRC to their tenant. Based on the DTAA treaty terms, it significantly reduces the TDS rate. For instance, under the US-India DTAA, the TDS on the rental income reduces up to 15%. Additionally, NRIs living in Mauritius or the UAE, as per the DTAA treaties, enjoy lower TDS rates ranging between 7.50% (for residents) to 10% (for NRIs).

Further, if you are also liable to pay taxes on your rental income in your resident country through DTAA, you can claim a tax credit. Considering this, you can offset your Indian taxes against your tax obligations in your resident country. By leveraging the DTAA provisions like tax credit and exemption, you can reduce your tax liabilities and ensure compliance without paying more taxes.

This was all about the impact of DTAA on NRI rental income. Moving ahead, let's know the effect of it on capital gains from the sale of property in India.

DTAA Impact on Capital Gains from Sale of Property

For NRIs, selling a property in India always remains a lucrative investment. However, in the absence of DTAA, it turns out be a non-profitable thing as you pay taxes in both India and your resident country, leading to double taxation. Confused?

Here is how DTAA impacts your capital gains from the sale of Indian property. Most DTAA treaties grant taxing rights to the country where the property is located. For instance, under the India-UK DTAA treaty, capital gains from selling the property are taxed only in India. Additionally, in some cases, the resident country can also impose tax on the capital gains accrued from the sale of Indian property. Considering this, the tax rates in India are as follows:

• Short-Term Capital Gains (STCG): If property is sold within 24 months of its purchase, it is taxed as per the applicable income slab rates for NRIs.
• Long-Term Capital Gains (LTCG): If the property is sold after 24 months from its purchase, 20% tax is imposed, plus applicable surcharge and health & education cess.

So, this was all about the impact of DTAA on capital gains from the sale of property in India. In simple words, it does not reduce your payable capital tax in India; however allow it claim credit of this tax in your resident country. Moving further, how NRIs can claim DTAA relief on property income.

How NRIs Get DTAA Relief on Property Income?

Here is how NRIs can get DTAA relief on property income:

Step 1: Confirm DTAA Eligibility

Before claiming DTAA benefits, you should confirm:

• India has a DTAA treaty with your resident country.
• You qualify as a tax resident of the foreign country.
• The income type is covered under the DTAA treaty.

Under the DTAA, eligibility depends on tax residency, not on passport or citizenship.

Step 2: Determine Which Income Is Covered

The DTAA treaty does not apply to all income types. Considering this, the income covered under this is as follows:

• Income earned from a property located in India
• Capital gains
• Interest income
• Technical or professional income

Further, each income category has its own relief mechanism and taxing rights. Additionally, misclassifying income is one of the most common DTAA mistakes.

Step 3: Get a Tax Residency Certificate (TRC)

To claim the DTAA benefits in India, it is mandatory to have a tax residency certificate (TRC) by your side. The TRC states that:

• You are a tax resident in a foreign country.
• It is valid for the relevant financial year.

In the absence of TRC, your DTAA benefits can be denied. Additionally, higher tax rates may apply to you. Also, you should renew your TRC periodically and align it with the financial year of India.

Step 4: Prepare Mandatory Declarations

Apart from the TRC certificate, according to Indian tax rules, you also need to submit the following documents:

• A declaration of beneficial ownership.
• Under the Indian tax regulations, prescribed compliance forms.

The above-mentioned declaration forms confirm that you are a true income owner. Additionally, your DTAA claim is compliant and genuine. Further, incorrectly filled or missed declarations can lead to DTAA rejection.

Step 5: Decide When to Claim the DTAA Benefits

You can claim the DTAA benefits at two different stages:

• TDS Deduction Stage: If you submitted the documents in advance:
  • TAX may be deducted at applicable DTAA rates
  • Improves the cash flow immediately
  • The dependency of refunds reduces
• ITR Filing Stage: If payment of higher taxes has already been made:
  • You can claim the DTAA benefits when filing your ITR returns
  • Get a refund of your excess tax.
  • It is the most common way to claim DTAA, but it includes longer timelines.

Step 6: Claim DTAA Benefits While Filing ITR

If you claim DTAA benefits when filing the ITR:

• Your Indian income is reported normally
• Under applicable sections, DTAA relief is claimed
• Your Indian taxes are adjusted accordingly

Further, it is vital to make a correct disclosure. It is because inconsistent reporting can trigger delays or scrutiny of refunds.

Step 7: Claim Foreign Tax Credit in Your Resident Country

The DTAA treaty works both ways. Considering this, after paying taxes in India:

• Report your Indian income to your foreign resident country.
• Claim tax credit for your paid taxes in India.
• Ensure your submitted documents match your Indian filings.

Moreover, mismatches between overseas and Indian filings are common reasons you do not get a tax refund for the already paid taxes. Now, moving ahead, let's know the documents NRIs require to claim DTAA benefits.

Documents Required to Claim DTAA Benefits as an NRI

Here is the list of documents that NRIs need to submit when claiming DTAA benefits:

• Tax residency certificate (TRC) from your resident country.
• Form 67
• Self-declaration form, i.e., Form 10F (filed online with PAN and TRC details)
• PAN card
• Proof of NRI status, such as a visa, passport
• Proof of paid taxes in India, for instance, ITR acknowledgment, TDS certificates.

So, these are the documents that you need to submit when claiming DTAA benefits as an NRI.

Final Thoughts

Lastly, the impact of DTAA on NRI property income is a very huge. It is a powerful tool for NRIs that assists them in optimizing their taxes on real estate investments in India. By understanding it, you can avoid double taxation and maximize your tax returns. However, for this, you need to file your returns accurately and maintain proper documents.

Further, if you need assistance in claiming DTAA benefits, connect with Savetaxs. We have a team of financial experts who will assist you in claiming the tax benefits under this treaty and resolve all your doubts associated with your taxes. Additionally, if you want, they can also help in planning your taxes in India.