Claiming DTAA Benefits in India: What Every NRI Must Know to Reduce Tax Liability

India’s DTAA rules are designed to prevent double taxation on cross-border income, yet many NRIs fail to fully benefit from them. The challenge is usually not the treaty itself, but gaps in documentation, filing, or treaty application. It is essential for NRIs to identify essential DTAA rules, common pitfalls, and the compliance steps to reduce withholding taxes and avoid prolonged refund processes.

Many Non-Resident Indians (NRIs) pay more tax in India than required, often because they do not complete the necessary documentation or apply Double Taxation Avoidance Agreement (DTAA) provisions correctly, rather than due to ineligibility for treaty relief.

India’s DTAA framework offers legitimate and structured mechanisms to reduce tax exposure on cross-border income. However, NRIs can access these benefits only when they fully meet procedural requirements. Missing documents, incorrect filings, or misinterpretation of treaty clauses can lead to denial of relief, higher withholding taxes, and extended refund processes.

In this article, India Briefing explains step-by-step how DTAA works, why it matters for NRIs, and what actions must be taken to successfully claim treaty benefits in India.

1. Why NRIs often pay excess tax in India

Income earned in India, such as bank interest, rental income, dividends, or capital gains, is generally subject to Tax Deducted at Source (TDS). In the absence of valid DTAA documentation, banks and payers will apply the domestic withholding rates by default, which are typically 20 percent or higher.

Even where a DTAA provides a lower tax rate or exemption, the benefit is denied if documentation is missing, outdated, or incorrectly submitted. As a result, many NRIs pay excess tax upfront and are forced into lengthy refund or assessment processes.

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2. What is DTAA, and why does it matter.

A DTAA is a bilateral treaty between India and another country designed to prevent the same income from being taxed twice, once in the source country and again in the country of residence.

India has signed DTAAs with nearly 100 countries, including the United States (US), the United Kingdom (UK), Canada, Australia, Singapore, Germany, and the United Arab Emirates (UAE). These treaties clearly define:

• Which country has taxing rights over specific categories of income
• Concessional or capped tax rates
• The mechanisms available to claim tax relief or credit

DTAA does not eliminate tax altogether. Instead, it ensures that income is taxed fairly, predictably, and without duplication.

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3. When does DTAA apply?

DTAA relief is available when:

• Income is taxable in both India and another country; and
• One party to the transaction is a non-resident or foreign entity

Importantly, the applicable DTAA is determined by tax residency, not nationality or citizenship. An individual’s residential status under the treaty’s “Residence” article is the starting point for claiming relief.

4. Types of income covered under DTAA

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DTAA provisions typically apply to a wide range of income streams, including:

• Salary or professional income
• Interest from Non-Resident Ordinary (NRO) accounts and fixed deposits
• Rental income from immovable property in India
• Capital gains from the sale of Indian assets
• Dividends, royalties, and fees for technical services

Where such income is taxable in both India and the country of residence, DTAA relief can generally be claimed, subject to treaty-specific conditions.

5. Key benefits available under DTAA

When applied correctly, DTAA allows NRIs to:

• Avoid double taxation on the same income
• Reduce TDS on Indian income such as interest, rent, or dividends
• Claim foreign tax credit in the country of residence
• Improve cash flows by minimizing excess deductions, refunds, and disputes

6. Three ways DTAA prevents double taxation

India’s DTAAs provide three primary mechanisms to mitigate double taxation. The applicable method depends on the nature of income and the relevant treaty article.

a. Foreign Tax Credit (FTC) method

Tax paid in the source country is allowed as a credit in the country of residence, limited to the tax payable on that income in the resident country.

For example, Rahul, a person of Indian origin (PIO) and US citizen, has relocated permanently to India and qualifies as an Indian tax resident. His total taxable income in India is INR 7.5 million (US$83,347.2), including long-term capital gains of INR 500,000 (US$5,556.8) from US-listed shares.

• US federal tax paid on gains: INR 100,000 (US$1,111.29)
• Tax payable in India on such gains: INR 71,500 (US$794.57)

India allows a foreign tax credit only up to INR 71,500 (US$794.57). Although Rahul paid more tax in the US, no additional tax is payable in India on this income.

b. Exemption method

Certain income is taxed exclusively in one country and fully exempt in the other, depending on treaty provisions.

For example, Rohan, an Indian citizen, is seconded by an Indian multinational to the US for three years and becomes a US tax resident and an NRI in India. He earns a salary of INR 5 million (US$55,564.8) in India for services rendered in the US.

While the salary is taxable in India under domestic law due to receipt, the India-US DTAA (Article 16) allows India to exempt this income. Rohan remains liable to tax in the US under the US law.

c. Reduced or special tax rates

Many DTAAs prescribe lower withholding tax rates than those under the Income Tax Act, 1961. These concessional rates can be applied when filing returns or claiming refunds.

For instance, Smriti, a Canada-based NRI, earns INR 2.5 million (US$27,782.4) as interest income from an NRO account in India. TDS is deducted at 31.20 percent, amounting to INR 780,000 (US$8,668.1).

Under the India-Canada DTAA, tax on such interest is capped at 15 percent. Smriti can claim a refund of excess TDS in India and may also claim an FTC in Canada.

7. DTAA relief mechanisms: Overview

8. Mandatory documents to claim DTAA benefits

To successfully claim DTAA relief, NRIs must ensure the following documents are in place:

• Tax Residency Certificate (TRC) from the country of residence
• Form 10F filed electronically on the Indian income tax portal
• PAN card
• DTAA self-declaration submitted to the bank or payer
• Self-attested copy of passport
• Self-attested copy of valid visa
• Overseas citizenship of India (OCI) or PIO card, where applicable
• Form 67 (mandatory for claiming foreign tax credit)

Even a single missing document can result in denial of treaty benefits.

9. Consequences of incomplete documentation

Failure to submit proper DTAA documentation can lead to:

• Higher TDS deductions
• Rejection of concessional treaty rates
• Delays in refunds
• Tax notices or assessment queries

In most cases, excess tax can only be recovered through a time-consuming refund process.

10. DTAA vs. Income Tax Act: Which one applies?

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Section 90(2) of the Income Tax Act, 1961, allows a “treaty override,” meaning:

• If domestic law is more beneficial, it applies
• If the DTAA offers better relief, the treaty prevails

However, where a Permanent Establishment (PE) exists in India, business income may still be taxed under domestic provisions.

11. Special relief for returning NRIs: Section 89A

Section 89A of the Income Tax Act, 1961, introduced in 2021, addresses double taxation of foreign retirement accounts. It allows specified individuals returning to India to defer tax on income from notified foreign retirement accounts until actual receipt, subject to prescribed conditions.

12. Common DTAA partner countries and indicative rates

India’s DTAAs typically prescribe concessional withholding rates such as the following:

• US, UK, Canada, Australia, Singapore: ~15 percent
• Germany, South Africa, New Zealand: ~10 percent
• UAE: ~12.5 percent
• Mauritius: 7.5–10 percent

Actual rates vary depending on income type and treaty article.

13. How to claim DTAA benefits in India

To avail DTAA relief, NRIs should follow a structured compliance process:

1. Determine tax residency under the applicable DTAA
2. Obtain a valid TRC
3. Identify eligible income and map each stream to the relevant DTAA article

Professional advice is strongly recommended due to treaty complexity and frequent documentation errors.

Conclusion

India’s extensive DTAA network provides meaningful relief to NRIs, OCIs, and PIOs by preventing the same income from being taxed twice. Relief may be claimed through foreign tax credits, income exemptions, or reduced tax rates, depending on treaty provisions.

However, eligibility alone is not sufficient. Accurate documentation, correct interpretation of treaty clauses, and procedural compliance are critical. Given the complexity involved, consulting qualified tax professionals in both India and the country of residence is advisable before filing returns.

(US$1 = INR 89.98)

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