What is DTAA and How does it Work?

One of the most common questions that trouble NRIs is whether they have to pay taxes in two countries- the one they are working in, and the one that’s their home country i.e. India. This is a problem, which is why Double Tax Avoidance Agreement (DTAA) was created.

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What is DTAA?

It’s a formal agreement between two or more countries to address the problem of double taxation. It helps in checking tax evasion and fair taxation.

How does DTAA Work?

DTAA allows you to prevent double taxable through several methods, such as:

Exemption

In this method, an NRI can claim for the exemption of their foreign income. This way their income won’t be considered as a taxable income. There are many countries that have signed DTAA with India based on this method.

Tax Credit

In this, the taxpayer NRI adds their foreign income to the full taxable income and calculates the applicable tax. However, later on, they can claim the credit for the foreign taxes.

The tax credit is the most common method used under DTAA.

Note: If the tax rate in the resident country (India, in this case) is higher than the foreign country then the NRI has to pay the difference in the taxes in their home country (India).

An important point to note is that in India, the tax liability is based on the source of income and residential status of an individual.  So, while an NRI is taxed on their Indian sourced income, a resident is taxed on their global income.