If an NRI has already paid tax in India and stays abroad for a minimum of 182 days in a year, they are qualified to petition for tax exemption in their place of residence. India has DTAAs (Double Taxation Avoidance Agreements) with a number of nations to prevent double taxation.
In order to avoid paying taxes twice, NRIs might request an exemption for taxes paid in India when filing their tax return in the other nation.
Let’s examine how DTAA avoids double taxation.
For instance, suppose Mr. Ajay Kwatra, who resides in the UK, receives 50,000 in interest income from India. Let’s say that the tax rates in India and the UK are 10 and 15 percent, respectively, due to the differing tax laws in each country. The UK will grant a tax credit for the tax he paid in India due to the tax treaty.
In this instance, his tax obligation will be determined using the formula:
Interest income: ₹50,000
Tax paid in India: ₹5,000
Tax to be paid in UK: ₹7,500
Minus: Credit for tax paid in India: ₹5,000
Total tax due in UK: ₹2,500
The Tax Residency Certificate (TRC) and other pertinent documents must be submitted before an NRI can apply for DTAA benefits.
Although the tax on interest income earned by an NRI in India is collected at a rate of 20% (plus surcharge & cess), it will be levied at a lower rate if India has signed the treaty with that country.
However, the taxpayer must submit a tax residency certificate, form 10F, and PAN in order to be qualified for a lower tax rate (Permanent Account Number).
The form 10F is an assessment’s self-declaration that he lived in a nation with which India has a DTAA for more than 182 days during that year, making him eligible for a lower tax rate.
Additionally, the taxpayer has the option of claiming a tax credit for taxes paid in India while paying off his tax debt in his place of residence.
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In conclusion, an NRI is required to pay tax in India on income earned here, but he can apply for an exemption and may qualify for a lower tax rate if India and the other nation have a double taxation avoidance agreement. The main goal is to stop taxpayers from having to pay income tax on the same income twice.