Double tax for NRIs if this form is not filed and foreign tax credit is not claimed
If you're an non-resident Indian (NRI) who has filed an income tax return (ITR) while claiming relief for income tax and double taxation, it's important to follow additional procedures. Failure to do so could lead to rejection of your claim by the tax department. If your claim for double taxation relief is rejected, you'll be impacted in two ways. First, you'll have to pay income tax according to the laws of the foreign country where you're a resident. Second, you'll also have to pay income tax in India.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} To save NRIs from this trouble, the Indian government has signed a Double Tax Avoidance Agreement (DTAA) with more than 90 countries including USA, the UK, Korea and Taiwan.
How DTAA helps in avoiding double taxation of same income for NRIs
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says that many countries follow residence-based taxation systems, where the global income of residents is subject to taxation in such countries. "Hence given the same, NRI's resident country may also tax the income earned by NRI in India as part of their global income. Also, such India sourced income would be subject to tax in India as per Indian domestic tax law against which beneficial provisions, if any, under the Double Taxation Avoidance Agreement (DTAA) could be applied," he says.For example, global income of residents in the USA is subject to tax in the USA. Hence, the Indian income of an NRI who is a resident of the USA may be taxable in the USA at the rates applicable to such income to such NRI. "In this situation, NRI can claim the beneficial provisions under the India-USA DTAA, if any, for taxes payable in the source country. In such a case, the NRI can claim the beneficial tax rate under the India-USA DTAA subject to obtaining a TRC and online Form 10F," says Jhunjhunwala.
Jhunjhunwala explains the concept with an example: "For instance, where the NRI earns dividends from shares held in an Indian company, the India Income Tax Act prescribes a withholding tax (TDS) at the rate of 20 per cent (plus applicable surcharge and cess) on such dividend payments/ accruals to a USA resident. However, Article 10 of the India-USA DTAA stipulates a tax rate of 15 per cent on dividends (in certain specified cases). In such a case, the NRI can claim the beneficial tax rate under the India-USA DTAA subject to obtaining a TRC and submission of online Form 10F."
Your double taxation treaty rates and income tax relief claim might get rejected if Form 10F and TRC are not submitted
If you don't submit Form 10F and Tax Residency Certificate (TRC) then the favourable rates under the DTAA might not be granted. TRC is a document issued by a country's tax authorities that certifies an individual's tax residency status."TRC is particularly relevant for Non-Resident Indians (NRIs) who may have income sources or assets in both India and another country," says Yeeshu Sehgal, Head of Tax Markets at AKM Global.
According to the income tax department, "Non-resident taxpayers claiming benefit of lower tax rates under the relevant DTAA, you are requested to obtain a tax residency certificate from the tax jurisdiction having DTAA with India under which lower tax rate benefit is being claimed. Further, please ensure that certification in prescribed form no. 10F including a copy of the tax residency certificate obtained from the resident jurisdiction was submitted through the e-filing ITR portal."
CA (Dr.) Suresh Surana says that among the multiple pre-conditions for claiming DTAA taxation relief, one includes the taxpayer being a 'resident' of a country with a DTAA signed with India. "This residency must be established through a Tax Residency Certificate (TRC) issued by the tax authorities of the country of residence. TRC provides evidence that they are a tax resident of a country that has a tax treaty with India," says Surana.
Deadline to file Form 10F and TRC?
According to Sehgal, NRIs have no deadline for filing Form 10F and TRC. "Form 10F and TRC is filed whenever there is any incidence of double taxation and the NRI wishes to claim DTAA benefits," he adds.How NRIs can avoid double taxation even if Form 10F and TRC are not submitted
CA Abhishek Soni, co-founder, Tax2Win, says that without submitting Form 10F and TRC, the Indian tax authorities might not grant the tax relief under DTAA, "potentially leading to higher tax liability."Experts say that even if an NRI does not furnish TRC and Form 10F, they can still avoid paying double tax on the same income. "Even if an NRI does not furnish a TRC and Form 10F, they can still claim a foreign tax credit in their resident jurisdiction to avoid double taxation," says Sehgal.
Jhunjhunwala explains with an example: "The NRI can claim credit for taxes withheld in India in its USA income-tax return, subject to compliance with the foreign tax credit claim requirements of the domestic tax laws of the USA."
How does DTAA work
According to Surana, many DTAAs with other nations often provide for reduced tax rates or exemptions on certain types of income (such as dividends, interest, royalties, etc.) for residents of the treaty signatory countries. "To benefit from the lower tax rates or exemptions under a DTAA, a taxpayer must provide specified documentation including TRC in order to provide evidence that they are a tax resident of a country that has a tax treaty with India.," says Surana.As per Surana, the TRC must substantiate the tax residential status claim for the lower tax rate or exemption under the DTAA. "Without it, one may be taxed at the higher domestic rate or miss out on treaty benefits. For instance, if a taxpayer earns interest from a foreign country, the DTAA may allow them to pay tax on that interest at a reduced rate in the source country or claim a credit for taxes paid abroad in the home country," he says.
According to Surana there are two types of double taxation relief- section 90 (when there is a treaty country) or section 91 (when there is a non-treaty country).
Surana says that section 90, also known as 'bilateral relief', applies when a DTAA exists. "The taxpayer can claim relief based on the provisions of the DTAA, which may include lower tax rates or exemptions," he says.
While on the other hand, section 91 is known as 'unilateral relief'. "This section is applicable when there is no DTAA between India and the foreign country. In this case, the taxpayer can claim relief for taxes paid in the foreign country, limited to the Indian tax payable on the same income," says Surana.
According to Soni, to claim relief under section 91 (unilateral relief with no DTAA treaty) the following conditions must be met:
Income Earned: The income must have been earned in the previous financial year.Tax Liability: The income must be subject to taxation in both India and the foreign country.Comparable Tax System: The foreign country's tax system must be comparable to India's. And India should not have a DTAA with the specified country.Tax Payment: The taxpayer must have paid taxes in the foreign country.Relief Calculation: The amount of unilateral relief is the lesser of the Indian or foreign tax rate applied to the foreign income. This amount is then deducted from the taxpayer's overall Indian tax liability. #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
