When individuals earn income in a foreign country, it can be taxed both in the country where it arises and where the individual resides. This leads to a double incidence of tax on the same income. To prevent this, the Indian government has signed Double Taxation Avoidance Agreements (DTAA) with many countries, including the USA.
What is DTAA?
DTAA, or Double Taxation Avoidance Agreement, is a treaty between two countries that protects their citizens from being taxed twice on the same income. It ensures that taxpayers do not have to pay taxes in both countries.
How Does DTAA Between India and USA Work?
For instance, if Mr. Mohan, a resident of India, works in the USA and earns a salary, the US government taxes his income. This income is also taxable in India. DTAA prevents Mr. Mohan from paying taxes twice on the same income. Relief can be provided by exempting the entire income in one country or giving credit for the tax paid in the USA.
Conditions for Applicability of India-USA DTAA
The DTAA between India and the USA applies to individuals, companies, partnership firms, trusts, and any entity earning income in both countries. It covers:
- Federal income tax in the USA.
- Indian income tax, including surtax and surcharge.
How is Residential Status Determined?
If an individual is a resident in both India and the USA, residential status is determined by:
- Permanent home availability.
- Closer personal and economic relations.
- Habitual home presence.
- Nationality.
Different Income Types Under DTAA
- Income from Immovable Property: Taxed in the country where the property is located.
- Dividend: Taxed in the receiving country and possibly the paying country.
- Interest Income: Taxed in the receiver’s and possibly the paying country.
- Teachers, Professors, and Scholars: Income is tax-exempt if the individual has resided in a foreign country for up to two years.
Relief from Double Taxation
In India
Suppose an Indian resident earns income taxable in the USA. In that case, they can claim a deduction for the tax paid in the USA, provided it does not exceed the total tax payable in India on that income.
In the USA
A US resident can claim a credit against US tax for the income tax paid in India.
Reporting Income in ITR
Indian taxpayers must report foreign income and assets in their ITR:
- Schedule FSI (Foreign Source of Income): Report income and taxes paid outside India.
- Schedule TR (Tax Relief): Auto-populated based on Schedule FSI.
- Schedule FA (Foreign Assets): Report foreign assets.
- Form 67: Essential for claiming foreign tax credits.
Applying for the India-US DTAA
- Eligibility: Determine if you qualify.
- Forms: Use Form 10F for Indian residents and Form W-8BEN for US residents.
- Supporting Documentation: Prepare necessary documents.
- Submit Forms To the relevant tax authorities.
- Monitor Correspondence: For additional information requests.
Claiming DTAA Benefits
- Determine Applicable Tax Rate: Based on DTAA terms.
- Obtain a Tax Residency Certificate (TRC): Essential for claiming benefits.
- Complete Required Forms: Form 10F for Indian residents, Form W-8BEN for US residents.
- Include DTAA Claim in Tax Return With supporting documentation.
- Calculate taxes according to DTAA instead of using standard rates.
- Maintain Records: For verification or audit purposes.
- Ensure Compliance: With tax laws in both countries.
Frequently Asked Questions
Q: What is covered by DTAA?
A: DTAA prevents double taxation on the same income across borders, ensuring taxpayers do not face dual taxation.
Q: What is Article 12 of DTAA between India and the USA?
A: Article 12 focuses on the taxation of royalties and fees for included services, allowing the recipient’s state of residence to tax such income.
Q: Is TRC mandatory for claiming DTAA benefits?
A: Yes, a Tax Residency Certificate (TRC) along with Form 10F is required to claim DTAA benefits.