NRIs living abroad may have a source of income back in India. This income may come from various sources like interest income on bank deposits, rent from Indian property, capital gains or dividends from holding Indian stocks and mutual funds.
The income from these sources is liable to be taxed in both countries: the country where the income is earned (i.e. India) and the country where the NRI is a resident. This increases the tax burden on the NRI.
To prevent or alleviate such a situation, countries typically sign bilateral treaties called Double Taxation Avoidance Agreements (DTAA). India has such DTAA agreements with 80+ countries. These treaties reduce the tax burden on NRI/OCIs living and working abroad but having some income in India.
What is DTAA and How Does it work?
Double taxation occurs when taxes are imposed on the same income in two different countries. In order to avoid this, countries sign bilateral Double Taxation Avoidance Agreements or DTAAs. DTAAs provide relief to the non-resident taxpayer in the form of either foreign tax credit, exemptions, or reduced rates of taxation.
The most general provision under any DTAA is the foreign tax credit benefit. Under this, one country allows tax deduction equivalent to the taxes paid in the other country where the income is earned. For example, Rahul is an Indian resident and citizen who earns Rs. 3,00,000 from a short-term (3 months) consulting project in the UK. Say, UK tax authorities tax his salary at 20%. This makes the tax deducted to Rs. 60,000. In India, he falls into the 30% tax slab. Due to the provision of tax credit under the UK-India DTAA, he can claim the Rs 60,000 paid in the UK as tax credit in India and pay only the additional tax of 10% on his UK income in India and not the entire 30%.
Beyond foreign tax credit provisions, sometimes DTAAs have provisions which exempt certain types of income from taxation in the source country. For example, Anand is a tax resident of the UAE and a non-resident of India. He has capital gains of Rs. 5 lakhs in India from his mutual funds. Now, India-UAE DTAA has a provision that exempts capital gains from mutual funds from being taxed in India for UAE residents. Hence, Anand can claim full tax exemption on his 5 lakhs of capital gains in India. Further, as the UAE does not have any income tax, his total tax liability will be zero.
DTAAs also have provisions for reduced tax rates on certain types of income in the source country. For example, Rohini is an NRI who is a UAE resident. She earned a dividend of Rs. 2,50,000 from her stock market investments. In general, dividends from Indian companies are taxed at individual’s slab rates in India, even for NRIs, but under the India-UAE DTAA, as a UAE-based NRI, she is eligible for a special tax rate of only 10%, i.e. she is liable to pay tax of only Rs. 2,500.
In this article, we will look into the specifics of the DTAA signed between India and the UAE, and how UAE-based NRIs can leverage its provisions to lower the taxation burden on their Indian income.
India-UAE DTAA for NRIs and OCIs
The India-UAE DTAA was signed in 1993. India is the UAE’s third-largest trading partner, with more than 3.5 million Indian expatriates living and earning in the UAE. This DTAA provides relief to residents of the UAE (NRIs, OCIs or other foreign nationals and even companies) who also have some income in India from sources like dividends, interest and capital gains from mutual funds. The DTAA has undergone multiple changes reflecting the evolving economic relations between India and the UAE.
Types of income covered under the India–UAE DTAA
The DTAA defines taxation for different types of income generated by individuals and entities who are resident in the UAE (NRIs, OCIs or other foreign nationals or companies) and have income in India (and vice versa). The taxation rules for key income categories relevant to individuals under this agreement are summarised below:
Table: Tax on Indian income for UAE residents (NRIs, OCIs, foreign nationals) under India-UAE DTAA
Source of Income in India | Tax in India without DTAA | Tax relief available under DTAA | Tax in India under DTAA |
Interest | As per the slab rate TDS @ 30% | Yes | Max rate of 12.5% |
Dividends | As per the slab rate TDS @ 30% | Yes | Max rate of 10% |
Royalties | As per the slab rate. TDS @ 30% | Yes | Max rate of 10% |
Capital gains from equity-based mutual funds | Short-term capital gains @ 20% Long-term capital gains @ 12.5% TDS at 20% & 12.5% respectively | Yes | Tax-free |
Capital gains from debt and non-equity-based mutual funds | Taxed at 30% for both short and long-term TDS @ 30% | Yes | Tax-free |
Capital gains from stocks | Short-term capital gains @ 20% Long-term capital gains @ 12.5% TDS at 20% & 12.5% respectively | No | Same as a resident Indian.
|
Capital gains from selling real estate | Short-term capital gains @ 30% Long-term capital gains @ 12.5% TDS at 30% & 12.5% respectively on the sale value | No | Same as a resident Indian. |
Rental income from property | As per the slab rate TDS @30% | No | Same as a resident Indian. |
How to Claim Benefits Under the India-UAE DTAA
NRIs/OCIs resident in UAE can strategically utilise the DTAA agreement to claim the exemptions and reduced tax rate in India. To do this, four prerequisites must be met:
- The individual must be classified as a non-resident under the Income Tax Act of India. You can check your resident status using Belong’s Residential Status Calculator.
- The individual must be a resident of UAE, i.e. must have spent 183 or more days in the UAE in a calendar year.
- They must procure a tax residency certificate from the Federal Tax Authority of UAE.
- Filing Form 10F on the income tax portal is necessary to avail of the DTAA benefits.
What is a Tax Residency Certificate (TRC)?
A Tax Residency Certificate is a legal document issued by a government confirming an individual’s tax residency in that country. This document is essential for claiming tax benefits under the DTAA.
How can NRIs apply for a TRC in the UAE?
To obtain a Tax Residency Certificate (TRC) in the UAE, you must make an application online via the Federal Tax Authority (FTA) portal.
To obtain a TRC, the individual must have been a resident of the UAE for at least 183 days in the calendar year for which they are requesting the certificate.
The required documents to obtain a TRC for individuals are:
Passport
Valid residence permit, i.e. UAE visa
Emirates ID
Proof of permanent place of residence
Proof of source of income
A bank statement for the last six months issued by a local bank
Filing the Form 10F in the IT portal
Form 10F is a self-declaration used by NRIs to claim the benefits of DTAA while filing their ITR. This form needs to be filled out, and the TRC needs to be attached with it to claim the benefit of DTAA.
Documents needed to file Form 10F
Proof of residential address in the country of residence, i.e. UAE, in this case
Duration of residential status as stated in the TRC
Proof of nationality, eg passport
TIN or any other unique tax identification number in the country of residence
Steps to File Form 10F Online
- Step 1: Log in to the official e-filing portal with your PAN or the user ID.
- Step 2: On the dashboard, navigate to the ‘e-File’ menu and select ‘Income Tax Forms’.
- Step 3: Click on ‘File Income Tax Forms’.
- Step 4: You will find the option to file Form 10F in the last column on this page. Click on ‘File Now’.
- Step 5: Enter your PAN and select the assessment year from a dropdown menu. Click on ‘Continue’.
- Step 6: Enter the required details, including your name, father’s name, Section 90/90A, country of registration/residence, TIN, etc.
- Step 7: Next, select the period for which you obtained the TRC and your address outside India.
- Step 8: After filing the other details, you need to attach a copy of your tax residency certificate.
- Step 9: Signing of the form can be done via digital signature or electronic verification code.
- Step 10: Click on ‘Preview’ to review the details and submit the form.
Form 10F needs to be submitted while filing the IT returns.
| Also Read - Step-by-step procedure for NRIs to file their Income Tax Return (ITR) in India.
DTAA Tax Savings for NRIs in UAE: What to Remember
India-UAE DTAA can help UAE-based NRIs to claim lower taxes and get exemptions on certain asset classes. Capital gains tax on their investments in debt and equity mutual funds in India is exempt, while the tax rates are capped for income from dividends and interest.
Two important things to note here: the cost of TRC and the scope of disputes. The cost of a single UAE TRC for a given year is approximately Rs. 25,000. Hence, taking TRC for claiming DTAA deductions will only be useful if more than Rs. 25,000 in taxes will be saved in India. Secondly, DTAA exemptions are not considered as water-tight as exemptions in the IT Act. Hence, the scope of scrutiny is higher, and so are the chances of the IT department disputing it. Hence, it is important to have your entire paperwork in order when you claim significant DTAA benefits.
Claiming the benefits of DTAA can bring significant tax relief, but it is a complex process and involves a lot of paperwork. Seeking help from tax professionals is the best way to navigate this complexity.
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