Understanding Double Taxation: What Every NRI Must Know

Non-Resident Indians (NRIs) often earn income from multiple sources, including India and their country of residence. However, this can sometimes lead to double taxation, where the same income is taxed in both countries. Fortunately, tax treaties and strategic tax planning can help mitigate this burden. Here’s everything NRIs need to know about double taxation and how to avoid paying more tax than necessary.

What is Double Taxation?

Double taxation occurs when an individual is required to pay tax on the same income in two different countries. For NRIs, this can apply to:

• Salary Income: If working abroad but receiving payments from India.

• Rental Income: If earning rental income from property in India.

• Capital Gains: If selling stocks, real estate, or other assets in India.

• Business Profits: If conducting business in India while residing elsewhere.

• Interest or Dividend Income: Earnings from Indian bank deposits, stocks, or bonds.

However, to prevent undue taxation, India has Double Taxation Avoidance Agreements (DTAA) with more than 90 countries, allowing relief through exemptions or credits.

How NRIs Can Avoid Double Taxation

1. Claim DTAA Benefits

DTAA agreements ensure that an NRI does not pay tax twice on the same income. Depending on the agreement between India and the NRI’s resident country, there are two primary ways to avoid double taxation:

• Exemption Method: Income is taxed only in one country and exempt in the other.

• Tax Credit Method: Tax paid in India can be offset against tax payable in the resident country.

2. Utilize Foreign Tax Credit (FTC)

NRIs can claim Foreign Tax Credit (FTC) under DTAA provisions by:

• Obtaining a Tax Residency Certificate (TRC) from the country of residence.

• Submitting Form 67 before filing an Indian tax return.

• Providing proof of tax paid in the foreign country.

This ensures that the tax already paid in one country is credited against the tax liability in the other.

3. Understand Residential Status Rules

An NRI’s tax liability in India depends on residential status, determined by the number of days spent in India in a financial year.

• NRI (Non-Resident Indian): Stayed in India for less than 182 days.

• Resident but Not Ordinarily Resident (RNOR): Stayed for 120-181 days in India and meets past residency criteria.

• Resident: Stayed in India for 182+ days in a financial year or meets specific conditions over preceding years.

NRIs should monitor their stay in India to avoid triggering tax residency status.

Key Tax Planning Tips for NRIs

• Check Your Country’s DTAA Agreement: Every country has different DTAA terms. Consult a tax expert to maximize benefits.

• Use NRO/NRE Accounts Smartly: Keep taxable and tax-free income separate for easy tax compliance.

• Plan Investments Wisely: Some investments like PPF and NRE FD interest are tax-free in India.

• File Tax Returns in Both Countries: Even if DTAA applies, filing tax returns ensures compliance and FTC claims.

Conclusion

Double taxation can significantly impact NRIs' earnings, but with proper planning and awareness of DTAA benefits, NRIs can legally minimize their tax burden. Consulting a Chartered Accountant (CA) with expertise in cross-border taxation ensures compliance while optimizing tax liability. With the right approach, NRIs can enjoy financial growth without unnecessary taxation.