Decoding dual taxation: What NRIs need to know for better tax efficiency

This trend has been driven by changes in tax residency conditions and a heightened focus on global transparency. NRIs are now more diligent in reporting their Indian-sourced income and claiming tax reliefs under the act and the Double Taxation Avoidance Agreement (DTAA).

When NRIs become residents, they need to make disclosure of their foreign assets. The total NRI tax return filings rose from 4.9 lakh in FY2019-20 to 7.2 lakh in FY2023-24, reflecting an increase of 47%.

DTAA: A framework for relief

Double taxation can occur when an NRI’s income is taxed both in India and their country of residence. DTAAs are bilateral treaties that outline each country’s rights to tax specific income streams. These help resolve conflicts and ensure fairness in taxation. These agreements aim to:

• Prevent double taxation.
•  Offer tax relief for payments made in the other country.
•  Promote transparency and exchange of information to curb tax evasion.
•  Foster international trade and investment.
• Strengthen economic relations between countries.

India has comprehensive DTAAs with 96 countries, which help NRIs mitigate their overall tax liabilities.

Also Read: Budget 2025: The NRI’s wish list

How NRIs benefit from DTAA

1. Tax exemptions: Certain incomes are taxed only in the source country. For example, salary earned by an NRI may not be taxed in India, subject to specific conditions (e.g., Article 15 of the India-Singapore DTAA).

2. Tax credit mechanisms: DTAAs allow NRIs to offset taxes paid in one country against their liabilities in another to avoid double taxation. (e.g., Article 25 of the India-Singapore DTAA).

3. Lower tax rates: Preferential tax rates on incomes like dividends/ interest, are specified under DTAAs. It reduces withholding tax burden, offering relief to NRIs during tax filings (e.g., Articles 10, 11 of the India-Singapore DTAA).

Importance of DTAA in NRI taxation

DTAAs is pivotal in mitigating double taxation for NRIs. Courts have affirmed their primacy over domestic tax laws in case of conflict. For example, in the Visakhapatnam Port Trust vs CIT case, the Andhra Pradesh high court emphasized the obligation to uphold DTAAs. Similarly, the Supreme Court in UOI vs Azadi Bachao Andolan ruled that DTAAs override provisions of the Act when determining tax liabilities.

Also Read: Tax breaks, reforms, and returns: Why NRIs are banking big on India

Challenges in claiming DTAA benefits

Despite the benefits, NRIs face hurdles while claiming DTAA relief.

1. Documentation issues: Section 90 of the Act requires NRIs to submit prescribed documents, such as a Tax Residency Certificate (TRC), Form 10F, and other details. However, obtaining these documents can be challenging due to differences in fiscal years between India and foreign jurisdictions leading to denial of DTAA benefits.

2. Foreign tax credit (FTC) complications: NRIs claiming FTC on doubly taxed income must file Form 67 with proof of overseas tax payments. Despite filing proper Form 67, claims are disallowed during preliminary assessments leading to demands.

3. Errors in tax rates: NRIs compute taxes as per DTAA rates in their return without surcharge and education cess. However, the Tax authorities include the same while computing tax.

Also Read: NRI investing in Indian stocks? Know about TDS on capital gains

Proposed solutions

1. Streamlining compliance requirements: Allow NRIs to file a self-declaration for DTAA-related documents, such as TRC and Form 10F, along with their returns. These documents could then be submitted on e-filing portal by a specified deadline (e.g., March 31 of the AY).

2. Flexible payment mechanisms: Introduce an option for NRIs to make tax payments based on their tentative foreign tax residency. Final adjustments can be made once the overseas tax residency is confirmed to ensure timely compliance.

3. Dedicated assessment jurisdiction: Establishing a specialized assessment cell for NR taxpayers can ensure accurate evaluation of DTAA claims. This will eliminate preliminary disallowances that arise from lack of understanding and applying DTAA provisions.

4. Improving processing systems: Update return-processing software to avoid errors of addition of surcharge and cess to DTAA rates. Inherent automated checks and balances prevents unnecessary demands.

5. Simplified dispute resolution: Set up a verification process for DTAA claims, whereby once the claims are supported by valid documents, they should not be challenged, except in exceptional circumstances. This will reduce litigation and save time for both taxpayers and authorities.

DTAAs are critical for NRIs to minimize their tax liabilities and avoid double taxation. While DTAA signed by India provides significant relief, addressing the challenges faced by NRIs in compliance and assessment becomes important. Simplified procedures, enhanced infrastructure, and a specialized focus on NR taxpayers will bolster confidence in tax framework and encourage greater tax compliance.

Hemen Asher is partner, Bhuta Shah & Co LLP