A DTAA is a TAX treaty signed between two or more countries.
Treaty- A tax treaty is a bilateral agreement made by two countries to resolve issues involving double taxation on income. Agreement generally determine the amount of tax that a country can apply to a taxpayer's income, capital, estate, and wealth.
Objective: It’s main objective is that tax payers in these countries can avoid being taxed twice for the same income. Income earned outside India is taxed in the hands of individual based on his/her residential status. Income received from outside India is taxed in the hands of Resident. So, if DTAA exists with the respective country, then benefit can be claimed as per Sec 90 and 90A. If DTAA does not exist, then benefit can be claimed as per section 91.
Applicable: A DTAA applies in cases where a tax-payer resides in one country and earns income in another country.
Importance: DTAAs are intended to make a country attractive by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.
As per the provisions of income tax Act 1961 NRI who wish to avail DTAA benefit have to mandatorily provide “Tax Residency Certificate (TRC)” to the bank. To obtain Tax residency certificate, an application has to be made in Form 10FA to the Income Tax authorities.
NRIs are required to provide all the requisite documents at the beginning of every financial year to continue availing the benefit under DTAA.
Exemption method: Income is taxed in one country and exempted in another country.
Tax Credit method: where the income is taxed in both countries, tax relief can be claimed in the country of residence.