India has emerged as a global hub for investment, attracting foreign investors across multiple sectors. While investing in India promises great returns, taxation often becomes a critical concern. Foreign investors are sometimes subject to taxation both in India and their home country, resulting in double taxation on the same income.
To address this, India has entered into Double Tax Avoidance Agreements (DTAAs) with over 80 countries worldwide. This ensures that foreign investors enjoy relief from double taxation and can plan their investments efficiently.
The Double Tax Avoidance Agreement (DTAA) is a bilateral treaty signed between India and another country to avoid taxing the same income twice. It provides clarity on:
Which country has the right to tax certain types of income
The applicable tax rates on dividends, interest, royalties, and capital gains
Mechanisms for tax credit or exemption to prevent double taxation
For example, if an investor from the USA earns interest income in India, DTAA ensures that tax is not levied twice on the same income both in India and the USA.
Avoidance of Double Taxation
Income earned in India is taxed only once, either in India or in the investor’s home country, as per treaty provisions.
Reduced Withholding Tax Rates
DTAAs often provide lower TDS rates on income such as dividends, royalties, interest, or technical fees. For example, interest may be taxed at 10% under DTAA instead of the standard 20%.
Tax Credits in Home Country
If income is taxed in India, the foreign investor can claim credit for taxes paid in India while filing returns in their home country.
Increased Foreign Investments
With tax certainty, India becomes a more attractive investment destination, leading to higher capital inflows.
Clarity on Taxation Rules
DTAA provides transparency, reducing tax disputes and litigation between taxpayers and authorities.
Special Provisions for NRIs
Non-Resident Indians (NRIs) enjoy special benefits such as lower TDS on interest income earned from deposits in Indian banks.
To avail of DTAA benefits, foreign investors must comply with specific legal requirements:
Tax Residency Certificate (TRC):
Issued by the government of the investor’s home country. It certifies that the individual or company is a tax resident of that country.
Form 10F:
A declaration form that contains investor details like nationality, tax residency status, and DTAA eligibility.
PAN (Permanent Account Number) in India:
Mandatory for claiming DTAA benefits and avoiding higher withholding tax rates.
Self-Declaration:
Confirming no permanent establishment (PE) in India if required under the treaty.
Withholding Tax Compliance:
The Indian payer (company or bank) must deduct tax at the lower DTAA rate after receiving TRC and Form 10F.
India has signed DTAAs with countries like the USA, UK, UAE, Singapore, Mauritius, France, Germany, Australia, and many others. Each treaty has different provisions, tax rates, and eligibility rules.
Suppose a foreign investor from the UK earns royalty income of INR 10,00,000 from an Indian company.
Under Indian law, the withholding tax is 20%.
However, under the India–UK DTAA, the applicable rate may be 10%.
This saves the investor INR 1,00,000, making India a more favorable investment destination.