Understanding Double Taxation Avoidance Agreement (DTAA) and its Benefits

If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you. In the 108th part of this series, Riju Mehta explains how the Double Taxation Avoidance Agreement helps taxpayers.

A Double Taxation Avoidance Agreement (DTAA) prevents your income from being taxed twice across borders. If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you.

What’s DTAA?

If you are a tax resident of one country and earning an income from another, it may be taxable in both the countries, resulting in a heavy tax burden. The Double Taxation Avoidance Agreement (DTAA) between two countries helps reduce your overall tax burden by preventing the same income from being taxed in two countries through mechanisms such as exemption and tax credit.

While the exemption method allows tax payment only in one country, making it exempt in the other, the most common method used by India in its DTAAs is the credit method. According to this method, the taxpayers are taxed in both countries, but can offset the tax paid in one country against the tax payable in the home country. Hence, they can claim credit in India (home country) for the tax paid in a foreign country, under Section 159 of the Income Tax Act, 2025, by filling Form 44 with the Income Tax Department.

A resident can claim credit for tax paid in the foreign country in the year in which the income earned in the foreign country is assessed for tax in India.

Types of incomes

India has signed the DTAA with over 90 countries and the scope of these agreements varies depending on the type of income and the country. It covers various types of incomes, such as salary income, capital gains, interest income and dividends, rental income from immovable property, business profits, pension and royalty, among others.

Benefits of DTAA

Avoid double taxation: It prevents the same income from being taxed in two countries, reducing the overall tax.

Boost global investment: Aligning the tax laws between various countries helps encourage cross-border investment and trade opportunities.

Prevent tax evasion: The bilateral treaties help in exchange of tax-related information between countries, preventing illegal activities and tax evasion.

DTAA or domestic tax?

The provisions of DTAA are allowed to override those of the Indian Income Tax Act, 2025, but claiming benefits under DTAA is optional and is subject to satisfying the conditions under the Income Tax Act, 2025 (such as tax residency certificate, e-filed Form 41, etc.), as well as the relevant DTAA. If the non-resident feels the domestic tax provisions are more beneficial, (s)he can opt for it instead of the DTAA.

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