Income Tax for NRI: How can NRIs avoid Double Taxation?

How can NRIs Avoid Double Taxation?

What is Double taxation?

Double taxation is getting taxed twice on the same income in the two different countries.

Methods to Claim Tax relief under Double taxation?

NRIs can avoid double taxation and can obtain relief by signing a Double taxation avoidance agreement between the two countries.

There are two methods to claim tax relief under DTAA –

Exemption Method

Under exemption method, NRI’s are taxed only in one country and exempted for tax in another country.

Tax Credit Method

Under tax credit method, NRI’S income is taxed in both the countries but he has the option to avail exemption in the country of residence.

Deduction Method

Under this method, Tax you paid in the source country is deducted from your worldwide income and tax is levied on the remaining amount.

Comparison between Exemption Method, Tax Credit Method and Deduction Method to claim tax relief

S. No.	Particulars	Tax credit method	Exemption method	Deduction method
1	Source country income	4000	4000	4000
2	Resident country income	4000	4000	4000
3	Exemption deduction (Tax paid in foreign country)		(4000)	(600)
4	Total income	8000	4000	7400
5	Total tax payable in country of residence on total income (Assume 20%)	1600	800	1480
6	Tax paid in source country on foreign source (income assume 15%)	600	600	600
7	Tax payable in resident country on foreign source income (Assume 20%)	800	-	680
8	Relief available under DTAA (lower of 6 & 7)	600
9	Balance tax payable in country of residence (4-7)	1000	800	1480
10	Total tax paid	1600	800	2080

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Income Tax for NRI: Avoid Double Taxation