For example- Rahul, a PIO, is a US citizen who has permanently relocated to India (his resident country).
He has a total taxable income of ₹75,00,000 of which income from capital gains is ₹5,00,000 from his investments in shares in the US market (source country).
He has to pay US federal income tax of ₹1,00,000 (assumed) on such capital gain. As per Indian Income Tax Act, 1961 on long term capital gains on equity in a foreign country, he is liable to pay income tax at 22.88% (20% tax+ 10% surcharge + 4% education cess on tax and surcharge). Accordingly, he will have to pay a long term capital gain tax in India of ₹1,14,400.
Rahul is eligible to claim the FTC in respect of US federal tax of ₹1,00,000. Therefore, Rahul will pay only the Indian tax of ₹14,400 as taxes in India.
For example- Rohan, an Indian national, is deputed by an Indian MNC to work in the US for three years. Therefore, he becomes a US tax resident and an NRI in India.
During the deputation period, he received a salary in India of ₹50,00,000 for the services provided in USA. As the salary is received in India, It will be taxable in India under the Indian Income Tax Act, 1961.
Rohan can claim a full exemption from Indian income tax in respect of his total salary of ₹50,00,000 under the Article 16(1) 'Dependent Personal Services' category, of the India-US DTAA. However, Rohan is required to pay income tax in USA at the applicable rates.
In DTAAs with different countries, there are different exemptions available for different income sources such as capital gain on sale of securities, income from immovable property, business profits in absence of permanent establishment, etc.
The NRIs/OCIs/PIOs should familiarise themselves with various aspects of the applicable DTAAs.
For example- Smriti is a Canada-based NRI and has an NRO savings account in India. She is a tax resident of Canada under DTAA.
Smriti has earned ₹25,00,000 interest in India in a year and TDS of ₹7,80,000 has been deducted @ 31.20%.
Under the Indian Income Tax Act, 1961, she is liable to pay a tax of ₹4,68,000 as per the applicable tax slabs. However, under the India-Canada DTAA, she is eligible to apply for a special tax rate of 15%** on the savings bank interest income earned in India (source country) while filing her tax return in India. Hence, she can claim a refund of 16.2% (31.2% of TDS minus 15% of the special rate) while filling her Income Tax Return (ITR) in India.She can claim a foreign tax credit of the Indian taxes paidin Canadaas per the tax return filed in India against her Canadian income tax.
