How to avoid double taxation on Money Transfer

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Are you an NRI residing overseas? Are you paying taxes twice, once in your country of residence and once again in India? Here’s all that you need to know to avoid double taxation of your income.

India has one of the largest expat populations living in all corners of the world. This means, vast numbers of Indians are continually sending money to their loved ones back home, be it parents, spouse, children, or siblings.

Now, how do you ensure that your money isn’t taxed twice – Once at the country of residence of the NRI and once again in India? Here, in today’s post, you can find all that you need to avoid double taxation on online money transfer to India from overseas.

First things first,

What is Double Taxation?

An Indian, who is currently living and working overseas, has to pay taxes in the country of residence. Additionally, this person (NRI) might have a few other income sources back in India. Say, he might own a property in his hometown and this property generates rental income. He has to pay taxes on this income produced in India to the Indian government.

The problem arises when this income is taxed in both countries – the country of residence and the home country. This is called as double taxation.

Enter the DTAA

To avoid such situations, the Indian government has signed the DTAA (Double Taxation Avoidance Agreement) with several countries.

According to the DTAA, a resident Indian has to pay taxes for all his/her income in India. For instance, let’s take the case of Priya, a freelance web designer living in Pune. She works for a global firm based in the US, and her payment is wired to her from the US. In this case, she has to pay tax for this income in India.

On the other hand, a non-resident Indian has to pay taxes only for the income generated in India. Let’s take the case of Anand, an NRI living and working in the US. He has to pay taxes for his income earned in the US only in the US. He has to pay taxes on his investments back home in India, only in India. Thereby this avoids double taxation on the same income.

Additionally, if Anand sends money home to his parents via an online transfer, he doesn’t have to pay any taxes on this amount, as he has already paid income taxes for it in the US.

How to Claim Tax Relief from DTAA?

An NRI can claim tax relief by using either one of the following methods.

  1. Exemption Method

This method is applicable when either country (residence or home) has an exclusive right to tax the income in the point of origin. For instance, an Indian residing in the UK could be exempted from paying tax in India.

  1. Tax Credit Method

This method allows an NRI to get a tax credit on incomes that have been taxed twice. For instance, an Indian would be taxed twice in his year of deputation. According to the DTAA, he can claim a tax credit for the doubly taxed income. This can be redeemed in the following year.

The Last Word

The DTAA provides immense relief to thousands of Indians residing overseas. Make sure to understand the nuances of this agreement to avoid paying double taxes on your income or while sending money to and from India.