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Tax Treaty Considerations for Expats in India

Submitted: October 2013

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside India, and intend bring money earned from them into India during your stay. They also apply if you build up some investments in India during your stay, and intend to leave them here after you have left. India has the wide network of tax treaties in force with over 80 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in India; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to understand that a tax treaty applies to both money sent from and to India.

The withholding tax rate in India on dividends sent to countries without a tax treaty with India is 0%. Thus you are only likely to benefit from the treaty if you are remitting money into India from abroad during your stay. For example the tax rate on dividends sent from New Zealand to a country without a tax treaty is relatively high at 30%. The treaty with India calls for a maximum rate of 15%. This means that for dividends received from New Zealand, there may be a substantial saving as a result; though this may depend on the level of franking credits attached to the dividend. However as the highest withholding tax rate in India is 0%, this is the rate that will be applied to dividends sent from India to New Zealand, rather than the 15% stated in the treaty.

The withholding tax rate in India on interest sent to a country without a tax treaty is generally 20%, if sent to a country with a tax treaty they are generally reduced to 10%, this is also the rate which will generally apply to interest sent to India from another tax treaty country.

The withholding tax rate in India on royalties sent to a country without a tax treaty is 25%, if sent to a country with a tax treaty they are generally reduced to 10%, this is also the rate which will generally apply to royalties sent to India from another tax treaty country.   

A table showing the effective Indian tax treaties is available here. For the complete rules and rates it is necessary to read the treaties themselves. These can be found by following a link attached to the country name in the table. The sections on dividends, interest and royalties are generally in the middle of the document.

Prior to arriving in India you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-India country to another to reduce the tax rate paid.

If your home country has a generally lower rate of tax than India, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country. By doing this you may avoid paying some India tax on overseas income from work outside India and non-India dividends, interest, royalties and capital gains.

If your home country has a generally higher rate of tax than India, you may benefit by becoming tax-resident in India as early as possible. At the end of your stay in India you can also rearrange your affairs to ensure that any ongoing income from India employment or investments is also taxed at the lowest rate possible in the future.

 

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