What is a Tax Residency Certificate & Why Do NRIs Need It?

As an NRI (Non-Resident Indian), you may earn income in multiple countries, leading to possible taxation in both the country where the income is generated and your country of residence. To prevent being taxed twice on the same income, a Tax Residency Certificate (TRC) plays a crucial role. This document is required to avail of tax benefits under DTAA (Double Taxation Avoidance Agreement) between India and your country of residence. Let us explore how a TRC benefits NRIs, the eligibility criteria, and the process of obtaining one.

What is a tax residency certificate?
 

A tax residency certificate (TRC) is an official document issued by the tax authority of a country to certify an individual’s tax residency status. It serves as proof that the person is a tax resident of that country during a particular period and helps in determining applicable tax rates on foreign income.

Role of TRC in avoiding double taxation
 

Under the DTAA, an NRI can take advantage of beneficial provision (if any) on taxation on income earned in India provided they furnish a valid TRC and online filed form 10F. Otherwise, the default tax rates applicable to foreign investors may be significantly higher.

Eligibility criteria for NRIs to obtain TRC
 

Here’s what you need to know with regards to NRIs obtaining their TRCs:

Residency requirements for a TRC
 

To qualify for a TRC, NRIs must satisfy their resident country’s tax residency rules, which typically consider:

• Physical presence: Number of days spent in the country.
• Permanent establishment: Owning or renting a house.
• Centre of vital interests: Location of family and financial assets.

Documentation required for NRIs
 

NRIs must provide:

• A copy of their passport with a valid visa.
• Tax Identification Number (TIN) or equivalent proof.
• Address proof in the resident country.
• Tax return documents from the resident country.

Application process for obtaining TRC
 

NRIs must follow the following process for obtaining their TRCs:

• Submit an application to the resident country’s tax authority.
• Provide supporting documents like tax returns, passport copies, and address proof.
• Upon verification, the tax authority issues the tax residency certificate with details like name, nationality, residency period, and tax identification number.

Benefits of a tax residency certificate for NRIs
 

A tax residency certificate offers 4 key benefits:

· Avoidance of double taxation through DTAA:

With a TRC, NRIs can claim tax benefits under the DTAA between India and their country of residence, ensuring they are not taxed twice on the same income.

· Reduction in tax liabilities in both India and the country of residence:

A TRC helps in reducing tax burdens by allowing NRIs to benefit from lower tax rates on income earned in India.

·  Eligibility for lower tax rates under tax treaties:

Many tax treaties specify lower withholding tax rates on interest, dividends, and capital gains. TRC enables NRIs to claim these reduced tax rates.

·  Facilitates tax filing in India and abroad:

A TRC simplifies tax return filing in India and ensures NRIs can legally claim tax exemptions on income earned outside India.

How TRC helps in filing taxes in India
 

• For NRIs earning interest, rent, or dividends in India, a TRC helps in determining applicable tax rates and claiming deductions under DTAA.
• Income earned in foreign countries may be taxable in India. TRC assists in determining the applicable tax exemption or rebate.
  
  · NRIs with a TRC can claim tax deductions on interest earned from NRE accounts.
  
  · It allows NRIs to avoid higher TDS (Tax Deducted at Source) on capital gains and dividends..

Tax implications for NRIs without TRC
 

· Higher tax rates without TRC:

Without a TRC, NRIs may be subjected to higher withholding tax rates on income generated in India.

·  Risks of non-compliance with tax laws:

Failure to obtain a TRC can result in non-compliance issues and rejection of DTAA benefits during tax assessments.

·  Potential penalties or double taxation:

NRIs without a TRC might face double taxation, leading to extra financial burden. Additionally, tax authorities may levy penalties for incorrect tax filings.

Conclusion

A tax residency certificate is essential for NRIs to avoid double taxation and to avail benefit of lower tax rates (if any) available under the DTAA. It simplifies tax filing processes in India and abroad, ensuring compliance with tax laws. Without a TRC, NRIs may face higher tax rates and legal complications. Therefore, it is crucial to apply for and maintain a valid TRC to manage tax liabilities effectively.

If you are an NRI looking for seamless banking solutions, you can opt for IDFC FIRST Bank’s NRI Account to avail features that are tailored to your financial needs.