Thread by @manansmehta5

How does a DTAA work?

We've heard this so many times - "India and XYZ country have a DTAA. So I don't need to pay tax on this income right?"

A THREAD

Before we start, let's clear one thing up - A Double Taxation Avoidance Agreement (DTAA) is NOT a magic wand that makes your tax liability go away.

Now that we have this out of the way, let's tackle the beast that is the Double Taxation Avoidance Agreement.

We're going to use the India-US DTAA as an example here. DTAAs tend to have similar treatment overall (but obviously, if you ask a CA, we see a million differences between DTAAs with different countries).

Case 1: Professional Income

Captain Planet receives INR 45,00,000 each year from his US client. Captain Planet resides in India and is an Indian citizen. Captain Planet approached Galactic Advisors with the following statement:

"I receive money from the US and since there is a DTAA between India and USA, I will pay no tax in India, right?"

Galactic Outlook

*cue facepalm* Unfortunately, that's not how a DTAA works. There is no double taxation at all in this case. India has the sole right to tax this income since services are provided from India. USA has no right to tax this income

There has to be some form of double taxation for the DTAA to be applicable

Case 2: Capital Gains on RSUs

Hermione is an Indian citizen working with Google India. As part of her compensation, she receives Alphabet RSUs every year. She understands that the value of RSUs is taxable as perquisites in India (since that shows up in her Form 16).

Hermione is smart. She knows there is no Capital Gains tax in the US for Non-American residents. She decides to sell her RSUs and remit the money to India. She approaches Galactic Advisors with the following statement:

"I know I pay no tax in the US on this sale of restricted stock. What happens in India though?"

Galactic Outlook

This is again not a case of double taxation. India has the sole right to tax this income since Hermione is an Indian resident.

Case 3: Capital Gains on US shares

Mr. Investor is an Indian citizen who invests in US stocks. He doesn't believe in dividend stocks and invests only in growth stocks like Amazon, Alphabet or Tesla.

With the prices skyrocketing last year, Mr. Investor decides to book his profits. Mr. Investor was told by a friend that India and USA have a Tax Treaty (DTAA) so he doesn't have to pay tax in India

Galactic Outlook

This is in fact the same as Case 2 above. India has the sole right to tax this income since Mr. Investor is an Indian resident.

See how tax works on foreign stocks here

thegalacticadvisors.com/post/investing…

There's obviously a little more to this.

Full article available below

#tax #taxtreaty #incometaxindia

thegalacticadvisors.com/post/how-does-…