In today’s globalized world, cross-border trade, investment, and employment are commonplace. With individuals and businesses earning income in multiple countries, double taxation has become a significant concern. To address this issue, many countries, including India, have signed Double Taxation Avoidance Agreements (DTAAs). However, to avail the benefits under a DTAA, one must obtain a Tax Residency Certificate (TRC).
This blog explains the importance of TRCs, the legal framework governing them, the process for obtaining them in India, their practical use cases, and the common challenges faced by taxpayers.
What is a Tax Residency Certificate (TRC)?
A Tax Residency Certificate is the official document of the income tax authority of a nation that certifies that the person or entity is a tax resident of the country within a given timeframe. In the Indian context, a TRC is granted by the Department of Income Tax to taxpayers and residents seeking relief under a DTAA with another nation.
Why TRC is Necessary?
To establish residency status for eligibility for benefits under a DTAA, the following are the key reasons for obtaining a TRC:
- Lower withholding tax (TDS) rates on cross-border payments
- Exemption from double taxation
- Availability of special exemptions or deductions that are given to residents only
Legal Principles: TRC under the Indian Income Tax Law
Indian TRC requirements and formats are regulated by the Income Tax Act, 1961, and the relevant rules. Applicable provisions are:
- Section 90(4): A taxpayer wishing to be eligible for DTAA benefits has to provide a TRC issued by the government of the nation of which they claim to be a resident.
- Section 90A (4): Same requirement for agreements made with designated territories.
- Rule 21AB of the Income Tax Rules, 1962: Prescribes the form, contents, and procedure therein in respect of TRC.
In the absence of a proper TRC, the non-resident may not be entitled to any relief or concession in the pertinent DTAA, even if otherwise eligible.
Who Needs a Tax Residency Certificate?
All individuals who are residents of one nation, receive income from another nation, and intend to avail themselves of DTAA relief will require TRC. These are:
- Non-Resident Indians (NRIs): Receiving rental, dividend, or interest income from India.
- Foreign Companies: Receipt of royalties, fees for technical services, or capital gains from sources in India.
- Indian Residents: Receipt of salary or business income from a country outside India with which India has a DTAA.
- • Investors and Multinationals: Engaging in cross-border investments or services.
Main Parts of a Tax Residency Certificate
To be valid for claiming DTAA benefits, a TRC must contain the following details (as per Rule 21AB):
- Name of the Assessee
- Status (Individual, Company, Firm, etc.)
- Tax Identification Number (TIN)
- Residential Status for Taxation
- Duration for which the certificate remains valid
- Address of the taxpayer
- Seal and signature of the issuing authority
In the absence of such compulsory fields, the TRC might not be acceptable to the Indian tax authority.
How to Obtain a TRC in India
There are different processes for acquiring the TRC in India, depending on whether the candidate is a resident or a non-resident.
For Indian Residents Seeking TRC to Claim DTAA Abroad
Residents who wish to avail DTAA relief in a foreign country must obtain a TRC from the Indian Income Tax Department.
Step-by-step Process
Form 10FA Submission: The applicant has to apply in Form 10FA as per Rule 21AB.
It can be furnished in electronic format using the Income Tax Portal.
- Verification by Assessing Officer (AO): The AO may request supporting documents such as PAN, ITR, bank statements, proof of address, etc.
- Issues of TRC: Upon satisfaction, the AO will issue the TRC in Form 10FB, which is valid for the period requested.
Important: The TRC, issued by the Indian authorities, should be furnished to overseas tax authorities for the purpose of availing tax relief in foreign jurisdictions.
For Non-Residents Claiming DTAA Benefits in Delhi
Non-resident individuals or companies earning income from India must obtain a TRC from the tax authorities of their country of residence. This TRC must be submitted to the deductor in India (the payer of income) or to the Indian tax authorities when filing tax returns.
In such situations, the TRC must:
- Be issued by the tax department of a foreign country
- Be notarized/apostilled if required
- Include all required details per Indian Rule 21AB
Additionally, a self-declaration (Form 10F) may be needed if the TRC lacks specific fields mandated by Indian rules.
Real World Applications of TRC
These are some actual examples of the use of TRC:
NRI Receiving Interest from Indian Bank
An NRI who draws interest income from banks in India may be liable for 30% TDS. However, under the India-UAE DTAA, TDS can be reduced to 10% if the NRI furnishes a TRC from the UAE.
A foreign firm offering Software Solutions to an Indian Customer.
A US software company bills an Indian client. The Indian client, however, deducts TDS at 10%. However, the company can either avoid or reduce this tax by providing a US TRC and seeking DTAA relief under the India-US DTAA.
Indian Consultant Working Remotely for UK Clients
An individual resident in India employed by UK clients and drawing consulting fees may be required to present an Indian TRC to the UK tax authorities to avoid double taxation in the UK.
Common Challenges Faced in TRC Application
Despite the formalized process, taxpayers usually experience difficulties in the form of:
- Processing delays by Assessing Officers
- Mismatch between the details or formats of the TRC issued and the TRC accepted
- Non-availability of TRC in the necessary language (countries require certified translations in some)
- Foreign authorities are not generating TRC easily due to the dearth of revenue in that jurisdiction
- Additional declarations (like Form 10F, PAN requirement) demanded by Indian authorities
Therefore, the TRC process should be properly planned well in advance to prevent rejection of DTAA benefits or tax liability.
TRC and PAN Requirements for Non-Residents
Indian tax authorities require non-residents to obtain a PAN (Permanent Account Number) if they wish to:
- File income tax returns
- Claim DTAA relief
- To receive income without the increased rate of TDS (20%)
Although the Finance Act has provided certain relaxations for investors in specific cases, most non-residents will still need a PAN and a valid TRC to claim DTAA benefits.
Digital Advancements and Online TRC Facility
Through the digitalization of the tax system of India, the process of obtaining TRC has now become easier. With the help of the Income Tax e-Filing Portal, the user can:
- File Form 10FA digitally
- Monitor the process of TRC issuance
- Download Form 10FB (TRC) upon issuance
It facilitates greater convenience and minimizes paperwork, particularly for those living outside India.
Penalty for False Information or Misuse
A taxpayer who presents false information or paperwork to receive a TRC can be subject to:
- Denial of DTAA Benefit
- Interest and penalty under the Indian Income Tax Act
- Blacklisting in future assessments or scrutiny.
- Criminal prosecution in extreme situations
It is essential to present accurate and honest information when making a TRC application.
Conclusion: Why TRC is More than a Document: A Tax Residency Certificate
A Tax Residency Certificate might seem like a mere formality, yet in the field of international taxation in Delhi, it is a powerful legal instrument. It saves taxpayers the hassle of paying taxes in two nations on the same income and maintains treaty compliance.
In the case of cross-border transactions by businesses or individuals, a validly issued and properly structured TRC can result in tax savings, hassle-free assessment, and improved budgetary planning. As a Consultant for International Tax Consultancy in Delhi, we, Legal N Tax, facilitate TRC application, documentation, and DTAA consultancy in Delhi so that your international income pays taxes in the right way, at the right time.
