Priya works in New Jersey and still has a fixed deposit in her NRO account in Chennai. Each quarter the bank deducts tax on the interest, and the US also wants to tax her worldwide income. She is not meant to pay full tax twice on the same rupee. That is the job of a DTAA, a double taxation avoidance agreement between India and another country, which decides who taxes what and how the other side gives relief.
For NRIs the treaty matters in two places: it can cut the tax deducted in India on income such as NRO interest, and it tells you how to claim credit abroad, or in India, for tax already paid. This guide explains how a DTAA works under the Income-tax Act, 2025, which papers you need, and where people in Gulf countries without income tax stand.
What a DTAA does
Section 159 of the Income-tax Act, 2025 lets the Central Government sign agreements with other countries, or specified territories, for four purposes: granting relief on income taxed in both places, avoiding double taxation without creating room for tax evasion or treaty shopping, exchanging information to prevent evasion, and recovering tax. Once notified, the treaty has legal force in India.
The most useful line for taxpayers is in section 159 itself. Where a treaty applies to you, the provisions of the Act apply only to the extent they are more beneficial to you. In plain words, you can rely on the treaty where it gives a lower tax or an exemption, and on the Act where the Act is kinder. There is one exception: the general anti-avoidance rules apply even if they are not beneficial.
A DTAA does not create a tax. It only limits or shares the right to tax. If Indian law does not tax an item at all, the treaty cannot make it taxable here.
How relief works: exemption or credit
Treaties give relief in one of two broad ways, and the wording differs from treaty to treaty.
- Exemption method: one country agrees not to tax a type of income at all, or to tax it only if certain conditions are met. Treaties often give the country where the work is done the main right to tax salary for that work, for instance.
- Credit method: both countries may tax the income, but the country where you are resident lets you deduct the tax paid in the other country from your own tax on that income, usually up to the tax it would have charged.
Many treaties also cap the tax the source country can charge on interest, dividends, royalties and fees for technical services. That cap is what lowers TDS for NRIs on Indian investment income.
Where India has no treaty with a country, a resident can still get relief under section 160. If you are resident in India and have paid tax in that country on income that arose there, you can deduct from Indian tax an amount worked out on that doubly taxed income at the Indian rate of tax or the foreign rate, whichever is lower (or the Indian rate if both are equal).
Tax residency certificate and Form 41
A non-resident cannot simply say “I live in Dubai” and claim treaty benefits. Section 159(8) says a person who is not resident in India can claim DTAA relief only if he gets a certificate of being resident in the other country from that country’s government, and provides other documents and information that are prescribed.
That certificate is the tax residency certificate, or TRC, issued by the tax authority of the country where you live. The prescribed information goes in Form 41 under Rule 75 of the Income-tax Rules, 2026. Form 41 took the place of the old Form 10F used under the 1961 Act.
The e-filing portal’s user manual for Form 41 sets out how it works:
- It is filed online only on the e-filing portal, for a selected tax year.
- You need your tax identification number in your country of residence and a copy of the certificate referred to in section 159(8), that is, your TRC.
- Non-residents with a PAN log in with their PAN. Non-residents who do not hold and do not need a PAN file through a separate non-resident login.
- The form has three panels: particulars of the applicant, residential information, and declaration and verification.
- PAN users verify with an electronic verification code or a digital signature; non-resident ID users verify with OTPs sent to their email and mobile.
Once filed, give the acknowledgement and your TRC to the Indian bank, company or tenant who pays you, so they can apply the DTAA rate.
Lower TDS on NRO interest
Interest on an NRO account is taxable in India. Under the TDS provisions of the new Act (section 393(2), Table, serial number 17, according to the Act text as published), tax on interest and other sums paid to a non-resident individual is deducted at the “rates in force”. The Act defines that, for this purpose, as the rate in that year’s Finance Act or the rate in the applicable DTAA, whichever is applicable. So where the DTAA rate is lower and you have given the payer your TRC and Form 41, the payer can deduct at the treaty rate.
Here is an illustration with assumed numbers. Say your NRO deposit earns ₹2 lakh of interest in a year. Assume, for illustration, that the bank would deduct 30% under the Finance Act rate and that your country’s treaty caps tax on interest at 15%.
- Without DTAA papers: ₹60,000 deducted (plus any surcharge and cess that apply).
- With TRC and Form 41: ₹30,000 deducted.
Check the actual Finance Act rate and the actual interest article of your treaty; both differ by country and year. If too much tax was deducted, you can claim the excess back only by filing an Indian return. Interest on an NRE account is a different matter: it is exempt for individuals who are non-residents under FEMA, so no DTAA claim is needed. The NRI FD calculator shows how NRE and NRO deposits compare.
Who claims what: a quick map
This table shows where DTAA relief is usually claimed and what you need.
| Your situation | Where relief is claimed | What you usually need |
|---|---|---|
| Non-resident earning NRO interest, rent or dividends in India | In India, through lower TDS or in your Indian return | TRC from your country, Form 41, PAN where required |
| Non-resident whose Indian income is taxed in India and again abroad | Abroad, as a credit for Indian tax | Indian TDS certificates and return; rules of your country |
| Resident of India earning foreign salary, pension or interest | In India, as foreign tax credit in your return | Proof of foreign tax paid; foreign tax credit statement |
| Resident of India with income from a country without a treaty | In India, under section 160 | Proof of foreign tax paid |
Residents with foreign income: claiming credit in India
If you are resident in India, your worldwide income is taxable here, so foreign salary, pension, dividends or interest go into your Indian return. You then claim credit for foreign tax under the treaty, or under section 160 where there is no treaty. The income tax return forms have separate schedules for this: Schedule FSI for income from outside India and Schedule TR for the tax relief claimed, worked out country by country as the lower of the foreign tax paid and the Indian tax on that income.
Under the old rules a statement in Form 67 had to be filed to claim this credit. Check the current form on the e-filing portal before you file, since forms were renumbered under the Income-tax Rules, 2026. Keep foreign tax returns, payslips and withholding statements; the credit is only as good as your proof.
Gulf countries with no income tax
A large number of Indians work in the Gulf, and some Gulf countries do not tax individuals on salary. The UAE, for instance, has said employees will continue to pay no tax on their incomes even after it brought in a corporate tax.
That has three consequences for a DTAA claim:
- Little to credit. The credit method helps only when tax has actually been paid abroad. If the Gulf country charged no tax, there is nothing to offset against Indian tax.
- DTAA rates still help. A non-resident living in a treaty country can still use the treaty to cut Indian TDS on NRO interest or dividends, provided he gets a TRC from that country and files Form 41.
- Watch the deemed residency rule. Under section 6(7), an Indian citizen whose Indian income (excluding foreign sources) exceeds ₹15 lakh and who is not liable to tax in any other country because of domicile, residence or similar criteria is deemed resident in India. If you live in a no-tax country and have large Indian income, get advice on whether this rule touches you.
Common mistakes to avoid
- Assuming a DTAA applies automatically. Without a TRC and Form 41 the payer will deduct at the Finance Act rate.
- Using last year’s papers. Form 41 is filed for a tax year, and a TRC covers a period; renew both in time.
- Claiming credit for tax you have not paid, or for tax paid in a third country the treaty does not cover.
- Forgetting that India taxes income received in India even for non-residents.
- Ignoring the 120-day and deemed residency rules, which can change your status and so the treaty position.
Key takeaways
- A DTAA decides which country taxes an item of income and how the other gives relief; under section 159 you get the treaty or the Act, whichever is more beneficial.
- Non-residents need a tax residency certificate and an online Form 41 to claim treaty benefits in India.
- TDS on NRO interest can be cut to the treaty rate if the payer has your TRC and Form 41; NRE interest is already exempt for FEMA non-residents.
- Residents claim foreign tax credit in their Indian return, and get unilateral relief under section 160 where no treaty exists.
- In no-tax Gulf countries there is little to credit, but treaty rates on Indian income can still apply.
Treaties are technical and each one is different. Use this guide to ask the right questions, and check your treaty’s exact wording with a chartered accountant before claiming relief. The income tax calculator helps estimate the Indian tax side.
