The Income Tax Act of 1961 mandates taxation on individuals and corporate entities established in India. The Income Tax Department of India validates the individuals and corporate entities as Indian tax residents by awarding them a Tax Residency Certificate (TRC). To be eligible for benefits under Double Taxation Avoidance Agreements (DTAA), the TRC is necessary. The TRC makes sure that money isn’t taxed twice in different regions of the country. It facilitates more seamless foreign financial transactions and adherence to international tax laws by acting as proof of domicile. TRC streamlines international financial transactions and serves as official documentation of a person’s residency.
In this blog, we shall explain the meaning of a Tax Residency Certificate (TRC), its importance, eligibility criteria, required documents, and the process of obtaining one in detail.
What is a Tax Residency Certificate?
The Income Tax Department formally certifies an individual or an entity’s resident status for tax purposes within a given fiscal year by issuing a Tax resident Certificate.
Importance of a Tax Residency Certificate
- Avoiding Double Taxation: One of the primary advantages of a TRC is that it prevents double taxation. Without TRC, the same income could be taxed in both the source country and the country of residence.
- Claim Tax Benefits under DTAA: TRCs help taxpayers claim deductions under DTAA in numerous countries. A TRC serves as proof of residency for individuals, which allows them to claim benefits such as reduced withholding tax rates on income like dividends, interest, and royalties earned abroad.
- Reduced Withholding Tax Rates: Lower tax rates on dividends, interest, and royalties received from foreign entities.
- Essential for Foreign Tax credits: If anyone has paid tax in the foreign country, a TRC is required to claim foreign tax credit in India, which allows you to counterbalance tax liability in India.
- Easier tax compliance: For businesses engaging in cross-border transactions, TRC helps to simplify the taxation procedure and reduce the risks of tax disputes.
Who Needs a TRC?
- Indian residents or NRIs who receive income from foreign sources, salary, interests, dividends, or capital gain need a TRC to claim Double Taxation Avoidance Agreements (DTAAs) benefits and avoid double taxation.
- Indian companies that conduct business outside India or generate income from foreign sources, such as exports, foreign investments, or services, must obtain a TRC to reduce their tax liabilities and facilitate smooth cross-border financial activities.
TRC is Applicable on
A Tax Residency Certificate (TRC) is not just limited to income from salary or business, but it covers a broad range of income, such as:
- Income earned from Assets Located outside India: This category covers earnings from any property or assets you own in a foreign country, such as rental income.
- Earning from services provided overseas: If a consultant, professional, or business owner earns overseas from services rendered outside India, TR can help you claim DTAA benefits on the same earnings.
- Salary earned from abroad: If an individual receives salary from abroad, a TRC helps to ensure that the individual is not taxed twice.
- Interest earned on Income from Foreign Bank Accounts and Fixed Deposits.
- Dividend Income from Foreign Investments such as shares or mutual funds from the companies incorporated outside India.
- Capital Gains from selling property or other capital assets located outside India.
- Income earned from intellectual property rights, such as royalties or fees for technical services provided to foreign entities.
- Revenue generated from the sale of agricultural products outside India.
Types of Residents under the Income Tax Act, 1961
The Income Tax Act, 1961, has divided residents into different groups on the basis of the duration of their stay and the nature of their presence in India. The classification helps to understand how income is taxed in India, especially when earning from a foreign country is involved:
- Resident or Ordinary Resident (ROR): If the individual has stayed in India for at least 182 days during a financial year OR They should stay in India for 730 days or more for 7 years OR they should have stayed in India for 365 days or more in 4 years OR if they have stayed in India for 2 years in the last 10 financial years. RORs are taxed on their global income, which means if you qualify for ROR, you are liable to pay tax on the income earned from both India and abroad.
- Resident but Not Ordinarily Resident (RNOR): If the individual has stayed in India for less than 182 days in a financial year OR if they stay in India for not more than 60 days within a fiscal year OR if they stay in India for 60 days but not 365 days or more in the last four financial year. RNORs are taxed only on the income that is received or deemed to accrue in India. Foreign income is generally not subject to Indian tax unless it is brought into the nation.
- Non-Resident (NR): These are individuals who are not residents of India and spend less than 182 days in India during a financial year. Non-residents are taxed only on income earned or accrued in India. The income of individuals or NRIs who work and live permanently is not taxed in India.
Corporate Tax Residency
Under Indian tax laws, the concept of Place of Effective Management (POEM) is used to determine a company’s tax residency. According to this principle, a foreign company will be considered a resident of India for tax purposes if key management and commercial decisions necessary for the conduct of its business are made in India.
In simple terms, if the company’s core decision-makers operate from India and most strategic decisions are made within the country, the company will be treated as an Indian tax resident and liable to pay taxes in India on its global income.
Documents Required:
- Proof of Identity and Proof of Address such as Aadhaar Card, Passport, or Voter ID etc.
- PAN of the individual or corporate identities
- Recent passport-sized photograph
- Bank statements, tax returns, or salary slips for proof of income and payments
- For NRIs: They need a Tax Identification Number from their country of residence and documents to support their claim.
- Form 10FA for residents and Form 10F for NRIs
- Incorporation Certificate for the companies
- Details of foreign income and tax paid abroad
How to Apply for a Tax Residency Certificate in India
- Step 1: Check the Eligibility Criteria – Check the eligibility criteria by verifying your residency status as per the eligibility criteria mentioned above.
- Step 2: Collect the required Documents – Collect all the required documents and ensure that each one is valid and that there are no discrepancies in information between them.
- Step 3: Fill out the Application Form – For Indian Residents, fill out Form 10FA, and for foreign nationals, fill out Form 10F by logging in to the Income Tax Department online portal.
- Step 4: Submit your application – Submit your application along with supporting documents online at the Income Tax Portal.
- Step 5: Verification by the Assessing Officer – The Assessing officer (AO) will verify the application and the documents. The AO may request additional information or documents.
- Step 6: Issuance of Form 10FB – Upon verification, the AO will issue a Form 10FB, which is the official Tax Residency Certificate.
Conclusion
Getting a Tax Residency Certificate in India is a must for anyone managing foreign income sources. Whether you are an individual, NRI, business owner, or salaried employee, a TRC streamlines your cross-border transactions and shields you from the double taxation penalties. You can easily register for TRC by filing Form 10FA and Form 10F to negotiate the intricacies of international taxation. A well-kept TRC helps to expedite your financial planning by acting as a mark of compliance and a valuable instrument for claiming treaty benefits.
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Frequently Asked Questions
1. What is a Tax Residency Certificate (TRC)?
A TRC is a document issued by the Income Tax Department of India that confirms you are a tax resident for a particular financial year. It is used to claim benefits under international tax treaties.
2. Who needs to obtain a TRC?
Indian residents or NRIs earning income from foreign sources—such as salary, interest, dividends, capital gains, royalties, or rental income—should obtain a TRC to avoid double taxation.
3. What types of income does a TRC cover?
It applies to income from assets abroad (e.g., rental income), earnings from overseas services, foreign salary, interest on deposits, dividends from foreign investments, capital gains from overseas sales, and income from intellectual property.
4. How long is a TRC valid?
A TRC is generally valid for one financial year. You must renew it each year to continue enjoying tax treaty benefits.
5. What documents are required to apply for a TRC?
You need valid proof of identity and address (like Aadhaar or Passport), your PAN card, income proof (such as salary slips or bank statements), and the relevant application form (Form 10FA for residents or Form 10F for NRIs).
6. Can I apply for a TRC online?
Yes, if you are an Indian resident, you can apply online through the Income Tax e-Filing Portal. Just log in with your credentials, fill Form 10FA, upload the required documents, and submit. The TRC (Form 10FB) will be issued after verification.
7. Is TRC mandatory to claim foreign tax credit in India?
Yes. If you have paid income tax in another country and want to claim a foreign tax credit in India, you must provide a TRC from the foreign country along with proof of tax paid there.
