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Non-Resident Taxation Series | June 2026
A DTAA can significantly reduce your Indian tax liability as a non-resident. But claiming treaty benefits is not automatic. You need the right documents, an understanding of the treaty override rule, and knowledge of when GAAR can neutralise treaty protection. Section 159 of the Income Tax Act 2025 governs the entire framework. This article explains all of it.
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 7: DTAA: Section 159.
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | NRI Provisions | Representative Assesse and Agent | PE | ITR Filing
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | NRI Provisions | Representative Assesse and Agent | PE | ITR Filing
Table of Contents
- What is a DTAA and Why Does It Matter?
- The Treaty Override Rule: Section 159(4)
- What Agreements India Can Enter: Sections 159(1) and 159(2)
- Anti-Treaty Shopping: Section 159(3)(b)
- Term Interpretation: Section 159(7)
- The GAAR Override: Section 159(6)
- Claiming DTAA Benefits: TRC and Form No. 41Rule 75 of the Income Tax Rules 2026; Form No. 41 replaces old Form 10F
- Certificate of Residence from India: Forms No. 42 and 43
- Countries Without DTAA: Section 160
- Foreign Tax Credit: Rule 76
- Practical Compliance Checklist
- Frequently Asked Questions
Section 159(4)
Treaty override rule. Where a DTAA exists, the more beneficial of the Act rate or DTAA rate always applies to the assessee.
Section 159(6)
GAAR override. General Anti-Avoidance Rules under Chapter XI apply even where a DTAA exists and even when GAAR is not beneficial to the assessee.
Form No. 41
Prescribed under Rule 75(1) of the Income Tax Rules 2026. Replaces old Form 10F under Rule 21AB of the 1962 Rules. Must be furnished along with TRC to claim DTAA benefits.
Rule 76
Foreign tax credit rules under Income Tax Rules 2026. Equivalent to Rule 128 of the 1962 Rules. Credit available against income tax, surcharge, and cess only.
Part IWhat is a DTAA and Why Does It Matter?
Imagine you are an Indian NRI working in Germany. Germany taxes your income because you work there. India taxes your Indian-source income. If both countries taxed the same income, you would pay tax twice on the same money.
A Double Taxation Avoidance Agreement (DTAA) prevents exactly this. It is a bilateral treaty between two countries that says: for income taxable in both countries, here is how we divide the taxing right, or here is the maximum rate one country can charge, or here is the credit mechanism.
For non-residents earning from India, a DTAA often means lower withholding rates on dividends, interest, royalty, and FTS than the rates in the Indian Act.
Part IIThe Treaty Override Rule: Section 159(4)
This is the most important sub-section for a non-resident. Section 159(4) says: where a DTAA with a foreign country or specified territory has been notified, the provisions of the Income Tax Act apply to the assessee to the extent they are more beneficial to that assessee.
Plain language: You always get the better of the two. If the Act’s rate is 20% on royalty and the DTAA caps it at 10%, you pay 10%. If the DTAA rate were 25%, the Act’s 20% would apply since the Act is more beneficial. You never apply the DTAA mechanically without comparing it with the Act.
Example: The Income Tax Act charges 20% on royalty received by a non-resident under Section 207. The India-Netherlands DTAA caps royalty withholding at 10%. A Dutch company receiving royalty from India is taxed at 10%, not 20%, because the DTAA is more beneficial. The Dutch company must furnish its TRC and Form No. 41 to the Indian payer to claim this rate.
Part IIIWhat Agreements India Can Enter: Sections 159(1) and 159(2)
The Central Government may enter agreements with foreign countries or specified territories for:
- Granting relief to residents on income taxed in both countries
- Avoidance of double taxation on income earned in or from both countries
- Exchange of information for preventing tax evasion or avoidance
- Recovery of income tax on behalf of the other country
Part IVAnti-Treaty Shopping: Section 159(3)(b)
Agreements under Section 159 are to be entered for avoidance of double taxation without creating opportunities for non-taxation or reduced taxation through treaty-shopping arrangements aimed at obtaining reliefs for the indirect benefit of residents of a third country.
Treaty shopping example: A US company with no India DTAA sets up a shell company in a country that has a favourable treaty with India (say, Mauritius), routes its India royalty payments through that shell company, and claims Mauritius treaty rates. Section 159(3)(b) ensures agreements are not extended to such arrangements. Treaty benefits are for genuine residents of the treaty country, not for pass-through structures.
Part VTerm Interpretation: Section 159(7)
When interpreting a DTAA term, the following hierarchy applies:
- A term defined in the agreement takes that meaning
- A term not defined in the agreement but defined in the Income Tax Act takes the Act’s meaning
- If not defined in either, it takes the meaning from any Central Government law on taxes, and then any other Central Government law
Part VIThe GAAR Override: Section 159(6)
This is critical and often misunderstood. Section 159(6) says the provisions of Chapter XI (General Anti-Avoidance Rules) apply even where a DTAA exists and even in cases where GAAR is not beneficial to the assessee.
In plain terms: a DTAA does not protect you from GAAR. If the Indian tax authorities determine that your arrangement is an impermissible avoidance arrangement under GAAR, they can deny treaty benefits, even if the treaty technically applies.
When does GAAR apply? Chapter XI GAAR activates when the main purpose of a transaction is to obtain a tax benefit and the arrangement lacks commercial substance, does not deal at arm’s length, misuses provisions of the Act, or would not ordinarily be entered into except for the tax benefit. If these conditions are met, the tax authorities can recharacterise the transaction and deny deductions or treaty benefits.
Practical implication: Treaty-based structures such as Mauritius or Singapore holding companies that exist purely to claim DTAA benefits on capital gains or royalties, without genuine business substance, are at risk under GAAR. Adding commercial substance (directors, employees, genuine decision-making) to offshore structures is essential in today’s environment.
Part VIIClaiming DTAA Benefits: TRC and Form No. 41
A non-resident cannot simply claim treaty benefits by mentioning the treaty in a return. Section 159(8) requires two things:
(a) Tax Residency Certificate (TRC): A certificate issued by the Government of the country where the non-resident is a resident for tax purposes. This is official proof of treaty-country residence.
(b) Documents and information as prescribed: Under Rule 75(1) of the Income Tax Rules, 2026, these must be furnished in Form No. 41.
Rule 75(2): The assessee must maintain all documents necessary to substantiate the information in Form No. 41. The income tax authority may call for these documents at any time.
Important note for readers familiar with the 1961 Act: Under the Income Tax Rules, 1962, this information was furnished in Form 10F under Rule 21AB. Under the Income Tax Rules, 2026, the equivalent is Form No. 41 under Rule 75(1). Form 10F is no longer applicable under the new rules.
Both documents must be furnished to the Indian payer BEFORE the payment is made. This enables TDS at the lower DTAA rate at the withholding stage itself, avoiding the need to claim a refund later through an ITR.
Part VIIICertificate of Residence from India: Forms No. 42 and 43
Indian residents who need a certificate of residence from India to claim DTAA benefits in another country follow this process under Rule 75(3) and (4):
- Apply to the Assessing Officer in Form No. 42
- The AO, on being satisfied, issues the certificate of residence in Form No. 43
Part IXCountries Without DTAA: Section 160
Corresponding to Section 91 of the 1961 Act. Where no DTAA exists and a resident of India proves that income accruing outside India was also taxed in that foreign country, relief is available as a deduction from Indian tax. The deduction is the lower of: (a) the Indian rate of tax on that income, or (b) the foreign country’s rate of tax [Section 160(1)].
Important: Section 160 unilateral relief is available only to residents (including RNOR) who paid tax abroad. It is not a provision for non-residents. A non-resident does not pay Indian tax on foreign income, so there is no double taxation to relieve for them under Section 160.
Part XForeign Tax Credit: Rule 76 of the Income Tax Rules, 2026
Corresponding to Rule 128 of the Income Tax Rules, 1962.
| Rule 76 Provision | Details |
|---|---|
| Credit amount [Rule 76(7)(a)] | Lower of: Indian tax payable on that income, or foreign tax actually paid |
| Currency conversion [Rule 76(7)(b)] | At telegraphic transfer buying rate on the last day of the month immediately before the month in which foreign tax was paid |
| Eligible taxes [Rule 76(4)] | Credit against income tax, surcharge, and cess only. NOT against interest, fee, or penalty |
| Disputed foreign tax [Rule 76(5) and (6)] | Not eligible for credit until dispute is settled. After settlement, credit must be claimed within 6 months |
| Form No. 44 [Rule 76(12)] | Statement of foreign income and tax. Must be filed within 12 months from the end of the tax year in which the income was offered to tax in India, provided ITR was filed on time |
| CA certification [Rule 76(16)] | Form No. 44 must be verified by a Chartered Accountant if the assessee is a company or if foreign tax paid equals or exceeds Rs. 1,00,000 |
| Settlement intimation [Rule 76(15)] | After settlement of disputed foreign tax, intimate in Form No. 45 |
If you receive royalty or FTS from India and your country has a DTAA
- Obtain a TRC from your home country tax authority before the payment date. Fill Form No. 41 with required information. Submit both to the Indian payer BEFORE the payment is made.
- Without TRC and Form No. 41 submitted in advance, TDS at the standard Act rate (often 20%) will be deducted and you will need to file an Indian ITR for a refund of the excess.
If you are an Indian resident claiming foreign tax credit
- File Form No. 44 within 12 months from the end of the tax year in which the foreign income was offered to Indian tax. Get it CA-certified if you are a company or if foreign tax exceeds Rs. 1,00,000.
- Do not claim credit for disputed foreign tax until the dispute is resolved. After resolution, claim within 6 months.
If you use an offshore holding structure to route Indian income
- Ensure genuine commercial substance: real directors making real decisions in the treaty country, employees on the ground, physical office, and genuine business activity beyond holding Indian investments.
- Structures that exist purely on paper face GAAR risk under Section 159(6) even with a valid DTAA. GAAR applies regardless of the treaty.
Wrapping Up
The DTAA framework under Section 159 does exactly what it says: avoids double taxation. It gives non-residents a clear and enforceable right to use treaty rates, backed by domestic law itself under the Section 159(4) treaty override rule. But it requires documentation (TRC and Form No. 41), substance (to withstand GAAR), and awareness of the GAAR backstop that applies even when a treaty exists.
Get the TRC and Form No. 41 in order before every payment, build genuine commercial substance into offshore structures, and the treaty benefit is yours by right.
Frequently Asked Questions
Yes, but you must file an ITR in India to claim the refund of the excess 10% TDS. The ITR must include a claim for the DTAA benefit with TRC and Form No. 41 as supporting documents. The refund cannot be claimed without filing. This is why it is always better to submit TRC and Form No. 41 to the Indian payer before payment: it avoids the need to file an ITR purely for a refund.
Capital gains on Indian listed shares acquired on or after 1st April 2017 are taxable in India under the India-Mauritius DTAA (as amended by the 2016 Protocol). The grandfathering protection only applies to investments made before 1st April 2017. For shares acquired after that date, India has the right to tax capital gains regardless of the DTAA. Additionally, if the Mauritius company lacks genuine commercial substance, GAAR under Section 159(6) may also apply to deny any residual treaty benefits.
Yes. As a resident, your US salary is taxable in India under Section 5(1)(c). The India-US DTAA and Rule 76 allow you to claim a foreign tax credit for the US tax paid. The credit is the lower of the Indian tax rate on that income or the US tax rate. File Form No. 44 (CA-certified if US tax equals or exceeds Rs. 1,00,000) within 12 months of the end of the tax year in which the income is offered to Indian tax.
Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.
