A Tax residency certificate or TRC is a certificate that is issued by the authorities of tax for the non-residents of that country declaring that the non-resident is a resident for that particular tax year for Double Taxation Avoidance Agreement (DTAA) applicability, and is eligible for tax benefits of the tax treaty.
An individual’s physical stay is considered for deciding the status of residence in India. An individual who is qualified as a ‘Resident and Ordinarily Resident’ (ROR) is expected to Pay Taxes for the Income that He/She has earned abroad. Both his/her foreign as well as Indian income is subject to tax. This foreign income will be taxed in the country where it was earned too. The individual will end up paying tax for the same income twice- in the resident country as well as source country.

Tax Residency Certificate and its Importance

In order to avoid such a situation, the nations entered into a DTAA to provide relief to such taxpayers. These taxpayers can claim the benefits while paying income tax in such nations. This benefit can only be claimed after he/she proves his residency in the country, and to prove it, a TRC helps. In short, it is a document that is issued by the IT department of the residency country, confirming that the individual is a resident of that particular country for that particular period. India has made it compulsory for NRIs who have a revenue from India and want to claim the treaty benefits to have a valid TRC.

Benefits of Tax Residency Certificate

There are various benefits that you can enjoy by getting a Tax Residency Certificate. Some of the benefits being:

  • Double Taxation Relief: A person residing in India may end up paying income tax twice on income that is earned abroad. For instance, a resident earning in the UK may have to pay tax in the UK as well as in India. To prevent this and provide relief, the Indian government enters into a Double Taxable Avoidance Agreement(DDTA) with other countries’ governments. In order to enjoy this benefit with DTAA, the taxpayer has to get a TRC that proves the taxpayer’s residency in India.

  • Remittance Transparency: In case a resident of India exports goods and services, for the amount remitted for exports to the foreign entities with whom the transaction is made, will ask for the TRC before making a remittance. Thus, Tax Resident Certificate brings transparency in fund remittance of transaction between the two country 

  • One Year Validity: Tax Residency Certificate after it is issued remains valid till the end of the year. Therefore, there is no need for multiple applications or lengthy recurring processes. 

Types of Income Covered