Sep 38 min read

Tax Residency Certificate: What Taxpayers Need to Know

Many people and companies earn money from several nations. Their income might then be subject to taxation in both countries. Most countries have double taxation avoidance agreements (DTAAs) in place to prevent such circumstances. As a result, taxpayers can only pay taxes in one country. To receive this advantage, assessees must provide proof of their nation of residency for tax purposes. They require a tax residency certificate (TRC) to do this. In this article, we will explain the concept of TRC in detail.

What is a Tax Residency Certificate in India?

A tax residency certificate is a document that the income tax department of the country where the taxpayer resides issues to verify a person's residency in that country for a specific fiscal year. People who meet the requirements to be classified as "Resident and Ordinarily Resident" (ROR) in India must pay taxes on their worldwide income. Double taxation results from the taxpayer's income being taxable in both the foreign country (source country) and the United States. India has double taxation avoidance agreements with around 100 nations to prevent such circumstances.

Taxpayers must present a TRC certificate as proof of residency in India to be eligible for this benefit. Assessees who are not residents may also benefit from the DTAA by providing a TRC from their nation of origin. A tax residence certificate is effective from the date of issuance until the conclusion of the fiscal year. Because of this, to receive the benefits of the DTAA treaty, assessees must apply for it annually.

Benefits of Tax Residency Certificate

The following are some advantages of possessing a tax residency certificate:

TRCs assist taxpayers in obtaining the advantages of DTAA agreements. By verifying an assessee's tax residency status, it makes sure their income isn't subject to double taxation.
To prove residency for a number of financial transactions, such as opening bank accounts, making investments, and conducting foreign trade, tax residency certificates are very useful.
The advantages of DTAA treaties are available to both persons and companies with tax residence certificates. They consist of reduced rates of withholding tax on particular categories of income such as interest, dividends, royalties, and so forth.
TRCs are an essential document for complying with international tax compliances. Their assistance in determining the assessee's tax residency status is crucial when submitting returns, interacting with banking institutions, or interacting with tax authorities.
It is imperative for global corporations to have a TRC. It guarantees that they receive the appropriate tax treatment by streamlining administrative processes connected to taxes. It also lessens the likelihood of encountering disagreements with foreign tax authorities.
TRCs determine a person's or company's tax residence status. This makes foreign transactions more credible and transparent, which makes financial transactions go more smoothly.

Applicability of TRC on Different Income Types

The following categories of income are covered by the tax residency certificate:

Income derived from assets located abroad
Income from services rendered overseas
Income from employment abroad
Interest received on international fixed deposits and savings accounts
Dividends received from overseas mutual funds and shares
Gains on capital transfers of real estate in other nations
Income from the selling of agricultural goods

Types of Residents under Income Tax

An individual's residence status may fall under one of the following categories under Indian Income Tax laws:

Resident and Ordinarily Resident (ROR):

As per the Income Tax Act Section 6(1), a person must have the following requirements to be considered a resident:

They spend at least 182 days during the fiscal year in India
If they visit India for seventy-three days or longer during the seven years before the current fiscal year
If they meet the requirements for ordinary residents and have lived in India for 365 days or more during the four years prior to the current year

Under Section 6(6), a person must meet the following requirements to qualify as a resident or an ordinarily resident:

If throughout the last ten fiscal years that preceded the current year, they have resided in India for at least two years
If throughout the seven years before the current fiscal year they resided in the nation for at least seventy-three days

Resident but Not Ordinarily Resident (RNOR): To qualify as a Resident but Not Ordinarily Resident, a person must meet the following requirements:

If over the previous fiscal year, they spent at least 730 days living in India
If they spent at least two of every ten days in India during the previous fiscal year

Non-Resident (NR): For someone to be considered a non-resident, they must fulfil the following criteria:

If, during a fiscal year, they spend less than 182 days in India
If they spend no more than sixty days living in India throughout a fiscal year
If throughout the previous four fiscal years, they spend more time in India than 60 days but less than 365 days.

Who can Get a Tax Residency Certificate?

A Tax Residency Certificate can be obtained by both individuals and corporate entities acknowledged as tax residents of India. The following requirements must be met by taxpayers to receive a Tax Residency Certificate:

Businesses or individuals must the residents of the issuing country
They have to be the owners of a permanent business location abroad
Alternatively, to receive a domicile certificate, they have to be a foreign national

An assessee who is formally recognised as an Indian resident must apply to the assessing officer using Form No. 10FA to receive this certificate. The officer will next provide the assessee with a residence certificate in Form No. 10FB after receiving their satisfaction. It's important to note that you cannot apply online for a Tax Residency Certificate.

How to Get a Tax Residency Certificate?

As per rule 21AB, an assesses who resides in India may apply to the Assessing Officer in Form No. 10FA for a Tax Residency Certificate. The assessee will receive a certificate of residency in Form No. 10FB from the Assessing Officer upon receipt of the application and satisfaction with the details submitted. A taxpayer who is not a resident of India may obtain a Tax Residency Certificate from the government of the nation or a designated territory in which they currently reside. The following crucial information has to be included in the TRC:

Name of the taxpayer
Status, whether individual, firm, company, etc.
Nationality (individual taxpayers) or country/country of registration (for businesses)
Aadhaar number
Permanent Account Number (PAN)
Assessee’s address abroad
Tax Identification Number (TIN)
Period of residential status under Section 90 (4)/90A (4)

Different countries may use different TRC formats. Hence, NRIs are required to add the aforementioned information when submitting Form 10F if their tax residency certificate was issued by a foreign authority and omits such information.

Steps to Obtain TRC

Here are the step-by-step instructions for resident Indians who wish to obtain a tax residence certificate from the Indian income tax authorities.

Step 1: Go to the Income Tax India website, download, and print Form No. 10FA.

Step 2: Manually complete the form. Please ensure that all information is entered into the appropriate fields.

Step 3: Provide the required documentation to substantiate your presence in India throughout the fiscal year.

Step 4: Fill out the form, sign it, and send it to the assessor for your jurisdiction. On the Income Tax India website, you can obtain information about your assessing officer.

The assessing officer will provide a TRC certificate in Form No. 10FB after confirming the legitimacy of your request.

Renewal of Tax Residency Certificate

To maintain the benefits of the DTAA treaty, taxpayers may also renew their tax residency certificates prior to the end of the fiscal year. This can be accomplished by fulfilling the income tax authorities' renewal requirements and submitting the revised documentation. But this is not a quick procedure, and it can take different amounts of time in different countries. Therefore, it is essential to file for a TRC renewal well in advance of the end of the fiscal year.

Conclusion

Any taxpayer with foreign income is required to file for a tax residency certificate, which is a crucial document. They are unable to make use of the benefits of the Double Tax Agreement (DTAA) between their country of residence and the country in which they make money without it. To continue taking advantage of DTAAs, it is crucial to remember that a TRC certificate is only good until the end of the fiscal year and needs to be renewed before it expires.

FAQ

Q1. What is a tax residency certificate in India?

A tax residency certificate serves as documentation of a taxpayer's nationality for the duration of a specific fiscal year. It makes it possible for people and companies to benefit from the DTAA accords and avoid paying double taxes.

Q2. What is tax residency self-certification?

Declaring one's nation of tax residence is possible for taxpayers using the tax residency self-certification form. It is applicable to assessees who are residents or non-residents who earn revenue from numerous countries.

Q3. Who is a tax resident in India?

In India, a person can qualify as a tax resident if they spend at least 182 days there within a fiscal year. For other entities to qualify as tax residents, the control and management of their affairs during a financial year must be located in India.

Q4. What is the validity period for a Tax Residency Certificate?

A TRC's validity duration varies based on the nation that issued it as well as the details of the certificate. While some TRCs have a one-year validity period, some could have longer ones.

Q5. Can a Tax Residency Certificate be renewed?

Yes, TRCs can usually be renewed by completing the renewal conditions provided by the tax authorities and providing current documents.

Q6. Can I use a Tax Residency Certificate in all countries?

TRCs are unique to the nation that issues them and are typically used to assert benefits under tax treaties between that nation and other nations with which it has agreements.

Q7. Is a TRC the same as a Tax Identification Number (TIN)?

No, a Tax Identification Number (TIN) is a special number issued by tax authorities to track an individual's or entity's tax-related actions, whereas a Tax Resident Certificate verifies a person's tax resident status.

Q8. What is Form 10F?

Form 10F is a self-declaration tax form that Indian taxpayers who are non-residents (NRs) utilise. When their Tax Residency Certificate (TRC) is devoid of certain information, it is mainly utilised to retrieve the advantages of Double Taxation Avoidance Agreements (DTAAs).

Q9. Is Form 10F and TRC the same?

To benefit from the DTAA treaties, non-resident assessees must self-declare on Form 10F. In contrast, a taxpayer's nation of residence can be verified using the tax residency certificate (TRC), which acts as a proof of residency.

Q10. Is TRC mandatory for claiming DTAA benefit?

To be eligible for DTAA benefits, taxpayers are required by Section 90(4) to provide their tax residency certificates and the pertinent data on Form 10F.

Q11. What happens if TRC is not available?

Taxpayers will not be able to benefit from the DTAA accord if TRC is unavailable. In such cases, the income tax laws of both the resident and the source country will apply, subjecting them to double taxation.

Q12. Can Form 10F be filed without TRC?

It is possible for taxpayers to file Form 10F without a TRC. They must provide details such as the assessee's residence, TIN, nationality, and length of stay.

Q13. Can you get a tax residency certificate in India online?

Assessees can apply to the Income Tax Department for an India tax residency certificate. They can submit application Form 10FA to file a TRC claim. The assessing officer will use Form 10FB to issue a TRC if the application meets their requirements.

Q14. What is the purpose of Form 10FA?

Under Section 90(5) and Section 90A of the Income Tax Act, Indian citizens utilise a Form 10FA to get a certificate of residency. The concerned evaluating officer will use Form 10FB to issue a residency certificate after they have verified the information.

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