Tax Residency Certificate or TRC is a certificate issued by a competent tax authority in a country to give you the status of “Tax-Resident” of the concerned country. Such a TRC is proof of tax residence for the purpose taxation of income generated from that country. This becomes relevant in the case of taxation where NRI has income in multiple countries and the income could potentially be subject to double taxation.
Typically, u/s6 of the IT Act, 1960, one is said to be a Resident Indian (RI) for tax purposes, if s/he was in India for more than 182 days in the given fiscal year. However for NRI they would be tax residents of another country say USA, as they stayed less than the designated days and a TRC is needed to show to Indian tax authorities while claiming relief under DTAA in India. Double Taxation Avoidance Agreements (DTAA) between two countries have the objective to avoid taxing the same declared asset twice by both countries. The rules for DTAA applicable for NRIs are defined u/s 90 & u/s 90A of the Income Tax Act, 1961.
The provisions of DTAA allow you to benefit by subjecting your income only in one country and making it tax-exempt in the other automatically. A TRC comes in handy to help establish your tax residency status and apply the relevant DTAA rules for the application of tax jurisdiction. As per the most common practices under the DTAAs income is taxed by the country where the individual was tax-resident normally for the said financial year – it can be the source country if the person was not resident in India for at least 182 days or will be India otherwise.
To obtain a TRC, you may approach the competent Income Tax authority of the country where you reside, like the IRS in the USA or the HMRC in the UK. Your financial advisor or the local bank, where you have your local bank account, may help you with the format to apply for TRC in the country of residence. A TRC is issued fresh for each financial year for which it is applicable and is the only document acceptable by governments all over for granting benefits under the DTAA proviso. Therefore, it becomes necessary to obtain a fresh TRC each year and submit it to the tax authorities and/or banks.
TRC helps with reduced TDS (tax Deducted at Source). A NRI needs to submit Form 10FA to the competent IT authority in India and bank. A TRC would also be required when claiming DTAA relief when filing tax returns.
Tax residency certificate to claim tax relief under an agreement referred to in sections 90 and 90A is specified under rule 21AB of the Income Tax Act. Refer to Income Tax site https://incometaxindia.gov.in/Pages/default.aspx for more details.