Tax Residency Certificate (TRC): Meaning, Benefits, and Application Process

A Tax Residency Certificate (TRC) is an official document issued by the Income Tax Department of India. It certifies that an individual or a business entity is a tax resident of India during a defined period. This confirms the taxpayer's residential status for a particular financial year.

This certification is essential for claiming tax treaty benefits in foreign jurisdictions and to prevent double taxation on cross-border income. In this blog, we shall understand the meaning of TRC, along with its benefits and application process. Read on!

What is a Tax Residency Certificate?

A TRC document confirms that an individual or an entity is a tax resident of India. This indicates that they are regarded as residents under Indian tax laws and are subject to taxation in India, as applicable. In simple terms, tax residency refers to the country where an individual or entity is considered a resident for tax purposes. It is generally based on factors such as physical presence and residential status, and not merely on where a company is incorporated.

This is essential to determine which income is subject to a country’s tax laws. A TRC does not exempt income from tax; it only establishes residency for treaty eligibility. The actual taxation depends on applicable tax treaty provisions and domestic tax laws.

Who Needs a Tax Residency Certificate in India?

TRC is required for the Indian residents earning income from foreign sources. Non-residents also need this certificate to claim treaty benefits in India. The most common applicants are:

• Individuals earning foreign income, interest, dividends, or royalties

• Consultants or freelancers providing services to foreign clients

• Entities that receive cross-border service income

• Foreign companies and NRIs earning income or investing in India

If an individual or an entity failed to get TRC, the tax authorities may deny the treaty benefits available for the income concerned.

TRC is governed under Section 90 and Section 90A of the Indian Income Tax Act, 1961. Sometimes, even when a valid TRC is submitted, Income tax authorities may request additional information to verify treaty eligibility. One can refer to the Income Tax Department's official guidance for more details regarding this.

A TRC contains legally verified taxpayer details, each of which is important for treaty enforcement. A standard TRC generally includes:

• Name of the taxpayer

• Tax residency status

• Country of residence (or incorporation, in the case of entities)

• Tax Identification Number (TIN)

• Residential or registered address

• Period of tax residency

If there are any incorrect or missing details, it may lead to rejection of the tax treaty benefit claims. Therefore, it is important to maintain proper documentation with correct details.

Benefits of Obtaining a Tax Residency Certificate (TRC)

A TRC avoids unnecessary tax confusion that occurs due to foreign capital gains and has several advantages. Some of them are:

Avoids Double Taxation

Some income types may attract double taxation, which reduces the profit gained to a large extent. TRC provides a great relief for the taxpayers under Double Taxation Avoidance Agreements (DTAA). The income earned is taxed only once through a reduced rate or tax credits.

Lower Withholding Tax Rates

If a foreign taxpayer presents a valid TRC, they may be eligible for reduced withholding tax rates under the relevant tax treaty. However, this is subject to specific conditions. Cash flows can be improved by lowering upfront tax deductions.

Compliance with International Tax Laws

In order to provide treaty benefits, several jurisdictions demand evidence of tax residency. As recognised documentation, a TRC assists taxpayers in meeting international tax obligations. It lowers the possibility of further inspection during audits.

Enhanced Credibility with Foreign Authorities

Some clients from foreign countries prefer financial transactions with only compliant taxpayers. Under such scenarios, a TRC builds trust during cross-border dealings.

Prevention of Tax Disputes

Conflicts with foreign tax authorities about resident status or treaty eligibility are less common with proper documentation. It also enables taxpayers to credibly back up their assertions in assessments or inquiries pertaining to taxes.

Access to Tax Treaty Benefits

Any taxpayer with TRC can get an added advantage under tax treaties, such as lower tax rates or exemptions. This is subject to the provisions of the relevant DTAA and domestic tax laws.

Also Read: Tax Exemption & Its Various Categories

Application Process for Tax Residency Certificate (TRC)

To apply for a TRC in India, one needs to follow the steps given below:

Step 1: Check the Eligibility Criteria

Confirm your residential status under the Indian tax laws. Residency rules differ for individuals and entities and are determined based on criteria prescribed under the Income-tax Act. Check and ensure you pass the eligibility criteria before the application process.

Step 2: File Form 10FA

One should submit Form 10FA to request a TRC. It includes personal, residency, and income details. The form can be filed online through the income tax portal. The documents required to apply for TRC vary depending on the applicant category. Most commonly requested documents are:

• PAN card

• Passport (for individuals) or certificate of incorporation (for entities)

• Address proof

• Income details

• Copy of the latest income tax return filed

Providing accurate documentation will avoid any delay in the application process.

Step 3: Verification by Tax Authorities

An assessing officer from the Indian Income Tax Department will verify all the information submitted. Sometimes they may request additional documents if required.

Step 4: Issuance of TRC

The TRC is issued in Form 10FB for the designated time following successful verification. A new application is needed every year, and the TRC is normally valid for the fiscal year specified in the certificate. Depending on the jurisdiction and application completeness, the processing time could change.

Reasons for Rejection of a TRC Application

The TRC application may be rejected due to:

• Incorrect residential status

• Incomplete or inaccurate documentation

• Mismatch in personal or income details

• Incorrect period or assessment year mentioned

• Non-compliance with tax filing requirements

In such cases, the applicant should reapply after correcting the errors.

To Conclude

A Tax Residency Certificate (TRC) is an essential document for managing cross-border tax obligations. It establishes tax residency, enables eligibility for treaty benefits, and helps prevent double taxation in accordance with applicable agreements. As each country has its own criteria for determining tax residency, it is important to check eligibility requirements and apply for a TRC promptly.

FAQs

Is a Tax Residency Certificate mandatory for all foreign income?

A Tax Residency Certificate is not required for domestic taxation purposes for all foreign income. However, if an individual or an entity needs to avail tax benefits from a treaty or avoid double taxation, TRC is mandatory.

Can a single TRC be used for multiple countries for one year?

Yes, the same TRC can be used across multiple countries that have DTAA treaties with India. However, the acceptance of TRC depends upon the tax authority of each country.

Does TRC guarantee tax exemption from foreign countries?

No, a TRC only serves as proof of tax residency. The actual tax treatment depends on the relevant tax treaty provisions, domestic tax laws, and the nature of the income.

Can foreign tax authorities reject a valid TRC?

Yes. If other treaty requirements, including beneficial ownership or substance requirements, are not met, foreign tax authorities may refuse treaty benefits.

Is it possible to revise a TRC after issuance?

Revisions to an issued TRC are generally not permitted. If there is an error in the certificate, a fresh application is usually required.