Tax Residency Certificate (TRC): What It Is & Why You Need It

Understanding taxes can often feel complex, especially when dealing with international income or benefits from tax treaties. Navigating these scenarios requires specific documentation to prove your eligibility for tax-related advantages. One such essential document is the Tax Residency Certificate (TRC). Whether you’re an individual or a business operating across borders, this certificate plays a key role in ensuring compliance and avoiding double taxation. What exactly is a TRC certificate, and how does it help? Let’s understand. 

What Is Tax Residency Certificate?

A Tax Residency Certificate is an official document issued by the Income Tax Department of a taxpayer's home country. It serves as proof of an individual’s residence in that nation for a specific financial year.

To avoid paying taxes twice on the same income in both the source country and the country of residence, countries sign Double Taxation Avoidance Agreements (DTAAs), also called tax treaties. These agreements let taxpayers benefit from taxes paid in the other country involved in the treaty. 

India has several DTAA agreements with over 94 countries. These treaties apply only to residents of the countries that are part of the agreement, so it’s important to confirm a person’s tax residency. The TRC is a key document for proving tax residency and claiming DTAA benefits.

For residents of India, the TRC is issued by the Income Tax Department to certify residency for a specific financial year. For non-residents earning income from India, a valid TRC from their home country is mandatory to claim treaty benefits. Similarly, other countries require TRCs to verify eligibility for DTAA advantages.

Types Of Residency Statuses In Income Tax:

A TRC certificate can be used by all three types of residents of India to benefit from the DTAA treaties-

This is the most common category. You are an ROR if you meet either of these conditions:

• You were in India for at least 182 days during the financial year (the 182-day rule).
• You were in India for at least 60 days in the current year and 365 days in total across the last four financial years (the 60-day rule).

An RNOR is someone who has connections with India but doesn't fully meet ROR criteria. Under the Income Tax Act, you’re an RNOR if you:

• Spent 730 days or more in India during the last seven years, or
• Stayed in India for at least two of the last ten financial years.

You are an NRI if you don’t qualify as an ROR or RNOR. This means failing both:

• 182 days or more in India during the financial year or
• 60 days in the current year and 365 days in the last four financial years

Who Can Get A TRC Certificate and How?

A Tax Residency Certificate (TRC) can be obtained by individuals and businesses recognized as tax residents of India. To qualify, the following conditions must be met:

• Applicants must be residents of the issuing country.
• They should own a permanent business location abroad.
• Alternatively, foreign nationals may require a domicile certificate.

Indian residents need to apply using Form No.10FA, which they submit to the assessing officer. If the officer approves, they will issue the TRC in Form No.10FB. One point to remember is that the application for TRC cannot be made online. Then how does the process work?

• Step 1: Visit the Income Tax India website. Download and print Form No. 10FA.
• Step 2: Fill out the form by hand. Make sure you enter all details in the correct fields.
• Step 3: Gather the necessary documents to prove your presence in India for the entire fiscal year.
• Step 4: Complete the form, sign it, and send it to the assessing officer in your jurisdiction. You can find your assessing officer's contact details on the Income Tax India website.

Once your request is verified, the assessing officer will issue a TRC certificate in Form No. 10FB. The certificate will include the following details:

• Name of the taxpayer
• TIN or PAN number, depending on who the taxpayer is
• Nationality of the individual or country of incorporation of the company
• Address
• Duration of certificate’s validity
• The tax authority that issued the TRC

The process changes slightly for non-resident individuals as two country’s authorities are involved. 

Obtaining TRC As An NRI:

If you're an NRI earning income in India, you’ll need a Tax Residency Certificate (TRC) from your country of residence to claim the benefits of the Double Taxation Avoidance Agreement (DTAA). Here’s how you can get it:

Apply with Tax Authorities in Your Resident Country:

You’ll need to apply for a TRC with the tax authorities of the country where you reside. Each country has its own process, but generally, you can submit the application online or in person.

Submit Supporting Documents:

To prove your tax residency, you’ll need to submit several documents, such as:

• Tax returns filed in the foreign country.
• A copy of your passport to verify your identity.
• Proof of residency, like a residency card or utility bills, to confirm your stay in that country.

If your foreign TRC doesn’t include all the details required by Indian tax authorities (like nationality, Tax Identification Number, or address), you’ll need to provide Form 10F along with the TRC when filing with the Indian authorities. This form fills in the missing details and ensures everything aligns with the DTAA rules.

How Does A Tax Residency Certificate (India) Benefit?

• Clear Tax Status: It clearly establishes your tax residency. For example, an Indian company with global operations can easily prove its tax status to foreign authorities, ensuring compliance.
• Smooth Foreign Transactions: A TRC simplifies international transactions, reducing tax-related disputes and creating a better business environment.
• Legal Compliance: By obtaining a TRC, your business meets the legal requirements of the Income Tax Act 1961, promoting transparency and compliance.
• Boosting Reputation: Having a TRC enhances your business's global reputation by proving compliance with international tax agreements.
• Attracting Foreign Investments: A TRC can make it easier to attract foreign investors. They prefer investing in companies certified as tax-compliant and follow international tax laws.
• Cost Efficiency: The savings from avoiding double taxation can be significant. These funds can be reinvested into other opportunities, supporting further growth.

Conclusion

A tax residency certificate (TRC) is necessary for any taxpayer with foreign income. Without it, you can’t claim the benefits of the Double Taxation Avoidance Agreement (DTAA) between your country of residence and the country where you earn income. But remember, a TRC is only valid until the end of the financial year. You'll need to renew it before it expires to enjoy those DTAA benefits.

FAQs

Ans. A residence certificate in India, the TRC, is an official document that verifies an individual's address and residence in a specific area. It is used for various purposes, including government schemes and job applications.

Ans. For the TRC application, you’ll need to submit Form 10F along with a few supporting documents, including proof of identity, address, tax identification number, and any other documents the tax authorities might request. 

Ans. To renew your TRC, simply submit updated documents and meet the renewal requirements set by the tax authorities. Keep in mind that these requirements can vary by country.