Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Tax Treaties: Basics, Models and Section 90

Updated 5 October 2026 · Fact-checked

A tax treaty (DTAA) is a bilateral agreement that divides taxing rights between two countries to avoid double taxation. Section 90 lets the Central Government make and notify such agreements. Under Section 90(2), the treaty or the Act applies, whichever is more beneficial to the assessee. Compare both, then apply the lower tax.

Understand Tax Treaties: Basics, Models and Section 90

Two countries can tax the same income. One taxes it because the person is resident there (residence basis). The other taxes it because the income arises there (source basis). The result is double taxation. A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty that fixes which country may tax which income, and at what maximum rate.

Countries sign DTAAs for five reasons:
- To avoid or relieve double taxation.
- To prevent tax evasion and treaty abuse.
- To encourage cross-border trade and investment by giving tax certainty.
- To exchange tax information and help in recovering tax.
- To protect taxpayers from discrimination.

Most treaties are drafted on one of two model conventions. The OECD Model leans towards the country of residence. It limits source-country taxation, so it suits countries that mainly send capital and technology abroad. The UN Model leans towards the country of source. It keeps more taxing rights for the source country, so developing countries, including India, often prefer its approach. Typical UN-model differences: a wider permanent establishment (PE) definition (for example, a building site PE after six months, against twelve months in the OECD Model, and a services PE), and room for source-country tax on royalties, interest and fees for technical services. Actual treaties are negotiated, so always read the specific article of the treaty in the question.

In India, the treaty-making power sits in Section 90 (agreements with foreign countries or specified territories) and Section 90A (adoption of agreements made between specified associations in India and in a specified territory outside India). Under Section 90, the Central Government may enter into an agreement for relief on income taxed in both countries, for avoidance of double taxation, for exchange of information to prevent evasion or avoidance, and for recovery of tax. The agreement takes effect through a notification.

Treaty override is often used loosely, so be precise. It does not mean the treaty always prevails over domestic law. Section 90(2) says that, for an assessee to whom a notified agreement applies, the Act applies only to the extent it is more beneficial to the assessee. In effect, the assessee gets the better of the treaty and the Act. The comparison is made income by income. Within the same income or treaty article, the assessee cannot mix provisions of the Act and the treaty selectively. A treaty can only reduce or remove tax. It cannot create a charge of tax that the Act does not impose.

Three limits matter. A non-resident must furnish a Tax Residency Certificate (TRC) under Section 90(4) and the prescribed information under Section 90(5) to claim treaty benefit. These are necessary conditions, not sufficient ones. The claim also depends on the treaty's own articles (including any limitation-of-benefits clause) and on GAAR. Under Section 90(2A), the General Anti-Avoidance Rule (GAAR) applies notwithstanding Section 90(2), even if it is not beneficial to the assessee. So GAAR can deny the treaty benefit only if the arrangement is an impermissible avoidance arrangement. And the specific article of the treaty must be read for the income in question.

Key rules to remember

Beneficial-provision rule (Section 90(2)): Tax payable = lower of (tax under the Act, tax under the treaty); Applies only to an assessee to whom a notified agreement applies. Compare income by income. Within one income or article, take the treaty treatment or the Act treatment. Do not mix provisions selectively.
Treaty cannot create a charge: No charge under the Act → no tax, even if the treaty permits India to tax; The treaty allocates or restricts taxing rights. The charge must exist in domestic law first.
Treaty eligibility: Treaty claim needs: TRC (Section 90(4)) and prescribed information (Section 90(5)) — necessary, not sufficient; A non-resident without a TRC and the prescribed information cannot claim treaty benefit. Even with them, the claim also depends on the treaty's own articles (including any limitation-of-benefits clause) and on GAAR. Residence is decided under the treaty's residence article.
GAAR and treaty (Section 90(2A)): GAAR applies notwithstanding Section 90(2); The treaty benefit can be denied only if the arrangement is an impermissible avoidance arrangement under GAAR.
Scope of Section 90 agreements: Relief + avoidance of double tax + exchange of information + recovery of tax; Four purposes for which the Central Government may enter agreements.
Section 90A: Agreement between specified associations of India and a specified territory outside India → adopted by notification; Used where there is no government-to-government treaty, for example with a specified territory.
OECD vs UN Model: OECD = residence-leaning; UN = source-leaning; UN Model has a wider PE (building site after 6 months, against 12 months in OECD) and more source taxation of royalties and fees.

How to solve Tax Treaties: Basics, Models and Section 90 questions

Use this order for any question on treaty basics, models or Section 90. It keeps your answer in provision, facts and conclusion form.

1Identify what is asked: purpose of treaties, model difference, Section 90 or 90A, or a computation under Section 90(2).
2State the legal base in one line: the Central Government's power under Section 90 or 90A, and the need for notification.
3Check that the assessee is a resident of the treaty country and holds a TRC with the prescribed information.
4Check that the income is charged under the Act. If it is not, the treaty cannot create tax.
5Work out the tax under the Act and the tax under the treaty for that income.
6Apply Section 90(2): the Act applies only to the extent it is more beneficial, so the assessee takes the better of the two. Do not say the treaty overrides the Act in every case.
7Add any limit: GAAR applies notwithstanding Section 90(2) (Section 90(2A)), and the treaty article must be read for the specific income.
8Write a one-line conclusion with the final tax figure or the legal position.

Quickest way: Two-column comparison

When to use it: Use it for computation or case questions where an Act rate and a treaty rate are both given.

Draw two columns: Act and Treaty.
Fill the rate or treatment for the income in each column.
Confirm the TRC and residence conditions before using the treaty column.
Pick the lower tax. Write 'Section 90(2) – more beneficial' and give the final amount.
For theory, answer in the order: purpose, model, Section 90 or 90A, override, limits.

Common mistakes in Tax Treaties: Basics, Models and Section 90

Saying the treaty always overrides the Act.
Students remember 'treaty override' and forget the condition.
Fix: Write that under Section 90(2) the Act applies to the extent it is more beneficial, so the assessee gets the better provision. Add that GAAR applies notwithstanding Section 90(2).
Claiming that a treaty can make an income taxable that the Act does not tax.
Students read 'India may tax' in a treaty article as a charge.
Fix: State that the charge must exist in domestic law. The treaty only allocates and limits taxing rights.
Ignoring the TRC and prescribed information for a non-resident.
The numbers look simple, so the documentation condition is skipped.
Fix: Always list the TRC and prescribed information as a condition before applying the treaty rate. Remember they are necessary but not sufficient: the treaty's own articles and GAAR must also be checked.
Mixing up Section 90 and Section 90A.
Both deal with agreements and have similar numbers.
Fix: Section 90: agreements with foreign countries or specified territories. Section 90A: adoption of agreements between specified associations of India and of a specified territory outside India.
Writing that OECD favours source states and UN favours residence states.
The labels are reversed in memory.
Fix: Remember OECD = residence-leaning, UN = source-leaning, which benefits developing countries.
Comparing the treaty and the Act on total tax rather than for each income, or mixing provisions of both within one income.
Students look at the whole return instead of each source, or pick the best part of each law.
Fix: Compare treatment income by income and apply the more beneficial of the treaty or the Act to each. Within the same income or article, do not mix provisions of the two.

Worked examples

Example 1

Alpha Inc., a company resident in country X (which has a notified DTAA with India), earns royalty of ₹50,00,000 from an Indian company. Assume the Act taxes this royalty at 20% and the treaty caps tax at 10%. Alpha holds a TRC and the prescribed information. Ignore surcharge and cess. What tax applies in India?

Show the solution

Provision: Section 90(2) applies the Act only to the extent it is more beneficial to the assessee. So the assessee takes the treaty where it is more beneficial.
Facts: Alpha is resident in treaty country X and holds a TRC and the prescribed information. The royalty is charged under the Act.
Tax under the Act: ₹50,00,000 × 20% = ₹10,00,000.
Tax under the treaty: ₹50,00,000 × 10% = ₹5,00,000.
The treaty is more beneficial, so it applies. GAAR is not triggered on these facts.

Answer: Tax in India is ₹5,00,000 under the treaty, not ₹10,00,000 under the Act.

Example 2

Beta Ltd., a resident of country Y (notified DTAA with India), receives dividend of ₹8,00,000 from an Indian company. Assume the Act taxes this dividend at 20% and the treaty caps source tax at 15%. These rates are assumed for the example. Beta holds a TRC (Section 90(4)) and the prescribed information (Section 90(5)), and the arrangement is not an impermissible avoidance arrangement under GAAR. Ignore surcharge and cess. Can India charge 20%?

Show the solution

Provision: under Section 90(2), the Act applies only to the extent it is more beneficial, so Beta can claim the treaty rate where it is lower. The treaty rate is a ceiling on source-country tax.
Facts: Beta is resident in treaty country Y. The dividend is charged under the Act.
Conditions: the treaty rate is available only because Beta holds a TRC and the prescribed information, and GAAR is not triggered. If any condition failed, the treaty rate could not be claimed.
Tax under the Act (assumed rate): ₹8,00,000 × 20% = ₹1,60,000.
Tax under the treaty (assumed rate): ₹8,00,000 × 15% = ₹1,20,000.
The treaty is more beneficial (₹1,20,000 is less than ₹1,60,000), so it applies.

Answer: On the assumed rates, and because the TRC, prescribed information and no-GAAR conditions are met, India cannot charge 20%. Tax is ₹1,20,000 at 15% under the treaty, the lower of the two.

Exam tips

Write the purpose of DTAAs as a short list. Examiners reward structured points.
For OECD vs UN, give three concrete differences and name the bias (residence vs source) first.
In case scenarios, check TRC, residence and the charge under the Act before using the treaty. These are the usual hidden conditions.
Always show both tax figures (Act and treaty) and name Section 90(2) when you choose the lower one.
Mention GAAR (Section 90(2A)) and the treaty's own article for the specific income in one line to show depth.

Practice questions from Application and Interpretation of Tax Treaties

Tax Treaties: Basics, Models and Section 90 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalTaxation of Income under Treaty Articles

Tax Treaties: Basics, Models and Section 90: frequently asked questions

What is Section 90 about?

Section 90 empowers the Central Government to enter into agreements with other countries or specified territories. These agreements cover relief from double taxation, exchange of information and recovery of tax. They take effect through notification.

What does Section 90(2) say?

For an assessee to whom a notified agreement applies, the Act applies only to the extent it is more beneficial. In practice, you take whichever of the treaty or the Act gives the lower tax for that income. Section 90(2A) adds that GAAR applies notwithstanding Section 90(2).

What is treaty override in India?

It is a loose term. It does not mean the treaty always prevails. Under Section 90(2), the assessee gets the more beneficial of the treaty and the Act, and a treaty cannot create a tax charge that the Act does not impose. GAAR can apply even where a treaty benefit is claimed.

What is the main difference between the OECD and UN models?

The OECD Model favours taxation in the country of residence and limits source taxation. The UN Model keeps more taxing rights for the source country, with a wider PE definition and more source taxation of royalties and fees.

How is Section 90A different from Section 90?

Section 90A deals with adoption of agreements made between specified associations in India and in a specified territory outside India. Section 90 covers agreements between the Central Government and foreign countries or specified territories.