Taxation of Interest Income under DTA agreement: Interest, paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States. Usually, the following are the common features in all DTA Agreements, regarding the taxation of income from interest:
If the payee is the Government or the Central Bank of the Government or a Government agency, the interest would usually be exempt from tax in the country in which the payment is made.
Penalty charges for late payment e.g. for defaults in clearance of dues for purchases will not constitute interest nor will any item be treated as dividend, though styled as dividend by the taxpayer or the person with whom he has the relevant transaction.
There will be no deduction of tax at source if the payee has a permanent establishment in the country from which the payment is made, or if he is engaged in professional services there. In this case, the income will be covered by his assessment to tax in that country in the ordinary course.
Interest will be deemed to arise in that State in which the payer resides.