Capital gains arising to non-residents and foreign portfolio investors (FPIs) from the transfer of capital assets are subject to special tax rates under the Income Tax Act, based on the nature of the relevant capital assets, viz. short-term or long-term. Short-term capital assets are defined as:

• Listed shares/ securities or units of an equity-oriented mutual fund held for not more than 12 months;
• Market linked debentures and units of specified mutual fund (less than or equal to 35% of the proceeds are invested in equity shares of domestic companies) acquired on or after 1 April 2023;
• Unlisted shares of a company/ immovable property held for not more than 24 months; and
• Any other capital asset held for not more than 36 months.

Any capital asset not covered above as a short-term asset is considered a long-term capital asset.

Long-term capital gains are calculated after considering the indexed cost of acquisition and the cost of improvement, i.e., the acquisition/ improvement cost is increased by a prescribed multiplier based on the period of holding to adjust for inflation.

The following rates apply on capital gains:

• Arising from the transfer of listed shares or specified securities on which securities transaction tax (see Sec. 8.1.3. in India Analysis Chapter) has been paid (effective 1 April 2018):
• 10% (plus applicable surcharge and cess) in case of long-term capital gains exceeding INR 100,000;
• 15% (plus applicable surcharge and cess) in case of short-term capital gains; and

• Arising from the transfer of any other capital assets (including other securities):
• 10% (plus applicable surcharge and cess) in case of long-term capital gains arising from other securities;
• 20% (plus applicable surcharge and cess) in case of any other long-term capital gains;
• standard corporate tax rate of 40% (plus applicable surcharge and cess) in case of any other short-term capital gains; and
• 30% (plus applicable surcharge and cess) in case of short-term capital gains earned by FPIs.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on capital gains as follows:

Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Effective from 1 April 2020, tax is withheld at the rate of 20% (plus applicable surcharge and cess) on the gross amount declared, distributed, or paid to non-resident recipients by domestic companies.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on dividends as follows:

 A reduced withholding tax rate of 10% (plus applicable surcharge and cess) applies on:

• Dividends paid on Global Depository Receipts (GDRs) issued by an Indian company or a public sector company, provided the GDRs are purchased in foreign currency; and
• Dividends received by a business trust from a special purpose vehicle (Real Estate Investment Trust and Infrastructure Investment Trust) distributed to the unit holders of the business trust.

Until 31 March 2020, dividends distributed by an Indian company were not taxable in the hands of the recipient. Instead, a dividend distribution tax (DDT) applied on dividends distributed by Indian companies at the rate of 15% (plus applicable surcharge and cess).

Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

The original treaty rate is 10%. However, a reduced rate of 10% applies as a result of the triggering of the MFN clause under the India-Netherlands treaty through India’s treaty with Germany.

Further, a reduced rate of 5% may apply as a result of the triggering of the MFN clause under the India-Netherlands treaty through India’s treaty with Colombia. The 5% rate also applies through India’s treaty with Slovenia and Lithuania, if the participation is at least 10% of the capital of the paying company.

The Indian authorities reportedly do not share this reading and consider that the MFN clause is not triggered by these treaties. This position is based on the fact that the clause is to be triggered by future treaties with other OECD member countries, and India’s treaties with Slovenia, Colombia, and Lithuania were concluded prior to their respective OECD accession.

The Indian authorities clarified their position via circular dated 3 February 2022, which provides that the applicability of an MFN clause and the benefit of the lower rate or restricted scope of source taxation rights provided in India's tax treaties with third States will be available to the first (OECD) State only when all the following conditions are met:

• The second treaty (with the third State) is entered into after the signature/ entry into force (depending upon the language of the MFN clause) of the treaty between India and the first State;
• The second treaty is entered into between India and a State that is a member of the OECD at the time of signing the treaty;
• India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and
• A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax Act, 1961.

If all the above conditions are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with the first State having an MFN clause, from the date as per the provisions of the MFN clause in the respective treaty. However, the above conditions do not apply if an Indian court has ordered otherwise for a specific case. Note that with respect to the last condition (specific notification by India), the Indian (Pune) Tribunal in a decision of 15 February 2022 has held that if the language used in the treaty is clear, the import of the benefits of the second treaty does not require the issue of specific notification by India.

India has not issued any notification importing the benefit of the treaties with Slovenia, Lithuania, and Colombia to the treaty with Netherlands by virtue of the MFN clause.

Nevertheless, there are strong arguments in favour of triggering the MFN clause from the date of the OECD accession, regardless of the fact that the relevant treaty was concluded before such accession. This reading is supported by the Netherlands (Decree No. IFZ 2012/54M of 28 February 2012) and also by an April 2021 decision of the Indian (Delhi) High Court.

Non-residents were required to file with the income payer a Permanent Account Number ("PAN") issued by the Indian Income Tax Authorities in order to avail of reduced withholding tax rates. In the absence of a PAN, tax had to be withheld at the rate of 20% or the treaty rate if higher.

The PAN obligation has been rescinded from 1 June 2016 provided the non-resident furnishes the following information to the payer/withholding agent:

• Name, email, and contact number;
• Address in the foreign jurisdiction of the non-resident;
• A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and
• The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Interest paid to a non‐resident without a branch or permanent establishment in India (to which the income is connected) is subject to withholding tax at the rate of 20%.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on interest as follows:

Certain reduced withholding tax rates also apply as follows:

• 10% (plus applicable surcharge and cess) on income by way of interest in respect of bonds issued by an Indian company or a public sector company, provided the bonds are purchased in foreign currency; and
• 5% (plus applicable surcharge and cess) on the following interest income earned by a non‐resident or Foreign Portfolio Investor (FPI):
• Interest on certain borrowings in foreign currency, subject to certain conditions;
• Interest on borrowings by way of specified infrastructure debt funds;
• Interest on long term bonds if the borrowing is made between 1 October 2014 and 30 June 2023;
• Interest payment to FPIs in respect of bonds issued by Indian companies and on government securities up to 30 June 2023; and
• Interest payments on Municipal Bonds.

Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Tax is withheld at the rate of 20% (increased from 10% effective 1 April 2023) on royalties paid by a resident to a non‐resident.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on royalties as follows:

Subject to an applicable tax treaty, if the royalties paid are effectively connected to a permanent establishment in India of the non-resident recipient, the tax is withheld on a net income basis at a rate of 40% (plus applicable surcharge and cess) after allowing a deduction for expenses. The following are not deductible for this purpose:

• Expenditure not wholly and exclusively incurred for the business of the permanent establishment; and
• Amounts paid otherwise than towards reimbursement of actual expenses by the permanent establishment to its head office or to any of its other offices.

 Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

Note that the Supreme Court on 2 March 2021 ruled that payments to non-residents for the use of the software must not be classified as royalties under India’s tax treaties and, therefore, should not attract the royalty withholding tax in situations covered by a tax treaty.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Tax is withheld at the rate of 20% (increased from 10% effective 1 April 2023) on royalties paid by a resident to a non‐resident.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on royalties as follows:

Subject to an applicable tax treaty, if the royalties paid are effectively connected to a permanent establishment in India of the non-resident recipient, the tax is withheld on a net income basis at a rate of 40% (plus applicable surcharge and cess) after allowing a deduction for expenses. The following are not deductible for this purpose:

• Expenditure not wholly and exclusively incurred for the business of the permanent establishment; and
• Amounts paid otherwise than towards reimbursement of actual expenses by the permanent establishment to its head office or to any of its other offices.

 Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

Note that the Supreme Court on 2 March 2021 ruled that payments to non-residents for the use of the software must not be classified as royalties under India’s tax treaties and, therefore, should not attract the royalty withholding tax in situations covered by a tax treaty.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Tax is withheld at the rate of 20% (increased from 10% effective 1 April 2023) on royalties paid by a resident to a non‐resident.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on royalties as follows:

Subject to an applicable tax treaty, if the royalties paid are effectively connected to a permanent establishment in India of the non-resident recipient, the tax is withheld on a net income basis at a rate of 40% (plus applicable surcharge and cess) after allowing a deduction for expenses. The following are not deductible for this purpose:

• Expenditure not wholly and exclusively incurred for the business of the permanent establishment; and
• Amounts paid otherwise than towards reimbursement of actual expenses by the permanent establishment to its head office or to any of its other offices.

 Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

Note that the Supreme Court on 2 March 2021 ruled that payments to non-residents for the use of the software must not be classified as royalties under India’s tax treaties and, therefore, should not attract the royalty withholding tax in situations covered by a tax treaty.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

The rate shown is based on physical sales which typically do not attract a withholding tax. Note, however, that more and more countries apply various types of taxes to “digital transactions” and similar. India specifically provides for an equalisation levy at the rate of 2% for non-resident e-commerce operators; and VAT at the standard rate of 18% on supplies provided through a digital marketplace in India. For details of such taxes in India, see Sec. 8.2.1. and Sec. 12. in India Analysis chapter.

Tax is withheld at the rate of 20% (increased from 10% effective 1 April 2023) on managerial service fees paid by a resident to a non-resident.

 A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on service fees as follows:

 Subject to the provisions of the applicable tax treaty, if the service fees paid are effectively connected to a permanent establishment in India of the non-resident recipient, the tax is withheld on a net income basis at a rate of 40% (plus applicable surcharge and cess) after allowing a deduction for expenses. The following are not deductible for this purpose:

• Expenditure not wholly and exclusively incurred for the business of the permanent establishment; and
• Amounts paid otherwise than towards reimbursement of actual expenses by the permanent establishment to its head office or to any of its other offices.

Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.

Tax is withheld at the rate of 20% (increased from 10% effective 1 April 2023) on technical service fees paid by a resident to a non-resident.

A surcharge applies at progressive rates on the tax amount, viz. 0% where income is less than or equal to INR 10 million, 2% where the total income exceeds INR 10 million but is less than or equal to INR 100 million, and 5% where the total income exceeds INR 100 million. A Health and Education Cess of 4% also applies on the tax and surcharge. This results in an effective tax rate on service fees as follows:

Subject to the provisions of the applicable tax treaty, if the service fees paid are effectively connected to a permanent establishment in India of the non-resident recipient, the tax is withheld on a net income basis at a rate of 40% (plus applicable surcharge and cess) after allowing a deduction for expenses. The following are not deductible for this purpose:

• Expenditure not wholly and exclusively incurred for the business of the permanent establishment; and
• Amounts paid otherwise than towards reimbursement of actual expenses by the permanent establishment to its head office or to any of its other offices.

Effective 1 July 2021, tax should be withheld at twice the rate specified under domestic law for payments made to non-residents having a permanent establishment in India, where:

• The non-resident has not filed the tax return for one financial year (reduced from two financial years effective 1 April 2022) preceding the financial year in which tax is required to be withheld;
• The due date for filing the tax return has expired; and
• The aggregate of the tax withheld is INR 50,000 or above in the said financial year.

From 1 June 2016, the PAN requirement no longer applies for non-residents, provided the non-resident furnishes the following information to the payer responsible for the withholding of tax:

*Name, email, and contact number;

*Address in the foreign jurisdiction of the non-resident;

*A certificate of residence issued by the government of the foreign jurisdiction of the non-resident (if available in the jurisdiction); and

*The non-resident's tax identification number or other identification number issued by the government of the foreign jurisdiction.