Capital Gains Tax Between India and Australia Under DTAA

Capital Gains Tax Rate Between India and Australia

Under Article 13 of the India-Australia Double Taxation Avoidance Agreement (DTAA), capital gains from the alienation of property are allocated between the two Contracting States based on the type of asset being disposed of. Unlike income types such as dividends and interest where the treaty prescribes a specific maximum withholding rate, capital gains taxation under the India-Australia DTAA operates through a source-country taxation model -- meaning both India and Australia retain the right to tax capital gains arising from assets situated within their respective jurisdictions, subject to double taxation relief via the credit method under Article 24.

The India-Australia DTAA was originally signed on 25 July 1991 and became effective on 30 December 1991. A protocol amending the agreement was signed on 16 December 2011 and entered into force on 2 April 2013. The treaty has also been modified by the Multilateral Instrument (MLI), with the synthesised text published by the CBDT reflecting the combined effect of the original treaty, the 2011 protocol, and MLI provisions.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic capital gains tax rates for non-residents, as applicable from 23 July 2024 under the Finance (No. 2) Act, 2024, are as follows:

The India-Australia DTAA does not provide a reduced rate for capital gains -- unlike dividends (15%) or interest (15%). Instead, the treaty allocates taxing rights to the source country, and the domestic tax rates of that country apply. The residence country (Australia) then provides a foreign tax credit to eliminate double taxation.

Who Qualifies for Treaty Protection

To claim benefits under the capital gains provisions of the India-Australia DTAA, the taxpayer must satisfy several conditions:

Tax Residency Requirement

The taxpayer must be a tax resident of Australia as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Australian Taxation Office (ATO) is mandatory. The TRC establishes that the taxpayer is subject to tax in Australia by reason of domicile, residence, place of management, or other similar criteria.

Beneficial Ownership and Anti-Abuse

Post-MLI, the treaty includes a Principal Purpose Test (PPT) under Article 7 of the MLI. Treaty benefits (including the allocation of taxing rights on capital gains) can be denied if one of the principal purposes of an arrangement or transaction was to obtain benefits under the treaty. India's domestic General Anti-Avoidance Rules (GAAR), effective from April 2017, provide an additional layer of anti-abuse protection.

No Permanent Establishment Override

If the capital asset is effectively connected with a permanent establishment (PE) that the Australian resident has in India, the gains are taxed as business profits under Article 7, not under Article 13. This distinction is important for Australian companies with Indian PEs.

Capital Gains-Specific Treaty Provisions (Article 13)

Article 13 of the India-Australia DTAA establishes the following rules for different categories of capital assets:

Immovable Property (Article 13(1))

Gains derived by a resident of Australia from the alienation of immovable property (real property) situated in India may be taxed in India. The term "immovable property" has the meaning given under the domestic law of the country where the property is situated. This includes land, buildings, rights to natural resources, and property accessory to immovable property. Importantly, this also covers gains from shares in a company whose assets consist wholly or principally of immovable property situated in India.

Movable Property Forming Part of PE (Article 13(2))

Gains from the alienation of movable property forming part of the business property of a permanent establishment that an Australian enterprise has in India, including gains from the alienation of the PE itself, may be taxed in India. This covers equipment, inventory, goodwill, and other business assets connected to the PE.

Ships and Aircraft (Article 13(3))

Gains from the alienation of ships or aircraft operated in international traffic, and movable property pertaining to their operation, shall be taxable only in the Contracting State where the enterprise's place of effective management is situated. This is an exclusive allocation -- the source country has no taxing right.

Shares in Indian Companies (Article 13(4))

Gains from the alienation of shares in a company which is a resident of India may be taxed in India. This is a critical provision that gives India the right to tax capital gains when an Australian resident sells shares in an Indian company. Unlike some other Indian DTAAs (such as the pre-amendment India-Mauritius treaty or the India-Singapore treaty that previously exempted share sales from source taxation), the India-Australia DTAA has always allowed source country taxation of share sales.

Property-Rich Companies

Gains from shares in a company whose property consists wholly or principally of immovable property situated in India are specifically covered under Article 13(1). This anti-avoidance provision prevents taxpayers from indirectly disposing of Indian immovable property through share transfers in holding companies.

Residual Clause (Article 13(5))

Gains from the alienation of any property other than those described above shall be taxable only in the Contracting State of which the alienator is a resident. This residual clause provides exclusive taxation rights to the residence country for asset types not specifically covered.

Documentation Required

Australian residents with capital gains taxable in India must furnish the following documentation:

Tax Residency Certificate (TRC)

A valid TRC from the Australian Taxation Office (ATO) confirming Australian tax residency for the relevant financial year. This is the primary document required under Section 90(4) of the Indian Income Tax Act for claiming treaty protection.

Form 10F

If the TRC does not contain all prescribed particulars (name, status, nationality, tax identification number, period of residency, and address), the taxpayer must file Form 10F electronically on the Indian Income Tax portal to supplement the TRC.

PAN (Permanent Account Number)

While not mandatory for claiming treaty benefits (per CBDT Notification No. 53/2016), having an Indian PAN is strongly recommended. Without a PAN, the provisions of Section 206AA may apply, though treaty rates prevail if prescribed documents are furnished.

Self-Declaration

A self-declaration confirming beneficial ownership, absence of a PE in India to which the gains are attributable (where applicable), and that the arrangement is not primarily motivated by tax avoidance.

Withholding Procedure for Indian Payers (Section 195)

When an Indian resident purchases shares or property from an Australian resident, the Indian buyer must comply with Section 195 of the Income Tax Act:

Step 1: Determine Taxability

Verify whether the capital gains are taxable in India under Article 13 of the DTAA. If the asset is shares in an Indian company or immovable property in India, India has the taxing right. Collect the TRC, Form 10F, and self-declaration from the Australian seller.

Step 2: Compute Capital Gains

Calculate the capital gains (sale consideration minus cost of acquisition) and determine the applicable domestic tax rate. Apply the domestic rate since the treaty does not prescribe a reduced rate for capital gains -- it only allocates the taxing right.

Step 3: Deduct TDS

Deduct TDS at the applicable domestic rate on the capital gains amount. For listed shares where STT is paid, the rate is 12.5% for LTCG (above INR 1.25 lakh) or 20% for STCG. For unlisted shares, the rate is 12.5% for LTCG or slab rates for STCG.

Step 4: File Form 15CA/15CB

For remitting the sale proceeds to Australia, the buyer must file Form 15CA electronically. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant's certificate in Form 15CB is also required.

Common Disputes and Judicial Precedents

Indirect Transfers and Section 9(1)(i)

Following the Vodafone judgment and the subsequent amendment to Section 9(1)(i) through the Finance Act 2012, India taxes indirect transfers where shares derive substantial value from Indian assets. The India-Australia DTAA's property-rich company provision in Article 13 aligns with this domestic law position. The ITAT has examined several cases involving indirect transfers and treaty application, generally holding that where the treaty allows source taxation of shares, India's domestic law rates apply.

Characterization Disputes

Indian tax authorities have sometimes reclassified capital gains as business income (taxable under Article 7) or other income. The frequency and nature of share transactions may lead authorities to argue that the taxpayer is a dealer rather than an investor. Australian residents should maintain clear documentation of investment intent and holding periods.

Cost of Acquisition in Foreign Currency

Disputes have arisen regarding the computation of cost of acquisition when the original investment was made in foreign currency. The ITAT has held that the cost should be computed in Indian rupees at the exchange rate prevailing on the date of acquisition, and the sale consideration in rupees at the date of sale.

Section 54 Exemptions for Non-Residents

Whether Australian residents selling Indian immovable property can claim exemptions under Section 54 (reinvestment in residential property) or Section 54EC (investment in specified bonds) has been a subject of litigation. The general position is that these exemptions are available to non-residents, subject to compliance with the reinvestment conditions and timelines.

Practical Examples and Calculations

Example 1: Sale of Listed Shares (Long-Term)

An Australian individual purchased shares in an Indian listed company for INR 10,00,000 in March 2023 and sold them in June 2025 for INR 18,00,000 (holding period exceeds 12 months, STT paid). The long-term capital gain is INR 8,00,000. Under Section 112A, the first INR 1,25,000 is exempt, and the balance INR 6,75,000 is taxed at 12.5%, resulting in a tax of INR 84,375. This tax paid in India can be claimed as a foreign tax credit in Australia against Australian tax on the same gain.

Example 2: Sale of Unlisted Shares (Short-Term)

An Australian corporation sells unlisted shares in an Indian private company within 18 months of acquisition for a gain of INR 50,00,000. This is a short-term capital gain taxed at the applicable rate for foreign companies (35% plus surcharge and cess, approximately 38.22%). The tax liability is approximately INR 21,84,000. The India-Australia DTAA allows India to tax this gain, and Australia provides a credit for the Indian tax paid.

Example 3: Sale of Indian Immovable Property

An Australian resident sells a residential property in Mumbai held for 5 years for a gain of INR 1,00,00,000. Under Section 112, the long-term capital gain is taxed at 12.5% without indexation, resulting in a tax of INR 12,50,000 (plus surcharge and cess). The seller can explore exemptions under Section 54 or Section 54EC to reduce the tax liability. The treaty confirms India's right to tax this gain under Article 13(1).

Frequently Asked Questions

Does the India-Australia DTAA provide a reduced capital gains tax rate?

No. Unlike dividends (15%) or interest (15%), the India-Australia DTAA does not prescribe a reduced withholding rate for capital gains. Instead, Article 13 allocates taxing rights -- allowing the source country to tax gains at its domestic rates -- and the residence country provides a foreign tax credit to eliminate double taxation.

Can India tax an Australian resident on the sale of shares in an Indian company?

Yes. Under Article 13(4) of the India-Australia DTAA, gains from the alienation of shares in a company resident in India may be taxed in India. India's domestic capital gains tax rates (12.5% LTCG under Section 112A for listed shares, 12.5% under Section 112 for unlisted shares, or 20% STCG under Section 111A) apply to such gains.

Are gains from the sale of Indian immovable property taxable in India for Australian residents?

Yes. Article 13(1) explicitly provides that gains from the alienation of immovable property situated in India may be taxed in India. This covers direct sales of land, buildings, and other real property, as well as shares in property-rich companies whose assets consist principally of Indian immovable property.

How does Australia provide relief from double taxation on Indian capital gains?

Australia uses the credit method under Article 24 of the DTAA. Indian tax paid on capital gains is allowed as a credit against Australian tax payable on the same income, up to the amount of Australian tax attributable to that income. This ensures the taxpayer is not taxed twice on the same gain.

What documentation is needed to claim foreign tax credit in Australia?

To claim a foreign tax credit in Australia, the taxpayer needs the Indian TDS certificate (Form 16A), proof of Indian tax payment (challan), the computation of Indian capital gains, and the TRC. These documents must be submitted with the Australian tax return to the ATO.

Does the MLI affect capital gains taxation under the India-Australia DTAA?

The MLI introduces the Principal Purpose Test (PPT), which can deny treaty benefits if one of the principal purposes of an arrangement was to obtain a treaty benefit. For capital gains, this means that artificial arrangements designed solely to access the credit method relief or to shift the situs of assets could be challenged. The PPT has been applicable to the India-Australia treaty from FY 2020-21.

Can Australian residents claim Section 54/54EC exemptions on Indian property sales?

Yes. Exemptions under Section 54 (reinvestment in residential property within India) and Section 54EC (investment in specified bonds like NHAI or REC within 6 months) are available to non-residents including Australian residents. The taxpayer must comply with all conditions, including investment timelines and lock-in periods.