Capital Gains Tax Between India and France Under DTAA

Capital Gains Tax Rate Between India and France

The India-France Double Taxation Avoidance Convention (DTAA), originally signed on 29 September 1992 and effective from 1 August 1994, addresses capital gains taxation under Article 14 (Capital Gains). The treaty has been significantly amended by the Amending Protocol signed on 23 February 2026, which fundamentally changes the capital gains landscape for cross-border investors between India and France.

Under the original treaty, Article 14 restricted India's right to tax capital gains on shares sold by French residents — India could only tax gains where the French investor held at least 10% participation in the Indian company. The 2026 Amending Protocol removes this threshold entirely, granting India full taxing rights on capital gains from the sale of shares of Indian companies, regardless of the size of the French investor's shareholding. This marks a major shift in policy and aligns with India's broader push to assert source-country taxation on equity disposals.

For personalised guidance on structuring investments to optimise capital gains tax exposure under the revised treaty, consult BeaconFiling's tax advisory team.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 14 of the India-France DTAA establishes differentiated rules for capital gains based on asset type. The 2026 Amending Protocol introduces critical changes:

Original Article 14 — Pre-Amendment Rules

Under the original treaty, Article 14 provided the following framework:

• Immovable property (Article 14(1)): Gains from the alienation of immovable property situated in India may be taxed in India. This includes agricultural and forestry property.
• Business property (Article 14(2)): Gains from movable property forming part of a permanent establishment in India are taxable in India.
• Shares in immovable property companies (Article 14(4)): Gains from shares whose value derives principally from immovable property situated in India may be taxed in India.
• Substantial shareholding (Article 14(5)): Gains from shares representing at least 10% participation in an Indian company may be taxed in India.
• Other property (Article 14(6)): Gains from all other property are taxable only in the alienator's state of residence (France).

2026 Amending Protocol — New Capital Gains Rules

The Amending Protocol signed on 23 February 2026 fundamentally changes Article 14(5) by removing the 10% threshold. India now has the right to tax capital gains on the sale of shares of Indian companies irrespective of the percentage of shareholding held by the French investor. This means:

Note: The rates above reflect the post-Budget 2024 amendments. French investors now face Indian domestic rates on all share disposals, without the protection of the former 10% threshold.

Who Qualifies for Relief on Capital Gains

Since the revised treaty grants India broad taxing rights on capital gains from Indian shares, the mechanism for avoiding double taxation shifts to the foreign tax credit:

French Residents: Credit Method in France

A French tax resident who pays capital gains tax in India on the sale of Indian assets can claim a credit against their French tax liability for the Indian tax paid. France applies the credit method under Article 25 of the treaty — the French investor reports the Indian income and offsets the Indian tax against the French tax due on the same income. The credit is limited to the French tax attributable to the Indian-source income.

Indian Residents: Relief Under Section 90

Indian residents who sell French assets and pay French capital gains tax can claim relief under Section 90 of the Income Tax Act. The credit method under Section 90, read with Rule 128, allows the Indian taxpayer to deduct foreign taxes paid from their Indian tax liability on the same income.

MFN Clause Removed

The 2026 Amending Protocol removes the Most-Favoured-Nation (MFN) clause from the treaty. Previously, under Protocol Clause 7, if India entered into a DTAA with another OECD member state offering lower rates on dividends, interest, royalties, or FTS, France could claim the same lower rates. This clause no longer applies, meaning the rates specified in the revised treaty are final and cannot be reduced by reference to other treaties.

Capital Gains-Specific Treaty Provisions

Immovable Property Gains (Article 14(1))

Gains derived by a French resident from the alienation of immovable property situated in India — including agricultural and forestry property as defined in Article 6 — may be taxed in India. India applies its full domestic capital gains rates to such transactions. The definition of immovable property follows the law of the state where the property is situated, giving India full discretion to define what constitutes immovable property under the Income Tax Act.

Business Property Connected to a PE (Article 14(2))

Gains from the alienation of movable property forming part of the business property of a permanent establishment which a French enterprise maintains in India, including gains from the alienation of the PE itself, may be taxed in India. These gains are typically treated as business profits under Article 7.

Ships and Aircraft (Article 14(3))

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in the state where the enterprise's place of effective management is situated.

Shares in Immovable Property Companies (Article 14(4))

Gains from the alienation of shares of a company whose property consists principally of immovable property situated in India may be taxed in India. This provision captures indirect transfers where the value of the shares derives from underlying Indian real estate.

All Shares of Indian Companies (Revised Article 14(5))

Post-amendment, gains from the alienation of shares of any Indian-resident company may be taxed in India, with no minimum shareholding threshold. This is the most significant change introduced by the 2026 Amending Protocol, removing the prior requirement that the French investor hold at least 10% of the company's capital.

Documentation Required

To ensure proper tax compliance for capital gains transactions between India and France:

Tax Residency Certificate (TRC)

A Tax Residency Certificate issued by the French tax authorities is essential to establish the investor's treaty eligibility. While the TRC does not reduce capital gains rates (as India now has full taxing rights), it is necessary for claiming the foreign tax credit in France and for compliance with Indian withholding requirements.

Form 10F

The French resident must furnish Form 10F on India's Income Tax e-filing portal, providing details such as status, nationality, Tax Identification Number (TIN), and period of residential status in France.

Form 15CA and Form 15CB

When sale proceeds are remitted from India to France, Form 15CA (declaration of remittance) and Form 15CB (CA certificate confirming tax deduction at the appropriate rate) must be filed. Form 15CB is required where the remittance exceeds INR 5 lakh.

French Tax Return

French residents must report Indian capital gains on their French income tax return and claim the credit for Indian tax paid. France uses Form 2047 (Revenus de Source Étrangère) for declaring foreign-source income and computing the foreign tax credit.

Withholding Procedure for Indian Payers

Indian entities making payments to French residents on account of capital gains must comply with TDS obligations under Section 195:

TDS on Share Transactions

Following the 2026 amendment, all capital gains from the sale of Indian shares by French residents are subject to Indian tax. TDS applies as follows:

• LTCG on listed shares: 12.5% (Section 112A)
• LTCG on unlisted shares: 12.5% (Section 112)
• STCG on listed shares: 20% (Section 111A)
• STCG on unlisted shares: Applicable slab rate

TDS on Property Transactions

For immovable property sold by French non-residents, the buyer must deduct TDS at 12.5% for LTCG or the applicable rate for STCG under Section 195.

Lower Deduction Certificate (Section 197)

If the actual tax liability is lower than the TDS rate (for example, due to cost of acquisition adjustments), the French seller can apply for a lower deduction certificate under Section 197 before the transaction.

Common Disputes and Judicial Precedents

MFN Clause Litigation

The India-France DTAA's MFN clause (Protocol Clause 7) has been the subject of extensive litigation. The Supreme Court of India, in its landmark 2023 ruling in the case of Nestle SA and Others, held that the MFN clause does not automatically apply — it requires a separate notification under Section 90 of the Income Tax Act. The 2026 Amending Protocol resolves this issue by removing the MFN clause entirely.

Indirect Transfers

India's domestic law under Section 9(1)(i) Explanation 5 asserts taxing rights over shares deriving value substantially from Indian assets. For French investors holding shares in intermediary companies (whether French, Mauritian, or others) whose value derives from Indian assets, this provision can trigger Indian capital gains tax even if the transaction occurs entirely outside India.

GAAR Implications

India's General Anti-Avoidance Rule (GAAR), effective from 1 April 2017, can override treaty benefits where arrangements are found to have been entered into primarily for obtaining a tax benefit. French investors who have historically structured their Indian investments through intermediate jurisdictions to benefit from the 10% threshold may face increased scrutiny post-amendment.

Service PE Under Revised Treaty

The 2026 Amending Protocol introduces a Service PE concept, expanding the definition of permanent establishment to include services performed by French enterprises in India beyond specified thresholds. This can impact how business profits — and related capital gains on business assets — are attributed to India.

Practical Examples and Calculations

Example 1: French Investor Selling Listed Indian Shares (LTCG)

A French resident purchased 5,000 shares of an Indian listed company at INR 200 per share (INR 10,00,000 total) on 1 February 2023. They sell the shares on 1 June 2026 at INR 500 per share (INR 25,00,000 total).

• Capital gain: INR 25,00,000 - INR 10,00,000 = INR 15,00,000
• Exempt amount: INR 1,25,000 (threshold under Section 112A)
• Taxable LTCG: INR 13,75,000
• Tax in India: 12.5% of INR 13,75,000 = INR 1,71,875
• France treatment: Gain also reportable in France; credit of INR 1,71,875 (converted to EUR) claimed against French tax on the same income

Example 2: French Investor Selling Unlisted Shares — Impact of 2026 Amendment

A French private equity fund held a 3% stake in an Indian private company, acquired for INR 2,00,00,000. The stake is sold 30 months later for INR 5,00,00,000.

• Pre-amendment: Under the old Article 14(5), India could not tax this gain because the holding was below 10%. The gain would be taxable only in France.
• Post-amendment: India has full taxing rights regardless of the 3% holding
• Capital gain: INR 3,00,00,000
• Classification: Long-term (held more than 24 months for unlisted shares)
• Tax in India: 12.5% of INR 3,00,00,000 = INR 37,50,000
• France treatment: Credit for Indian tax claimed in France

Example 3: French Company Selling Indian Property

A French company sells commercial property in Mumbai purchased in 2020 for INR 5,00,00,000, sold in 2026 for INR 8,00,00,000.

• Capital gain: INR 8,00,00,000 - INR 5,00,00,000 = INR 3,00,00,000
• Classification: Long-term (held more than 24 months)
• Tax in India: 12.5% of INR 3,00,00,000 = INR 37,50,000
• TDS deducted by buyer: 12.5% under Section 195
• France treatment: Gain reported in France; credit for Indian tax claimed

Frequently Asked Questions

Does the India-France DTAA reduce capital gains tax rates on shares?

No. Following the 2026 Amending Protocol, India has full taxing rights on capital gains from the sale of shares of Indian companies by French residents, with no treaty-imposed rate cap. India applies its domestic capital gains tax rates (12.5% LTCG, 20% STCG on listed shares). Relief from double taxation comes through the foreign tax credit mechanism in France.

What changed in the 2026 Amending Protocol regarding capital gains?

The key change is the removal of the 10% shareholding threshold from Article 14(5). Previously, India could only tax gains on shares where the French investor held at least 10% of the Indian company's capital. Now, India can tax all share disposals by French residents regardless of the size of their holding.

How does a French investor avoid double taxation on Indian capital gains?

A French investor pays capital gains tax in India at domestic rates and then claims a foreign tax credit in France. Under Article 25 (Elimination of Double Taxation), France provides a credit for the Indian tax paid against the French tax due on the same income. The credit is limited to the French tax attributable to the Indian-source capital gains.

Does the MFN clause still apply to the India-France DTAA?

No. The 2026 Amending Protocol removes the MFN clause (Protocol Clause 7) from the treaty. Previously, France could claim lower rates if India offered such rates to another OECD member state. This mechanism no longer applies, and the rates in the revised treaty are final.

What is the LTCG rate on Indian listed shares for French residents?

French residents pay 12.5% LTCG tax on gains from Indian listed equity shares held for more than 12 months, with an exemption threshold of INR 1,25,000 per financial year under Section 112A. This is the full domestic rate — the DTAA does not reduce it.

Are gains from immovable property in India taxable for French residents?

Yes. Under Article 14(1), gains from the alienation of immovable property situated in India may be taxed in India at full domestic rates. India has always had this right under the treaty, and this provision has not changed with the 2026 amendment.

Can a French investor apply for a lower TDS certificate?

Yes. Under Section 197 of the Income Tax Act, a French non-resident can apply to the Assessing Officer for a lower deduction certificate if the actual tax liability is expected to be lower than the TDS rate. This is useful where the cost of acquisition significantly reduces the taxable gain.