Capital Gains Tax Between India and Hong Kong Under DTAA

Capital Gains Tax Rate Between India and Hong Kong

The India-Hong Kong Double Taxation Avoidance Agreement (DTAA), signed on March 19, 2018, and effective from November 30, 2018, contains one of the most comprehensive capital gains articles in India's modern treaty network. Article 14 of the treaty governs the taxation of capital gains between the two jurisdictions, with provisions spanning seven paragraphs that address immovable property, movable business assets, ships and aircraft, shares in property-rich companies, shares in other companies, residual gains, and a powerful anti-avoidance clause.

What makes the India-Hong Kong capital gains corridor particularly significant is Hong Kong's domestic tax regime — Hong Kong does not levy capital gains tax on private investors under its territorial taxation system. This creates a uniquely favourable position for Hong Kong residents disposing of Indian assets, as the only capital gains tax applicable is India's domestic rate, potentially reduced by the DTAA provisions. However, the treaty notably preserves India's right to tax capital gains on shares of Indian companies, making a thorough understanding of Article 14 essential for cross-border investors.

The treaty is a modern, post-BEPS instrument that incorporates anti-avoidance measures directly within the capital gains article. Unlike many of India's older DTAAs, the India-Hong Kong treaty was designed from the outset to align with OECD/BEPS recommendations, including the Principal Purpose Test (PPT) under the Multilateral Instrument (MLI), which both India and Hong Kong have signed.

Treaty Rate vs Domestic Rate: Detailed Comparison

The capital gains provisions under Article 14 do not prescribe specific withholding rates in the manner that dividend or interest articles do. Instead, they allocate taxing rights between India and Hong Kong for different categories of capital gains.

India's Domestic Capital Gains Tax Rates

Under India's Income Tax Act, 1961, capital gains tax rates for non-residents are:

• Short-term capital gains (listed securities): 20% under Section 111A for transfers on or after 23 July 2024 (holding period less than 12 months); 15% for transfers before that date
• Long-term capital gains (listed securities): 12.5% under Section 112A on gains exceeding INR 1.25 lakh for transfers on or after 23 July 2024, without indexation (Budget 2024); 10% on gains exceeding INR 1 lakh applied to transfers before 23 July 2024
• Short-term capital gains (unlisted shares): Slab rates for non-residents (up to 30% plus surcharge and cess)
• Long-term capital gains (unlisted shares): 12.5% without indexation under Section 112 for transfers on or after 23 July 2024 (Budget 2024 rationalised the rate; the earlier 10%/20%-with-indexation regime applied to transfers before that date)
• Immovable property: 12.5% without indexation for long-term transfers on or after 23 July 2024 (with a limited grandfathering option for resident individuals/HUFs to use 20% with indexation for property acquired before 23 July 2024); slab rates for short-term gains

Hong Kong's Capital Gains Position

Hong Kong does not impose capital gains tax on private investors. Gains from the disposal of capital assets are generally exempt from profits tax. However, gains from asset disposals that are trading in nature may be classified as trading profits and subject to Hong Kong profits tax at 16.5% for corporations or 15% for unincorporated businesses. A safe harbour rule provides that equity disposals where at least 15% of the total equity interest was held continuously for 24 months or more are deemed non-taxable capital gains.

Treaty Allocation Summary

Who Qualifies for Treaty Protection

To benefit from the capital gains provisions of the India-Hong Kong DTAA, the following requirements must be satisfied:

Tax Residency in Hong Kong

The person claiming treaty benefits must be a tax resident of Hong Kong. A company is resident if incorporated in Hong Kong or if its central management and control is exercised there. An individual is resident if they ordinarily reside in Hong Kong. The protocol to the DTAA clarifies the meaning of "ordinarily resides" and "right of abode" under Hong Kong law. A valid Tax Residency Certificate (TRC) from the Hong Kong Inland Revenue Department (IRD) is mandatory.

Beneficial Ownership and Substance

While the capital gains article does not contain a separate "beneficial ownership" requirement (unlike Articles 10-12), the anti-avoidance provision in Article 14(7) effectively requires that the transaction has genuine economic substance. Shell companies incorporated in Hong Kong solely to access treaty benefits on Indian capital gains will be denied protection under the anti-avoidance clause.

Principal Purpose Test (PPT)

Both India and Hong Kong have signed the MLI, and the PPT applies as an overarching anti-avoidance measure. Treaty benefits under Article 14 will be denied if obtaining the benefit was one of the principal purposes of the arrangement or transaction leading to the capital gain.

GAAR Compliance

India's domestic General Anti-Avoidance Rules (GAAR) under Sections 95-102 of the Income Tax Act apply as an additional layer. Arrangements that are classified as impermissible avoidance arrangements can have their treaty benefits denied, regardless of the DTAA provisions.

Capital Gains-Specific Treaty Provisions

Article 14(1): Immovable Property

Gains from the alienation of immovable property situated in India may be taxed in India. This includes agricultural land, buildings, and any rights or interests in land or buildings. The definition of immovable property follows the law of the country where the property is situated (Indian law for property in India). This is a standard provision found in virtually all DTAAs and preserves India's full right to tax capital gains on Indian real estate.

Article 14(2): Movable Property of a Permanent Establishment

Gains from the alienation of movable property forming part of the business assets of a permanent establishment in India may be taxed in India. This includes gains on the alienation of the PE itself (whether alone or with the whole enterprise). This provision ensures that business assets connected to an Indian PE remain within India's taxing jurisdiction.

Article 14(3): Ships and Aircraft

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in the contracting party of residence of the alienator. This is an exclusive allocation — India cannot tax Hong Kong shipping or airline companies on gains from disposing of their international fleet.

Article 14(4): Property-Rich Companies

Gains derived by a Hong Kong resident from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in India may be taxed in India. This is the "property-rich company" provision, designed to prevent indirect transfers of Indian real estate through share sales. The 50% threshold is calculated based on the total asset value of the company at the time of alienation.

Article 14(5): Shares of Indian Companies

This is the most significant provision for cross-border investors. Capital gains arising from the sale of shares of an Indian company are chargeable to tax in India. Unlike the India-Mauritius or India-Singapore DTAAs (pre-2017 amendment), the India-Hong Kong treaty has never provided a capital gains exemption on shares of Indian companies. India retains full taxing rights on all share disposals, and the applicable rate is India's domestic capital gains tax rate.

Article 14(6): Residual Clause

Gains from the alienation of any other property not covered by paragraphs 1-5 may be taxed in each contracting party in accordance with its domestic law. This is a dual-taxing-rights provision, meaning both India and Hong Kong can tax such gains, with double taxation relief provided through the credit method under Article 25.

Article 14(7): Anti-Avoidance

The benefits of Article 14 are denied entirely if the main purpose or one of the main purposes of any person concerned with the alienation is to take advantage of the capital gains article by means of that alienation. This is a broad, purpose-based anti-avoidance test that goes beyond the standard PPT, as it is embedded directly within the capital gains article rather than being an overarching treaty provision.

Documentation Required

Hong Kong residents subject to Indian capital gains tax must ensure proper documentation to claim any treaty benefits and comply with Indian tax obligations:

Tax Residency Certificate (TRC)

A Certificate of Resident Status from the Hong Kong Inland Revenue Department (IRD) is mandatory under Section 90(4) of the Indian Income Tax Act. The TRC must cover the relevant assessment year during which the capital gain arises.

Form 10F

The Hong Kong resident must file Form 10F electronically on India's Income Tax e-filing portal, declaring status, nationality, tax identification number, period of residential status, and Hong Kong address.

Permanent Account Number (PAN)

A Hong Kong resident earning capital gains in India must obtain a PAN (Permanent Account Number) from the Indian tax authorities. This is required for filing Indian tax returns and claiming treaty benefits.

Indian Tax Return Filing

Capital gains earned in India are reportable in the Indian income tax return (ITR-2 or ITR-3 for non-residents). The return must be filed by the due date (typically July 31 of the assessment year) to claim treaty benefits and any applicable exemptions.

Withholding Procedure for Indian Payers

When an Indian resident purchases shares or property from a Hong Kong resident, withholding obligations apply under Section 195 of the Income Tax Act:

TDS on Share Transfers

The buyer must deduct TDS on capital gains at the applicable domestic rate. Following Budget 2024 (effective 23 July 2024), long-term capital gains on listed shares are taxed at 12.5% on gains exceeding INR 1.25 lakh under Section 112A; long-term gains on unlisted shares are taxed at 12.5% without indexation under Section 112. Transfers before 23 July 2024 attract the earlier 10%/20% (with indexation) regime. The buyer must verify the seller's treaty eligibility before applying any treaty provisions. In practice, most share transfers are subject to India's full domestic rates since the treaty preserves India's taxing rights under Article 14(5).

Form 15CA and Form 15CB

For remittance of sale proceeds to Hong Kong:

• Form 15CB: A Chartered Accountant certifies the nature of remittance, applicable tax provisions, and TDS deducted via Form 15CB
• Form 15CA Part C: The remitter files Form 15CA online, referencing the 15CB acknowledgement number
• For remittances up to INR 5 lakh: Only Form 15CA Part A is required

Section 195 Compliance

The payer (buyer) must deduct and deposit TDS by the 7th of the following month and file quarterly TDS returns in Form 27Q. Failure to deduct TDS makes the payer liable under Section 201 as an assessee-in-default, with interest at 1% per month for non-deduction and 1.5% per month for non-payment after deduction.

Common Disputes and Judicial Precedents

Indirect Transfer Provisions

Following the Vodafone case and the introduction of Section 9(1)(i) Explanation 5 in 2012, India taxes indirect transfers — gains arising from the transfer of a share or interest in a foreign company if such share or interest derives its value substantially from assets located in India. The India-Hong Kong DTAA's Article 14(4) (property-rich companies) and Article 14(5) (shares of Indian companies) align with this domestic provision, ensuring that indirect transfers are taxable in India under both domestic law and the treaty.

Characterisation Disputes

A recurring issue is whether gains from the disposal of shares should be classified as capital gains (Article 14) or business profits (Article 7). If a Hong Kong entity is engaged in frequent trading of Indian securities, the gains may be recharacterised as business profits. If the entity has a PE in India, the profits are taxable in India under Article 7. If it does not have a PE, business profits are taxable only in Hong Kong. This characterisation can significantly affect the tax outcome.

Anti-Avoidance Enforcement

The Article 14(7) anti-avoidance clause has been particularly relevant for transactions involving Hong Kong special purpose vehicles (SPVs). Indian tax authorities have scrutinised cases where Hong Kong entities were interposed in share transfer chains primarily to claim treaty benefits. The burden of proof under Article 14(7) rests on the tax authorities, but the taxpayer must demonstrate genuine commercial purpose.

Double Taxation Relief

Since the treaty preserves India's right to tax most capital gains, Hong Kong residents may face double taxation only if Hong Kong also taxes the gain (which is rare given Hong Kong's no-CGT regime). Under Article 25, Hong Kong provides relief through the credit method — taxes paid in India are credited against Hong Kong tax liability. In practice, since Hong Kong generally does not tax capital gains, the Indian tax becomes the final tax on the transaction.

Practical Examples and Calculations

Example 1: Hong Kong Investor Selling Listed Indian Shares (Long-Term, post-Budget 2024)

A Hong Kong resident individual holds shares in an Indian listed company for 18 months and sells them after 23 July 2024 for a gain of INR 50,00,000.

• Classification: Long-term capital gain (holding period exceeds 12 months for listed shares)
• Applicable rate: 12.5% under Section 112A on gains exceeding INR 1,25,000 (Budget 2024)
• Tax calculation: 12.5% of INR 48,75,000 = INR 6,09,375 (plus surcharge and cess)
• Treaty impact: Article 14(5) preserves India's right to tax — no reduction available under DTAA
• Hong Kong tax: NIL (Hong Kong does not levy capital gains tax)
• Effective total tax: INR 6,09,375 (plus surcharge/cess) — India only

Example 2: Hong Kong Company Selling Unlisted Indian Subsidiary Shares

A Hong Kong holding company sells its 100% stake in an unlisted Indian subsidiary for a gain of INR 10,00,00,000 (INR 10 crore). Shares held for 30 months.

• Classification: Long-term capital gain (holding period exceeds 24 months for unlisted shares)
• Applicable rate: 12.5% without indexation under Section 112 (post-23 July 2024 Budget 2024 regime; transfers before that date attracted 10% without indexation)
• Tax calculation: 12.5% of INR 10,00,00,000 = INR 1,25,00,000 (plus surcharge and cess)
• Treaty impact: Article 14(5) — India retains full taxing rights on shares of Indian companies
• Hong Kong tax: NIL (no capital gains tax in Hong Kong)
• Effective total tax: INR 1,00,00,000 (plus surcharge/cess)

Example 3: Property-Rich Company Transfer

A Hong Kong entity holds shares in an Indian company whose assets are 70% immovable property in India. The Hong Kong entity sells these shares for a gain of INR 5,00,00,000.

• Article 14(4) applies: Since more than 50% of the company's value derives from Indian immovable property
• India's taxing right: Fully preserved — taxable at India's domestic capital gains rates
• If Article 14(4) did not apply: Article 14(5) would still preserve India's taxing rights on shares of an Indian company

Example 4: Transaction Denied Under Anti-Avoidance

A multinational routes a share transfer through a Hong Kong SPV incorporated days before the transaction, with no employees, office, or business activity in Hong Kong. The Indian tax authorities invoke Article 14(7) on the grounds that the main purpose of the arrangement was to access treaty benefits. The treaty benefits are denied, and India's domestic tax rates apply in full. Additionally, penalties under GAAR (Sections 95-102) may be imposed.

For the related dividend provisions, see dividend tax rate between India and Hong Kong, and for interest rates, see interest tax rate India-Hong Kong. For a comprehensive rate summary across all income types, visit our India to Hong Kong withholding tax rates page. The complete treaty analysis is available at India-Hong Kong DTAA complete guide. Businesses exploring Hong Kong-India structuring should consult our tax advisory services, transfer pricing advisory, and FEMA compliance support. See also how to register a company in India from Hong Kong and our DTAA benefits for Hong Kong companies guide.

Frequently Asked Questions

Does the India-Hong Kong DTAA exempt capital gains on shares?

No. Unlike older Indian treaties with Mauritius and Singapore (pre-2017), the India-Hong Kong DTAA preserves India's full right to tax capital gains on shares of Indian companies under Article 14(5). There is no capital gains exemption or reduced rate under this treaty.

Does Hong Kong tax capital gains received from India?

Generally no. Hong Kong does not levy capital gains tax on private investors. Gains from disposing of Indian shares or property by a Hong Kong resident are typically subject only to Indian capital gains tax, resulting in single taxation in India.

What is the anti-avoidance clause in Article 14(7)?

Article 14(7) denies treaty benefits if the main purpose or one of the main purposes of any person involved in the alienation is to exploit the capital gains article. This targets treaty shopping through Hong Kong SPVs and requires genuine commercial substance for all transactions.

How are indirect transfers of Indian shares taxed?

India taxes indirect transfers under Section 9(1)(i) Explanation 5, covering gains from transferring shares in a foreign entity if the value derives substantially from Indian assets. Article 14(4) of the DTAA aligns with this by allowing India to tax gains on shares deriving 50%+ value from Indian immovable property.

What documentation does a Hong Kong resident need for Indian capital gains?

A Tax Residency Certificate from the Hong Kong IRD, Form 10F filed electronically, a PAN (Permanent Account Number), and an Indian tax return (ITR-2 or ITR-3). The buyer must file Form 15CA/15CB for remitting sale proceeds to Hong Kong.

Can capital gains be reclassified as business profits?

Yes. If a Hong Kong entity is engaged in frequent share trading, Indian tax authorities may reclassify gains as business profits under Article 7. If the entity has no PE in India, business profits would be taxable only in Hong Kong, potentially resulting in zero tax. However, this requires demonstrating a genuine trading business, not just a tax-motivated classification.

What happens if GAAR is invoked on a capital gains transaction?

India's GAAR under Sections 95-102 can override treaty benefits for impermissible avoidance arrangements. If GAAR applies, the transaction is recharacterised or denied treaty benefits, and full domestic tax rates apply. Penalties and interest may also be levied. GAAR targets arrangements lacking commercial substance, not genuine investment transactions.