Capital Gains Tax Between India and Indonesia Under DTAA

Quick answer: Article 13 of the India-Indonesia DTAA does not set one capital gains rate — it allocates taxing rights by asset type. India can tax gains on Indian immovable property and, under Article 13(5), gains on shares of any Indian-resident company at any shareholding level, with no minimum threshold or holding-period look-back. Gains from ships or aircraft are taxable only where the operating enterprise's place of effective management is situated, and most other gains are taxable only in the seller's residence state. India applies its domestic rates — long-term gains at 12.5% under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), and short-term gains on listed shares at 20% under section 196 (section 111A of the 1961 Act) — with Indonesia providing relief for tax paid in India.

Key takeaways:

• Article 13 allocates taxing rights by asset type rather than fixing a single rate
• India can tax gains on Indian company shares at any shareholding level (Article 13(5))
• Ships/aircraft gains taxed only where the enterprise's place of effective management sits (Article 13(3))
• Residual gains — including most intangibles — taxed only in the seller's residence state (Article 13(6))
• India's domestic listed-share LTCG is 12.5% above INR 1.25 lakh (section 198); STCG on listed shares is 20% (section 196)

Capital Gains Tax Between India and Indonesia

The India-Indonesia DTAA, signed 27 July 2012 and in force from 5 February 2016, addresses capital gains under Article 13. Unlike dividends, interest and royalties, where the treaty sets a single withholding-rate ceiling, Article 13 instead allocates the right to tax between the two states according to the type of asset sold — and lets each state apply its own domestic rate once it has that right.

This structure matters most for Indonesian investors selling shares of Indian companies, and Indian investors disposing of Indonesian assets. India and Indonesia are significant investment partners across manufacturing, commodities, IT and infrastructure, and share sales — whether through private M&A, joint-venture exits, or portfolio disposals — are a routine part of that relationship. The treaty replaced the earlier 1987 India-Indonesia agreement and applied its provisions in India from fiscal years beginning on or after 1 April 2017.

For structuring guidance on cross-border transactions, see Beacon Filing's tax advisory services and our India-Indonesia DTAA complete guide and withholding tax rates page.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13 does not prescribe a withholding percentage; it determines which country may tax, and that country's ordinary domestic rate then applies.

Immovable Property — Article 13(1)

Gains from the alienation of immovable property situated in India by an Indonesian resident may be taxed in India, where the property sits. India's domestic rates apply: long-term gains (property held over 24 months) at 12.5% under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), or the applicable slab or corporate rate for short-term gains. This section 197 is the long-term capital gains charging provision and is a different provision from the lower-deduction certificate, which carried the number 197 under the 1961 Act and now sits at section 395(1) of the 2025 Act.

PE Movable Property — Article 13(2)

Gains from movable property forming part of the business property of a permanent establishment that an Indonesian enterprise maintains in India — including gains from alienating the PE itself — may be taxed in India, generally at the 35% foreign-company corporate rate (FY 2024-25 onward, Finance (No. 2) Act 2024).

Ships and Aircraft — Article 13(3)

Gains from the alienation of ships or aircraft operated in international traffic "shall be taxable only in that Contracting State in which the place of effective management" of the operating enterprise is situated — a genuine place-of-effective-management rule, not simply the state of residence, providing certainty for shipping and aviation operators.

Shares Deriving Value from Immovable Property — Article 13(4)

Gains from shares deriving more than 50% of their value, directly or indirectly, from immovable property situated in a Contracting State may be taxed in that state — an anti-avoidance rule preventing indirect transfers of real estate through a corporate wrapper.

Other Shares — Article 13(5)

This is the most commercially significant provision for portfolio and strategic investors. Gains from shares other than the property-rich shares in paragraph 4, in a company resident in a Contracting State, may be taxed in that state — with no minimum shareholding threshold and no holding-period look-back. India can therefore tax an Indonesian resident's gain on selling shares of any Indian company, whether the stake is 1% or 100%, and however long it was held.

Residual Clause — Article 13(6)

Gains from any property not covered by paragraphs 1 to 5 are taxable only in the Contracting State of which the alienator is a resident — an exclusive residence-state right covering, for example, intellectual property, goodwill, or partnership interests.

Who Qualifies for Treaty Protection on Capital Gains

Tax Residency

Treaty protection under Article 13(6) and the domestic-rate application under the other paragraphs both require the seller to be a genuine tax resident of Indonesia under Article 4, evidenced by a Certificate of Domicile from the DJP.

Beneficial Ownership and the MLI Principal Purpose Test

Article 13 does not itself use beneficial-ownership language, but substance still matters: the India-Indonesia DTAA is a Covered Tax Agreement under the Multilateral Instrument, and the Principal Purpose Test applies to arrangements resulting in a treaty benefit — including the Article 13(6) residual-clause protection — from 1 April 2021 (India-source) and 1 January 2021 (Indonesia-source). A share sale routed through an Indonesian holding entity with no independent function, set up mainly to access residual-clause protection instead of India's taxing right under Article 13(5), risks denial of the benefit under the PPT.

India's Domestic Law Override

Section 9 of the Income-tax Act, 2025 deems income from the transfer of a capital asset situated in India to accrue in India (transfer limb at section 9(2)(d); corresponds to section 9(1)(i) of the Income-tax Act, 1961), which covers an Indonesian seller's gain on shares of an Indian company. Section 9(10) goes further: shares of a company incorporated outside India are deemed situated in India where they derive their value substantially from Indian assets, tested as Indian assets worth more than INR 10 crore and at least 50% of the company's total assets. India's indirect-transfer rule can therefore reach a sale of a third-country holding company and limit the residual-clause protection where the entity sold is neither Indian nor Indonesian.

Documentation Required for Capital Gains Treaty Claims

Certificate of Domicile

A Certificate of Domicile from the DJP confirming Indonesian tax residency for the relevant year, required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Form 41 filed electronically where the Certificate of Domicile lacks prescribed particulars.

Self-Declaration and Transaction Documents

A self-declaration of beneficial ownership and, where relevant, the absence of an Indian PE to which the asset is attributable, along with the share purchase agreement and valuation supporting the gain computation.

Forms 145 and 146 for Remittances

When the Indian buyer remits sale proceeds to Indonesia, Form 145 must be filed electronically, with Form 146 (Chartered Accountant certified) required for remittances exceeding INR 5 lakh.

Withholding Procedure for Indian Payers

TDS on Share Transfers

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian buyer of shares from an Indonesian non-resident must deduct tax at source on the capital gains component at the rates in force, since Article 13 allocates the taxing right rather than fixing a specific rate.

Section 395: Lower Withholding Certificate

The Indonesian seller can apply for a certificate specifying a lower withholding rate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) — or, for amounts covered by section 393(2), under section 395(2) of the Income-tax Act, 2025 (section 195(2) and (3) of the Income-tax Act, 1961) — particularly useful where the actual gain is small relative to the sale consideration.

Advance Ruling

For complex transactions, an Indonesian seller can seek an advance ruling from the Board for Advance Rulings under section 380 of the Income-tax Act, 2025 (section 245N of the Income-tax Act, 1961) for certainty before completing the sale.

Compliance Notes and Common Issues

No Threshold on Share Gains

Because Article 13(5) applies with no minimum shareholding and no holding-period condition, Indonesian sellers sometimes wrongly assume a portfolio stake or a short holding period falls outside India's taxing right — it does not. India's own domestic holding-period rules (12 months for listed shares, 24 months for unlisted shares) determine whether the gain is long-term or short-term, not the treaty.

Genuine Place-of-Effective-Management Rule for Ships and Aircraft

Article 13(3) ties taxing rights to the enterprise's place of effective management, not simply its state of residence — these can differ in principle, so shipping and airline groups should confirm where effective management genuinely sits rather than assuming it matches the state of incorporation.

Indirect Transfers and the Residual Clause

Article 13(6) protects gains on shares of a third-country company from Indian tax, but India's indirect-transfer rules — carried forward from the provisions introduced after the Vodafone case, and tested again in the Cairn Energy arbitration — can still tax such gains where the foreign company derives substantial value from Indian assets, and India's domestic GAAR can override treaty protection where the structure lacks commercial substance. Indonesian groups holding Indian assets through a third-country intermediate company should map this exposure before assuming Article 13(6) is a complete answer.

Practical Examples and Calculations

Example 1: Sale of an Unlisted Indian Subsidiary

An Indonesian holding company sells its 60% stake in an unlisted Indian manufacturing company for INR 12 crore, against an original cost of INR 5 crore, held for four years.

• Gain: INR 7 crore, long-term (held over 24 months for unlisted shares).
• India's right to tax: Yes, under Article 13(5) — no shareholding threshold applies.
• Indian tax: 12.5% LTCG under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961) = INR 87.5 lakh (plus applicable surcharge and cess).
• Relief: Indonesia allows a credit for the Indian tax paid.

Example 2: Small Portfolio Stake in a Listed Company

An Indonesian individual investor sells listed shares worth INR 40 lakh in an Indian company, with an original cost of INR 25 lakh, held for 18 months.

• Gain: INR 15 lakh, long-term (over 12 months for listed shares).
• India's right to tax: Yes, under Article 13(5), regardless of the small stake size.
• Indian tax: 12.5% LTCG on gains above INR 1.25 lakh under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961) = approximately INR 1.72 lakh.

Example 3: Sale of Ships in International Traffic

An Indonesian shipping enterprise, whose place of effective management is in Jakarta, sells a vessel operated in international traffic that regularly calls at Indian ports. Under Article 13(3), the gain is taxable only in Indonesia — where the enterprise's place of effective management is situated — and not in India, regardless of the vessel's trading pattern.

Frequently Asked Questions

How are capital gains taxed under the India-Indonesia DTAA?

Article 13 allocates taxing rights by asset type rather than fixing one rate. India can tax gains from Indian immovable property and from shares of an Indian-resident company at domestic rates; gains from most other property are taxed only in the seller's residence state.

Can India tax an Indonesian resident on gains from selling Indian company shares?

Yes. Under Article 13(5), gains from shares of a company resident in India may be taxed in India, at any shareholding level — there is no minimum threshold or holding-period look-back. India applies its domestic capital gains rates, and Indonesia provides a credit for the Indian tax paid.

How are gains on ships and aircraft taxed?

Under Article 13(3), gains from the alienation of ships or aircraft operated in international traffic are taxable only in the Contracting State where the operating enterprise's place of effective management is situated — not automatically the state of residence, and not shared between both states.

What are India's domestic capital gains rates for non-residents?

For shares, India taxes long-term gains on listed shares at 12.5% above INR 1.25 lakh under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961), short-term gains on listed shares at 20% under section 196 (section 111A of the 1961 Act), and long-term gains on unlisted shares at 12.5% without indexation under section 197 (section 112 of the 1961 Act). Immovable property gains follow the same long-term and short-term structure.

Does the residual clause protect all other property from Indian tax?

Article 13(6) gives the seller's residence state exclusive taxing rights over gains not covered by paragraphs 1 to 5, such as intellectual property or partnership interests. India's domestic indirect-transfer provisions and GAAR can still apply where a foreign structure derives its value mainly from Indian assets.

Does the MLI affect capital gains taxation under this treaty?

Yes, indirectly. The India-Indonesia DTAA is a Covered Tax Agreement, so the MLI Principal Purpose Test can deny Article 13 protection — including the residual clause — to a structure set up mainly to avoid Indian tax on a share sale, alongside India's domestic GAAR.