Capital Gains Tax Between India and Israel Under DTAA

Quick answer: Under the India-Israel DTAA (signed 29 January 1996, amended by the 2015 Protocol in force from 19 December 2016), the treaty does NOT shelter share gains from Indian tax. Article 14(5) lets India tax gains on shares of Indian companies, and Article 14(4) (substituted by the Protocol) lets India tax shares and partnership/trust interests deriving more than 50% of their value from Indian immovable property. India therefore taxes at domestic rates — LTCG on listed shares at 12.5% above INR 1.25 lakh, STCG at 20% — and relief comes as a foreign tax credit in Israel under Article 24, not as an Indian exemption. Only gains on property outside paragraphs 1 to 5 (the Article 14(6) residual) are taxable solely in Israel.

Key takeaways:

• Article 14(5) lets India tax an Israeli resident's gains on shares of Indian companies — the treaty gives no share-gains exemption.
• Article 14(4) (2015 Protocol) additionally reaches shares and partnership/trust interests deriving over 50% of their value from Indian immovable property.
• Immovable property gains in India are always taxable in India under Article 14(1).
• India's domestic rates apply: LTCG 12.5% above INR 1.25 lakh on listed shares; STCG 20%.
• Double taxation is relieved by a foreign tax credit in Israel under Article 24; only Article 14(6) residual gains are residence-only.

Capital Gains Tax Rate Between India and Israel

The India-Israel Double Taxation Avoidance Agreement (DTAA), signed on 29 January 1996 and substantially amended by the 2015 Protocol (in force from 19 December 2016, effective in India for fiscal years beginning on or after 1 April 2017), contains specific provisions governing the taxation of capital gains under Article 14. Unlike dividends, interest, royalties, and fees for technical services -- which attract a uniform 10% withholding rate -- capital gains under the India-Israel DTAA are taxed based on the nature of the underlying asset rather than a single flat rate.

The 2015 Protocol introduced the most significant change to the capital gains provisions by expanding India's right to tax gains from shares that derive their value from Indian immovable property. This amendment aligned the treaty with the OECD's BEPS recommendations and India's broader treaty policy of ensuring source-country taxation on property-rich entities.

For Israeli investors holding shares in Indian companies, the capital gains treatment depends on three critical factors: (1) whether the shares derive more than 50% of their value from Indian immovable property, (2) whether the gains relate to movable property connected with a Permanent Establishment in India, and (3) that even outside those cases, Article 14(5) still preserves India's right to tax gains on shares of Indian companies -- only non-share residual property under Article 14(6) is taxed exclusively in the country of residence.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic tax rates on capital gains depend on the type of asset and the holding period. The interaction with the treaty creates different outcomes depending on the category of capital gains:

A point Israeli investors frequently get wrong: Article 14(5) is not a residence-only clause. It provides that gains from the sale, exchange or other disposition of shares in a company resident in the other Contracting State -- even shares that fail the 50% immovable-property test of Article 14(4) -- "may also be taxed" in that other State. An Israeli resident selling shares in Infosys, TCS, or Reliance Industries is therefore taxable in India at domestic capital gains rates; the treaty's role is to guarantee a corresponding credit in Israel under Article 24, not to exempt the gain in India. Only the residual clause, Article 14(6), gives residence-only taxation, and it covers property other than that referred to in paragraphs 1 to 5 -- it does not cover shares of Indian companies.

Under India's domestic law (post the Finance Act 2024 amendments), long-term capital gains on listed securities exceeding INR 1.25 lakh are taxed at 12.5% without indexation, and short-term capital gains on listed shares are taxed at 20%. Because Article 14(5) preserves India's taxing right, these domestic rates apply to Israeli sellers; the Israeli side then credits the Indian tax under Article 24.

Who Qualifies for the Reduced Rate

The capital gains provisions under the India-Israel DTAA apply differently depending on the nature of the asset. Because Articles 14(1) to 14(5) all preserve Indian taxing rights over India-situated assets and shares of Indian companies, the practical questions for an Israeli investor are which paragraph governs the gain, what compliance India requires, and how the Israeli credit is claimed:

Tax Residency in Israel

The alienator must be a tax resident of Israel as determined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) from the Israeli Tax Authority (Rashut HaMisim) is mandatory. Israeli residency is determined based on the centre-of-life test, considering factors such as permanent home, family ties, economic connections, and habitual abode.

PE Connection

Whether the shares form part of the business property of a Permanent Establishment that the Israeli enterprise has in India determines the governing paragraph: if the shares are effectively connected with a PE, the gains fall under Article 14(2) as PE-related property; otherwise they fall under Article 14(4) or 14(5). In either case India may tax the gain.

Immovable Property Value Test (Post-2015 Protocol)

Article 14(4) applies where the shares derive more than 50% of their value, directly or indirectly, from immovable property situated in India, tested at the time of alienation or at any time during the 12 preceding months. For shares of Indian companies the outcome barely changes -- Article 14(5) lets India tax them anyway -- but Article 14(4) matters because it also reaches interests in partnerships, trusts and other entities, closing indirect-transfer structuring routes.

Beneficial Ownership and Anti-Avoidance

Following the MLI's Principal Purpose Test (PPT), treaty benefits on capital gains can be denied if one of the principal purposes of an arrangement or transaction was to obtain a treaty benefit. India's GAAR provisions under Chapter X-A of the Income Tax Act provide an additional layer of anti-avoidance scrutiny, particularly for arrangements involving interposed entities.

Capital Gains-Specific Treaty Provisions

Article 14 of the India-Israel DTAA (as amended by the 2015 Protocol) allocates taxing rights on capital gains through a layered structure:

Article 14(1): Immovable Property

Gains from the alienation of immovable property situated in India may be taxed in India. "Immovable property" has the meaning defined under Article 6 and includes property accessory to immovable property, rights to which the provisions of general law respecting landed property apply, and usufruct of immovable property.

Article 14(2): PE-Related Movable Property

Gains from the alienation of movable property forming part of the business property of a PE that an Israeli enterprise has in India may be taxed in India. This includes gains from the alienation of the PE itself (alone or with the whole enterprise). Similarly, gains from movable property pertaining to a fixed base available for independent personal services may be taxed in India.

Article 14(3): Ships and Aircraft

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, are taxable only in the Contracting State of which the enterprise is a resident. This gives exclusive taxing rights to Israel for Israeli shipping and aviation companies.

Article 14(4): Shares Deriving Value from Immovable Property (2015 Protocol Amendment)

This is the most significant post-amendment provision. Gains from the alienation of shares (or comparable interests such as partnership or trust interests) deriving more than 50% of their value directly or indirectly from immovable property situated in India may be taxed in India. The value test is applied at the time of alienation or at any time during the preceding 12 months.

This provision was inserted by the 2015 Protocol to prevent indirect transfers of Indian real estate through share transactions. It is modelled on Action 6 of the OECD BEPS project and is consistent with Article 9 of the MLI. The 2015 Protocol replaced the original 1996 formulation with this clearer 50% threshold and the 12-month look-back.

Article 14(5): Other Shares -- Source-State Taxation

Gains derived from the sale, exchange or other disposition, directly or indirectly, of shares other than those mentioned in paragraph (4), or similar rights in a company which is a resident of the other Contracting State, may also be taxed in that other State. This is the decisive provision for Israeli investors: India retains full taxing rights over gains on shares of Indian companies, listed or unlisted, whether or not they are property-rich.

Article 14(6): Residual Clause -- Other Property

Gains from the alienation of any property other than that referred to in paragraphs (1) through (5) are taxable only in the Contracting State of which the alienator is a resident. Because shares of Indian companies are already covered by paragraphs (4) and (5), this residence-only rule applies to other categories of property -- it does not shelter share gains.

Documentation Required

Israeli investors claiming capital gains exemption or reduced taxation under the India-Israel DTAA must provide comprehensive documentation:

Tax Residency Certificate (TRC)

A valid TRC from the Israeli Tax Authority (Rashut HaMisim) for the relevant financial year. The TRC is the primary document for establishing treaty eligibility under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). It must cover the period during which the capital gain was realized.

Form 41 (formerly Form 10F)

Form 41 must be filed electronically on the Indian Income Tax portal. Since 2022, electronic filing is mandatory. The form requires details including the taxpayer's status, nationality, Israeli tax identification number, period of residential status, and address in Israel.

Valuation Report (for Article 14(4) Assessment)

If there is any question about whether the shares derive more than 50% of their value from Indian immovable property, a valuation report from a registered valuer may be required to establish which paragraph of Article 14 governs the gain. The valuation should assess the fair market value of the company's assets, including immovable property, at the time of alienation and during the preceding 12 months.

Capital Gains Computation Statement

A detailed computation showing the acquisition cost, period of holding, sale consideration, and the resulting capital gain. For listed securities, exchange records and contract notes suffice. For unlisted shares, the computation must follow section 72 of the Income-tax Act, 2025 (section 48 of the Income-tax Act, 1961), including any indexation benefits where applicable.

No PE Declaration

A self-declaration confirming that the shares sold are not effectively connected with a Permanent Establishment in India. This determines whether the gain is assessed as PE business property under Article 14(2) or as a share disposal under Article 14(4)/(5).

Withholding Procedure for Indian Payers

When an Israeli resident sells shares or other assets in India, the withholding and compliance requirements depend on the nature of the transaction:

Sale of Listed Securities Through Stock Exchange

For sales of listed shares through recognized Indian stock exchanges, STT (Securities Transaction Tax) is levied at the point of sale. Because Article 14(5) preserves India's taxing right, the gain is taxed in India at the applicable rates in section 196 and section 198 of the Income-tax Act, 2025 (sections 111A and 112A of the Income-tax Act, 1961); the Israeli investor reports it in an Indian return and claims the corresponding credit in Israel under Article 24. Where tax is being deducted on the gross consideration, the Israeli seller (as the payee) can apply for a lower withholding certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) -- or, for sums 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) -- so that deduction reflects the actual computed gain.

Off-Market Sales and Unlisted Shares

For off-market transactions or sales of unlisted shares, the buyer (if an Indian resident) is required to deduct tax at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), at the rates in force. The treaty does not exempt these gains -- Article 14(5) preserves India's taxing right -- so tax is deducted on the capital gain at the applicable domestic rates. The Israeli seller should still furnish the TRC, Form 41, and the no-PE declaration.

Forms 145 and 146 (formerly Forms 15CA and 15CB)

For remittance of sale proceeds to Israel, the buyer or the authorized dealer bank requires Form 145 (online declaration) and Form 146 (Chartered Accountant certificate). The CA certificate must reference the governing DTAA article (Article 14), state the tax deducted or paid on the gain, and confirm that all documentation requirements are met.

Advance Ruling Option

For high-value transactions, Israeli investors may consider applying for an advance ruling from the Board for Advance Rulings under Section 383 of the Income-tax Act, 2025 (section 245Q of the Income-tax Act, 1961). This provides certainty on the tax treatment before the transaction is completed, which is particularly valuable for private equity exits and large block deals.

Common Disputes and Judicial Precedents

Capital gains taxation under Indian DTAAs has generated significant litigation. While there are no widely reported India-Israel specific rulings on capital gains, the principles established in other treaty contexts are directly applicable:

The Immovable Property Value Test

Disputes frequently arise over whether shares "derive more than 50% of their value" from Indian immovable property. The key contested issues include: (a) whether the test should use book value or fair market value, (b) how to treat intangible assets like goodwill and brand value in the computation, and (c) whether temporary fluctuations in property values during the 12-month look-back period can trigger the provision. Indian tax authorities tend to apply the test aggressively, while taxpayers argue for a narrow interpretation.

Indirect Transfer Provisions (Section 9)

India's domestic law under section 9(1)(i) of the Income-tax Act, 1961 (introduced in 2012 following the Vodafone case), carried into section 9 of the Income-tax Act, 2025 from 1 April 2026, deems capital gains from the transfer of shares of a foreign company to be Indian-sourced income if the shares derive substantial value from Indian assets. The interplay between this domestic provision and the treaty's Article 14 is complex. For Israeli residents the treaty offers little shelter here: Article 14(4) reaches interests deriving more than 50% of their value from Indian immovable property, and Article 14(5) covers direct and indirect disposals of shares in Indian companies, so India's taxing claim under section 9 is generally preserved rather than overridden.

PE Connection and Capital Gains

If an Israeli enterprise has a PE in India, the question of whether specific shares are "effectively connected" with that PE determines whether Article 14(2) or 14(5) applies. Indian tribunals have examined the nature of the connection -- mere ownership of shares by the same entity is generally insufficient; the shares must be functionally connected with the PE's business activities.

Treaty Shopping and Capital Gains

The 2015 Protocol's Limitation of Benefits (LOB) article and the MLI's PPT are particularly relevant in the capital gains context. Arrangements where entities are interposed solely to access treaty benefits are vulnerable to challenge. The landmark cases involving Mauritius and Singapore (Vodafone, Tiger Global) provide cautionary precedents, though the India-Israel treaty's LOB provision operates differently from those treaties.

Practical Examples and Calculations

Example 1: Israeli VC Fund Selling Listed Indian Shares

An Israeli venture capital fund holds shares in an Indian listed technology company acquired for INR 5,00,00,000. After 3 years, the fund sells the shares for INR 12,00,00,000, realizing a long-term capital gain of INR 7,00,00,000.

• Indian tax (domestic law): LTCG at 12.5% on gains exceeding INR 1.25 lakh = INR 87,34,375 (approximately USD 105,000)
• With DTAA (Article 14(5)): India's taxing right is preserved -- the same INR 87,34,375 remains payable in India
• Treaty relief: Israel credits the Indian tax against Israeli tax on the same gain under Article 24

The fund also computes Israeli capital gains tax on the gains at Israel's domestic rates, but the Indian tax of INR 87.34 lakh is credited against the Israeli liability under Article 24, so the gain is not taxed twice -- the treaty's benefit is the credit, not an Indian exemption.

Example 2: Israeli Individual Selling Unlisted Shares in an Indian Company

An Israeli angel investor holds 5% shares in an Indian unlisted startup acquired for INR 20,00,000. The startup is valued at INR 50,00,00,000, but less than 10% of its assets consist of immovable property. After 30 months, the investor sells for INR 1,50,00,000.

• Indian tax (domestic law): LTCG at 12.5% = INR 16,25,000
• With DTAA: Immovable property is under 50%, so Article 14(4) does not apply -- but Article 14(5) still lets India tax the gain: INR 16,25,000 payable in India
• Treaty relief: the Indian tax is credited against the investor's Israeli tax on the same gain under Article 24

Example 3: Israeli Company Selling Shares in an Indian Real Estate Company

An Israeli real estate investment company holds shares in an Indian company whose assets consist of 70% immovable property in India. The shares are sold for INR 25,00,00,000, resulting in LTCG of INR 10,00,00,000.

• Without DTAA: LTCG at 12.5% = INR 1,25,00,000
• With DTAA: Since immovable property exceeds 50%, Article 14(4) applies -- India retains taxing rights. LTCG at domestic rate of 12.5% = INR 1,25,00,000
• Net saving: INR 0 -- the treaty does not provide relief for property-rich companies

Whether Article 14(4) or 14(5) applies, the Indian tax outcome for shares of Indian companies is the same -- the 50% test introduced by the 2015 Protocol chiefly matters for partnership and trust interests and other indirect holdings it brought within India's reach.

Frequently Asked Questions

Are capital gains from selling Indian listed shares exempt from Indian tax for Israeli residents?

No. Under Article 14(5) of the India-Israel DTAA, gains from the disposal of shares in an Indian company may also be taxed in India, whether or not the company is property-rich. Israeli residents pay Indian capital gains tax at domestic rates (sections 196 and 198 for listed shares) and claim a credit for that tax in Israel under Article 24.

What changed in the 2015 Protocol regarding capital gains?

The 2015 Protocol amended Article 14 to allow India to tax capital gains on shares that derive more than 50% of their value from Indian immovable property, at the time of alienation or during the preceding 12 months. It also extended this provision to interests in partnerships, trusts, and other entities, closing a structuring loophole.

How is the 50% immovable property test applied?

The test examines whether the shares being sold derive more than 50% of their value, directly or indirectly, from immovable property situated in India. The assessment is made at the time of the share sale or at any point during the 12 months preceding the sale. If the threshold is exceeded at any point during this period, India retains the right to tax the capital gain.

Do Israeli investors need to file an Indian tax return for capital gains?

Yes. Because Article 14(5) preserves India's taxing right, taxable capital gains must be reported in an Indian return (ITR-2 or ITR-3). Filing also documents the tax paid in India, which supports the foreign tax credit claim in Israel under Article 24. This is particularly important for off-market transactions where the buyer has deducted tax at source.

What documents does an Israeli investor need for treaty compliance on capital gains?

A valid Tax Residency Certificate from the Israeli Tax Authority, Form 41 filed electronically on the Indian portal, a no-PE declaration, the capital gains computation statement, and (for Article 14(4) assessment) a valuation report establishing whether the shares derive more than 50% of their value from Indian immovable property.

Does the MLI Principal Purpose Test affect capital gains treaty benefits?

Yes. The MLI's PPT, applicable to the India-Israel treaty from October 2019, allows Indian tax authorities to deny treaty benefits if one of the principal purposes of the transaction or arrangement was to obtain them. Genuine commercial transactions with bona fide business purposes are protected, but back-to-back arrangements designed purely for treaty access are vulnerable.

Does it matter whether shares sold by an Israeli enterprise are connected with its Indian PE?

Yes, for how the gain is characterised. If the shares form part of the business property of a Permanent Establishment that the Israeli enterprise maintains in India, the capital gains are taxable in India under Article 14(2) as PE property; otherwise they fall under Article 14(4) or 14(5). Either way India may tax the gain -- the treaty does not provide a share-gains exemption.