Capital Gains Tax Between India and Italy Under DTAA

Quick answer: Under the India-Italy DTAA (signed 19 February 1993, effective 23 November 1995), Article 14 preserves India's right to tax an Italian resident's gains on Indian assets — immovable property (Article 14(1)), assets of an Indian PE (Article 14(2)), shares of land-rich companies (Article 14(4)) and, under Article 14(5), shares of any company resident in India. The treaty sets no rate cap and contains no stock-exchange or residence-based exemption for share gains, so India taxes at full domestic rates: 12.5% LTCG on listed shares above INR 1.25 lakh, 20% STCG on listed shares, and 12.5% LTCG on unlisted shares and immovable property. Relief comes as a foreign tax credit in Italy under Article 24.

Key takeaways:

• Article 14(5) lets India tax gains on shares of any Indian-resident company — there is no stock-exchange exemption for share gains.
• Ships/aircraft gains are taxable only where the enterprise's place of effective management is situated (Article 14(3)); residual assets are residence-only (Article 14(6)).
• Listed share LTCG is 12.5% above INR 1.25 lakh; STCG is 20%.
• Immovable property and unlisted shares are taxed at 12.5% LTCG under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961).
• Italy has signed but not ratified the MLI, so the treaty is not modified by it and no Principal Purpose Test applies; India's domestic GAAR still does.

Capital Gains Tax Rate Between India and Italy

The India-Italy Double Taxation Avoidance Agreement (DTAA), signed on 19 February 1993 and entered into force on 23 November 1995, addresses capital gains taxation under Article 14 (Capital Gains) — the treaty uses shifted article numbering, so capital gains sit in Article 14 rather than the OECD Model's Article 13. Article 14 is a source-friendly provision: it preserves India's right to tax gains on Indian immovable property, on assets of an Indian permanent establishment, on shares of land-rich companies and, under Article 14(5), on shares of any company resident in India.

The India-Italy DTAA contains no rate cap on capital gains and no exemption for shares sold on a stock exchange. Italian investors therefore generally pay Indian capital gains tax at full domestic rates on Indian shares and property, with double taxation relieved through the foreign tax credit that Italy grants under Article 24.

For personalised guidance on structuring investments to optimise capital gains tax exposure, consult Beacon Filing's tax advisory team.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 14 of the India-Italy DTAA establishes a multi-tiered framework for capital gains:

Immovable Property (Article 14(1))

Gains from the alienation of immovable property situated in India may be taxed in India at full domestic rates. The definition of immovable property follows Article 6, and India has complete taxing rights over gains from Indian real estate sold by Italian residents.

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

Gains from the alienation of shares of a company whose property consists directly or indirectly principally of immovable property situated in India may be taxed in India. The "principally" test is generally understood to require that more than 50% of the company's total asset value derives from Indian immovable property, although the treaty itself does not define the term.

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

Gains from movable property forming part of the business property of a permanent establishment that an Italian enterprise has in India, including gains from the alienation of the PE itself, may be taxed in India.

Ships and Aircraft (Article 14(3))

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

Shares of Indian Companies — General Rule (Article 14(5))

Gains obtained by an Italian resident from the alienation of shares of a company resident in India may be taxed in India. This gives India the right to tax capital gains on Indian shares at domestic rates:

No Stock-Exchange or Residence Exemption for Share Gains

Article 14 contains no exemption for shares sold on a stock exchange and no residence-only rule for portfolio share gains. Article 14(5) expressly allows the State in which the company is resident to tax the gains, so India may tax an Italian resident's gains on shares of Indian companies whether they are listed or unlisted, and however the sale is executed.

Other Property (Article 14(6))

Gains from the alienation of any property other than those mentioned above are taxable only in the alienator's state of residence.

What Relief Does the Treaty Provide on Capital Gains?

Because Article 14 preserves India's taxing rights over most Indian-situs assets, the treaty's capital gains relief for Italian investors takes three forms:

Residence-Only Taxation of Residual Assets

Under Article 14(6), gains from property other than that covered by Articles 14(1) to 14(5) — for example, assets unconnected with India — are taxable only in the alienator's state of residence.

Effective-Management Rule for Ships and Aircraft

Under Article 14(3), gains on ships or aircraft operated in international traffic are taxable only where the enterprise's place of effective management is situated, regardless of where the sale occurs.

Foreign Tax Credit in Italy

Where India taxes a gain under Article 14, Italy relieves double taxation under Article 24 by crediting the Indian tax against the Italian tax on the same income, up to the Italian tax attributable to it. Italian residents must be the beneficial owners of the shares and should hold documentation establishing treaty residence; gains routed through nominee or conduit arrangements may be scrutinised by both tax administrations.

Capital Gains-Specific Treaty Provisions

No Treaty Rate Cap

Unlike dividends (Article 11, capped at 15%/25%) or interest (Article 12, capped at 15%), Article 14 does not impose a maximum tax rate on capital gains. Where India has the right to tax under Article 14, it levies its full domestic capital gains tax rates without treaty limitation.

Indirect Transfers

India's domestic law under section 9(1)(i), Explanation 5 of the Income-tax Act, 1961 -- carried into section 9 of the Income-tax Act, 2025 from 1 April 2026 -- asserts taxing rights over indirect transfers. For Italian investors selling shares of an Italian holding company whose value derives substantially from Indian assets, India may claim capital gains tax. The treaty's Article 14(4) (immovable property companies) partially addresses this, but the broader indirect transfer rules in domestic law go further.

Credit Method for Eliminating Double Taxation

Italy provides relief from double taxation through the credit method under Article 24. Italian residents who pay capital gains tax in India can claim a credit against their Italian tax liability for the Indian tax paid. The credit is limited to the Italian tax attributable to the Indian-source income.

Documentation Required

Italian investors must maintain the following documentation for capital gains transactions involving Indian assets:

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the Italian tax authorities (Agenzia delle Entrate) is essential to establish treaty eligibility. This is the foundational document for any treaty claim, including the Article 14(6) residence-only rule and foreign tax credit coordination.

Form 41 (formerly Form 10F)

The Italian resident must furnish Form 41 on India's Income Tax e-filing portal, providing details of status, nationality, Italian Codice Fiscale (tax identification number), and period of residential status.

Transaction and Cost Documentation

The Italian investor should retain purchase and sale documentation — broker contract notes, demat statements, and bank remittance records — to substantiate the cost of acquisition, the holding period, and the computation of the taxable gain.

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

When sale proceeds are remitted from India to Italy, Form 145 (declaration of remittance) and Form 146 (CA certificate) must be filed for remittances exceeding INR 5 lakh.

Withholding Procedure for Indian Payers

Indian entities making payments to Italian residents on account of capital gains must comply with TDS obligations under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), which requires deduction at the rates in force:

TDS on Share Transactions

Where the Italian seller disposes of Indian shares, TDS applies at domestic capital gains rates:

• LTCG on listed shares: 12.5% (Section 198)
• LTCG on unlisted shares: 12.5% (Section 197)
• STCG on listed shares: 20% (Section 196)
• STCG on unlisted shares: Applicable slab rate

TDS Where India Has No Taxing Right

Where the gain falls under Article 14(6) (residual property taxable only in Italy), no TDS should be deducted provided the seller furnishes a valid TRC, Form 41, and a declaration establishing that the asset is not one over which Article 14 gives India taxing rights.

TDS on Property Transactions

For immovable property sold by Italian non-residents, the buyer must deduct TDS at 12.5% for LTCG or the applicable rate for STCG under section 393(2).

Section 395 Lower Deduction Certificate

The Italian seller can apply for a lower deduction 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) -- if the actual tax liability is expected to be lower than the TDS rate.

Common Disputes and Judicial Precedents

Land-Rich Companies — the "Principally" Test

Article 14(4) does not define when a company's property consists "principally" of immovable property. Disputes arise over asset-valuation dates, whether gross or net assets are compared, and indirect holdings. Italian sellers of shares in property-heavy Indian companies should document the asset composition at the time of transfer.

No MFN Clause

The India-Italy DTAA contains no most-favoured-nation clause, so Italian residents cannot import lower rates or narrower source-taxation rules from India's treaties with other countries. The Supreme Court's 2023 ruling in Nestle SA confirmed that even an express MFN clause operates only once notified under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) — and Italy's treaty has none to begin with.

GAAR and Treaty Benefits

India's General Anti-Avoidance Rule (GAAR) can deny treaty benefits where arrangements are primarily designed to obtain tax advantages. Italian investors who interpose entities or arrangements primarily to reduce Indian tax on gains may face GAAR challenges if the arrangement lacks commercial substance.

High Royalty and FTS Rates

The India-Italy DTAA has comparatively high rates for royalties and FTS (both at 20% under Article 13). Since 1 April 2023, India's domestic rate under section 207(2) (Table, Sl. Nos. 1 and 2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) is also 20%, plus surcharge and cess. Because treaty rates apply without surcharge and cess, the treaty's 20% ceiling is now marginally better than the effective domestic rate of roughly 20.8% to 21.84%.

Practical Examples and Calculations

Example 1: Italian Investor Selling Listed Shares on BSE

An Italian resident purchases 10,000 shares of an Indian listed company on BSE at INR 150 per share (INR 15,00,000) in January 2024. The shares are sold on BSE in June 2026 at INR 350 per share (INR 35,00,000).

• Capital gain: INR 35,00,000 - INR 15,00,000 = INR 20,00,000
• Exempt amount: INR 1,25,000 (Section 198)
• Taxable LTCG: INR 18,75,000
• Tax in India: 12.5% of INR 18,75,000 = INR 2,34,375
• Italy treatment: Gain reported in Italian tax return; credit for INR 2,34,375 (converted to EUR) claimed against Italian tax

Example 2: Italian Company Selling Unlisted Shares of an Indian Subsidiary

An Italian company sells its stake in an unlisted Indian company, acquired in 2019 for INR 1,00,00,000, for INR 3,00,00,000 in 2026.

• Capital gain: INR 3,00,00,000 - INR 1,00,00,000 = INR 2,00,00,000
• Treaty treatment: Article 14(5) permits India to tax gains on shares of an Indian-resident company
• Tax in India: Long-term (held more than 24 months) — 12.5% of INR 2,00,00,000 = INR 25,00,000 (section 197, no indexation)
• Italy treatment: Gain included in Italian taxable income; credit claimed for the Indian tax under Article 24

Example 3: Italian Company Selling Indian Property

An Italian company sells commercial property in Delhi purchased in 2019 for INR 3,00,00,000, sold in 2026 for INR 5,00,00,000.

• Capital gain: INR 5,00,00,000 - INR 3,00,00,000 = INR 2,00,00,000
• Classification: Long-term (held more than 24 months)
• Tax in India: 12.5% of INR 2,00,00,000 = INR 25,00,000
• TDS deducted by buyer: 12.5% under section 393(2)
• Italy treatment: Gain reported in Italy; credit for Indian tax claimed

Frequently Asked Questions

Does the India-Italy DTAA offer any exemption from capital gains tax?

Not for Indian shares or property. Article 14 preserves India's right to tax gains on immovable property, PE assets, land-rich shares and shares of any Indian-resident company (Article 14(5)), with no rate cap and no stock-exchange exemption. Only residual assets under Article 14(6) are taxable solely in Italy; otherwise relief comes as a foreign tax credit in Italy under Article 24.

What capital gains tax rates apply to Italian investors in India?

India taxes capital gains at full domestic rates: 12.5% LTCG on listed shares (above INR 1.25 lakh threshold), 12.5% LTCG on unlisted shares, 20% STCG on listed shares, and slab rates for STCG on unlisted shares. The treaty does not cap these rates.

How does an Italian investor avoid double taxation on Indian capital gains?

Italy provides a foreign tax credit. The Italian investor reports the Indian capital gains in their Italian tax return and claims a credit for the Indian tax paid against their Italian tax liability on the same income. The credit is limited to the Italian tax attributable to the Indian-source income.

Is the India-Italy DTAA covered by the MLI?

Not yet. Both India and Italy signed the OECD Multilateral Instrument (MLI), but Italy has not deposited its instrument of ratification, so the MLI does not modify the India-Italy DTAA. The treaty continues to apply in its original form without MLI modifications such as the Principal Purpose Test.

Why are the royalty and FTS rates so high (20%) in the India-Italy DTAA?

The 20% treaty rate for royalties and FTS dates from the 1993 Convention. Since 1 April 2023, India's domestic rate under section 207(2) is also 20% plus surcharge and cess, so the treaty no longer looks like an outlier — and because treaty rates apply without surcharge and cess, the treaty's flat 20% is marginally lower than the effective domestic rate of roughly 20.8% to 21.84%.

Can an Italian investor apply for a lower TDS certificate?

Yes. Under section 395 of the Income-tax Act, 2025 (sections 195(2), 195(3) and 197 of the Income-tax Act, 1961), a non-resident can apply for a lower deduction certificate if the actual tax liability is expected to be lower than the TDS rate. This is particularly useful for property sales or share transactions where the cost of acquisition significantly reduces the taxable gain.