Capital Gains Tax Rate Between India and Italy
The India-Italy Double Taxation Avoidance Agreement (DTAA), signed on 23 September 1995 and effective from 25 April 1996, addresses capital gains taxation under Article 14 (Capital Gains). The India-Italy treaty contains a distinctive provision that sets it apart from many of India's other DTAAs: a stock exchange exemption that can exempt capital gains from Indian tax when shares are sold on an approved stock exchange in the alienator's country of residence.
Article 14 grants each contracting state the right to tax capital gains from shares of companies resident in that state. However, the stock exchange provision creates an important exception — gains from the alienation of shares on a stock exchange approved by the competent authority in the alienator's state of residence are taxable only in that state. This makes the India-Italy DTAA one of the more favourable treaties in India's network for Italian portfolio investors who trade Indian shares through approved Italian exchanges.
For personalised guidance on structuring investments to optimise capital gains tax exposure, consult BeaconFiling'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(2))
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 means that more than 50% of the company's total asset value must derive from Indian immovable property.
Business Property Connected to a PE (Article 14(3))
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.
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:
| Asset Type | Holding Period for LTCG | STCG Rate | LTCG Rate |
|---|---|---|---|
| Listed equity shares (Indian) | 12 months | 20% (Section 111A) | 12.5% above INR 1.25 lakh (Section 112A) |
| Unlisted shares | 24 months | Slab rate (non-resident: 30%+) | 12.5% (Section 112) |
| Immovable property | 24 months | Slab rate | 12.5% (Section 112) |
| Debt mutual funds | 24 months | Slab rate | 12.5% (Section 112) |
Stock Exchange Exemption (Article 14(5) Proviso)
However, gains from the alienation of shares are taxable only in the alienator's state of residence (Italy) if the alienation takes place on a stock exchange approved by the competent authority of that state. This means Italian investors who sell Indian shares through an approved Italian stock exchange may be exempt from Indian capital gains tax. In practice, this provision is relevant where Indian shares are dual-listed or where Italian depositary receipts trade on Italian exchanges.
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.
Who Qualifies for the Stock Exchange Exemption
The stock exchange exemption under Article 14(5) is the most valuable capital gains benefit in the India-Italy DTAA. To qualify:
Approved Stock Exchange Requirement
The alienation must take place on a stock exchange that is "approved by the competent authority" of Italy. In Italy, the competent authority is the Ministry of Economy and Finance (Ministero dell'Economia e delle Finanze). The primary approved exchange is Borsa Italiana (now part of Euronext). Italian investors trading through Borsa Italiana or other approved exchanges can claim this exemption.
Practical Limitations
In practice, this exemption has limited applicability for most Italian investors because:
- Most Indian shares are not dual-listed on Italian exchanges
- Indian listed shares are typically traded on NSE or BSE, which are Indian exchanges — not Italian approved exchanges
- The exemption applies only where the actual transaction occurs on the Italian exchange
For Italian investors trading Indian shares directly on NSE or BSE (through FPI routes), India retains the right to tax the capital gains at domestic rates. The stock exchange exemption primarily benefits cases involving depositary receipts or dual-listed securities.
Beneficial Ownership
The Italian investor must be the beneficial owner of the shares. Where shares are held through nominee arrangements, trusts, or intermediary entities, the Indian tax authorities may challenge the beneficial ownership and deny the stock exchange exemption.
Capital Gains-Specific Treaty Provisions
No Treaty Rate Cap
Unlike dividends (Article 10, capped at 15%/25%) or interest (Article 11, capped at 15%), Article 14 does not impose a maximum tax rate on capital gains. Where India has the right to tax (i.e., the stock exchange exemption does not apply), 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 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(2) (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. 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 particularly important for claiming the stock exchange exemption.
Form 10F
The Italian resident must furnish Form 10F on India's Income Tax e-filing portal, providing details of status, nationality, Italian Codice Fiscale (tax identification number), and period of residential status.
Evidence of Stock Exchange Transaction
To claim the stock exchange exemption, the Italian investor must provide documentation proving that the alienation occurred on an approved Italian stock exchange, including trade confirmations, exchange transaction records, and broker statements.
Form 15CA and Form 15CB
When sale proceeds are remitted from India to Italy, Form 15CA (declaration of remittance) and Form 15CB (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 195:
TDS on Share Transactions — Standard Case
Where the Italian seller trades Indian shares directly on Indian exchanges (NSE/BSE), TDS applies at domestic capital gains rates:
- 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 Share Transactions — Stock Exchange Exemption
Where the Italian seller claims the stock exchange exemption, no TDS should be deducted provided the seller furnishes a valid TRC, Form 10F, and evidence of the transaction on an approved Italian exchange.
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 195.
Section 197 Lower Deduction Certificate
The Italian seller can apply for a lower deduction certificate under Section 197 if the actual tax liability is expected to be lower than the TDS rate.
Common Disputes and Judicial Precedents
Stock Exchange Exemption — Scope and Interpretation
The scope of the stock exchange exemption has been debated in Indian tax jurisprudence. Key questions include whether the exemption applies to off-market transactions on the approved exchange, whether block deals qualify, and what constitutes an "approved" exchange. Italian investors should ensure clear documentation of the exchange on which the transaction was executed.
MFN Clause and Italy
Italy, as an OECD member, has historically benefited from MFN clauses in India's treaties with other countries. However, the Supreme Court's 2023 ruling in Nestle SA clarified that MFN clauses do not automatically apply without a Section 90 notification. This is relevant for Italian investors who may have relied on lower rates available in India's treaties with other OECD states.
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 structure their investments specifically to exploit the stock exchange exemption 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%), which is significantly higher than India's domestic rate of 10%. Under Section 90(2), Italian residents can claim the benefit of the lower domestic rate, effectively paying 10% + surcharge and cess rather than the 20% treaty rate.
Practical Examples and Calculations
Example 1: Italian Investor Trading on BSE (No Stock Exchange Exemption)
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 112A)
- 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 Investor Trading on Borsa Italiana (Stock Exchange Exemption)
An Italian resident holds depositary receipts of an Indian company listed on Borsa Italiana. The receipts are sold on Borsa Italiana for a gain of INR 10,00,000.
- Transaction venue: Borsa Italiana — an approved stock exchange
- Treaty treatment: Article 14(5) stock exchange exemption applies
- Indian tax: NIL — gains taxable only in Italy
- Italy treatment: Full gain of INR 10,00,000 (converted to EUR) taxed under Italian domestic capital gains law
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 195
- 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?
Yes. Article 14(5) provides a stock exchange exemption: gains from the alienation of shares on a stock exchange approved by the competent authority in the alienator's state of residence (Italy) are taxable only in Italy. However, this has limited practical applicability since most Indian shares are traded on Indian exchanges (NSE/BSE), not Italian ones.
What capital gains tax rates apply to Italian investors in India?
Where the stock exchange exemption does not apply, 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?
No. The India-Italy DTAA is not currently covered under the OECD Multilateral Instrument (MLI). 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 is a legacy of the 1995 negotiation. However, under Section 90(2) of the Income Tax Act, Italian residents can claim the benefit of the lower domestic rate (currently 10% + surcharge and cess), making the effective rate approximately 10.4% rather than 20%.
Can an Italian investor apply for a lower TDS certificate?
Yes. Under Section 197, 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.
Italy — Dividend Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| Substantial holding (10%+ shares) Beneficial owner is a company owning at least 10% of the shares of the paying company | 15% | 20% + surcharge + 4% cess | Article 10(2)(a) |
| General (portfolio investors) All other cases; domestic rate under Section 90(2) may be lower | 25% | 20% + surcharge + 4% cess | Article 10(2)(b) |
Italy — Interest Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Beneficial owner of interest is a resident of the other contracting state; government interest may be exempt | 15% | 20% + surcharge + 4% cess | Article 11(2) |
Italy — Royalty Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Beneficial owner of royalties is a resident of the other contracting state; domestic rate may be lower under Section 90(2) | 20% | 10% + surcharge + 4% cess | Article 12(2) |
Italy — FTS Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Fees for technical services; domestic rate may be lower under Section 90(2) | 20% | 10% + surcharge + 4% cess | Article 12(2) |