Capital Gains Tax Between India and Malaysia Under DTAA

Quick answer: The India-Malaysia DTAA does not set a single capital gains rate. Article 14 allocates taxing rights by asset type: immovable property and immovable-property-rich shares are taxable where the property sits (14(1), 14(4)); gains on ships and aircraft in international traffic are taxable only in the alienator's residence state (14(3)); and, critically, gains on all other shares of a company resident in a state may be taxed by that state -- meaning Malaysian residents' gains on Indian company shares are taxable in India at India's own domestic rates (14(5)), uncapped by the treaty. India's domestic long-term capital gains rate is 12.5% (on unlisted shares, and on listed shares above INR 1.25 lakh), and the short-term rate on listed equity is 20%, under sections 197, 198 and 196 of the Income-tax Act, 2025 respectively.

Key takeaways:

• Article 14 allocates taxing rights by asset type -- there is no single capped treaty rate for capital gains, unlike dividends, interest, royalties, and FTS
• Article 14(5) lets India tax gains on all shares of an Indian company held by a Malaysian resident (other than immovable-property-rich shares, which fall under 14(4) instead) -- this is broader than treaties that exempt ordinary portfolio share gains
• Gains from ships and aircraft operated in international traffic are taxable only in the alienator's state of residence (14(3)), not the state of effective management
• FTS occupies Article 13 in this treaty, which is why capital gains is Article 14 rather than the more usual Article 13
• Domestic Indian rates: 12.5% long-term capital gains on unlisted shares and on listed shares above INR 1.25 lakh (section 197 / section 198), 20% short-term capital gains on listed equity (section 196)
• The MLI's Principal Purpose Test applies to this treaty in India from 1 April 2022, and Labuan entities lose treaty benefits unless they elect into ordinary Malaysian income tax

Capital Gains Tax Between India and Malaysia

Capital gains under the India-Malaysia DTAA -- signed 9 May 2012 at Putrajaya, in force from 26 December 2012, and effective in India from 1 April 2013 -- are governed by Article 14, not the more usual Article 13. This numbering shift exists because the treaty gives fees for technical services its own stand-alone Article 13, pushing capital gains to 14, independent personal services to 15, and dependent personal services (employment income) to 16.

Unlike dividends, interest, royalties, and FTS, Article 14 does not set a single percentage cap. Instead it allocates the right to tax between India and Malaysia depending on what kind of asset is being sold, leaving the actual rate to be set by whichever state's domestic law applies under that allocation.

Article 14: Paragraph-by-Paragraph Allocation of Taxing Rights

Article 14(1): Immovable Property

Gains from the alienation of immovable property may be taxed in the state where the property is situated. For a Malaysian resident selling Indian real estate, India retains the taxing right and applies its domestic capital gains rates.

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

Gains from the alienation of movable property forming part of the business property of a permanent establishment -- or of movable property pertaining to a fixed base used for independent personal services -- may be taxed in the state where that PE or fixed base is situated, including gains from the alienation of the PE or fixed base itself (alone or with the whole enterprise).

Article 14(3): Ships and Aircraft -- Residence State Only

Gains from the alienation of ships or aircraft operated in international traffic are taxable only in the Contracting State of which the alienator is a resident. This is a residence-based rule, in contrast to some other treaties that instead look to the place of effective management of the shipping or airline enterprise.

Article 14(4): Immovable-Property-Rich Shares

Gains from the alienation of 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. A Malaysian resident selling shares in an Indian real-estate-heavy company falls under this paragraph, and India retains the taxing right.

Article 14(5): All Other Shares -- Source State May Tax

This is the paragraph that matters most for ordinary equity investors: gains from the alienation of shares other than those mentioned in paragraph 4 -- that is, ordinary shares of a company resident in a Contracting State -- may be taxed in that State. Because "that State" is the state of residence of the company whose shares are sold, this is a source-state rule: a Malaysian resident's gain on shares of an Indian company is taxable in India, whether the holding is a controlling stake, a portfolio position, or anything in between, and the treaty places no cap on the rate -- India applies its ordinary domestic capital gains rates.

Article 14(6): Residual Rule

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 -- a residence-only rule for whatever asset class does not fit the more specific categories above.

Why Article 14, Not the Usual Article 13

Most Indian DTAAs place capital gains at Article 13, following the OECD Model's numbering. The India-Malaysia treaty is a hybrid of the OECD and UN Models with a UN-leaning feature: a dedicated, stand-alone Article 13 for fees for technical services (see our India-Malaysia DTAA complete guide). That single structural choice cascades through the rest of the treaty's numbering -- capital gains, independent personal services, and dependent personal services are each pushed one article later than readers familiar with more standard treaties might expect.

Domestic Indian Capital Gains Rates

Because Article 14(5) gives India an uncapped taxing right over ordinary share gains, the actual tax burden on a Malaysian investor selling Indian shares depends entirely on India's domestic capital gains regime:

• Long-term capital gains on unlisted shares: 12.5% without indexation, under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), following the Finance (No. 2) Act, 2024 changes.
• Long-term capital gains on listed equity: 12.5% on gains above INR 1.25 lakh in a year, under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961).
• Short-term capital gains on listed equity: 20%, under section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961).

Surcharge and health and education cess apply on top of these domestic rates in the ordinary way -- Article 14 does not cap the rate the way Articles 10 through 13 cap withholding on dividends, interest, royalties, and FTS, so there is no all-inclusive treaty ceiling to invoke here.

Practical Implications for Malaysian Investors in Indian Shares

Article 14(5)'s source-state rule is broader than the share-gains provisions in some of India's other treaties, several of which historically exempted portfolio share gains from source-state taxation entirely (a position India has been steadily renegotiating away from in newer treaties and protocols). Under the India-Malaysia treaty, there is no such carve-out: a Malaysian fund or individual selling shares in an Indian company -- listed or unlisted, controlling or minority -- is subject to Indian capital gains tax at India's domestic rates, full stop, unless the gain instead falls under the immovable-property-rich test in 14(4) (same result, India taxes) or the residual rule in 14(6) (which would not apply to ordinary company shares).

This means Malaysian investors in Indian equities should plan for Indian tax on exit from the outset, factor Indian TDS into deal timelines, and claim a foreign tax credit in Malaysia for the Indian tax paid, rather than assuming residence-only taxation is available.

Anti-Abuse Rules: MLI PPT and the Labuan Carve-Out

Both India and Malaysia list this treaty as a Covered Tax Agreement under the Multilateral Instrument (MLI). Because of India's Article 35 substitution, the MLI's Principal Purpose Test (PPT) applies in India from 1 April 2022 for this treaty. For capital gains specifically, the PPT is less consequential than for dividends, interest, royalties, or FTS, since Article 14(5) already gives India an uncapped taxing right over ordinary share gains -- there is no favourable treaty position for the PPT to strip away on that category. It remains relevant to structures relying on Article 14(6)'s residence-only residual rule, or on the ships/aircraft rule in 14(3). Separately, clause 2 of the Protocol denies treaty benefits to Malaysian entities taxed under the Labuan Business Activity Tax Act 1990, unless they irrevocably elect into the ordinary Malaysian Income Tax Act 1967.

Documentation and Procedure

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the Inland Revenue Board of Malaysia (LHDN) supports any treaty-based position on a share sale, though because Article 14(5) generally confirms rather than displaces India's taxing right, the TRC's main practical use here is supporting the Malaysian foreign tax credit claim rather than reducing Indian tax.

Form 41 (formerly Form 10F) and TDS on Share Transfers

Form 41 should still be filed to document treaty residence. The buyer of shares from a non-resident must withhold tax at source on the capital gains component 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, with the applicable long-term or short-term rate depending on the holding period and listing status of the shares.

Section 395(1): Lower Withholding Certificate

Where the actual gain is smaller than the sale consideration would suggest (for example, where cost basis is high), the Malaysian seller can apply to the Indian Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate authorising withholding at a lower rate reflecting the actual taxable gain rather than the gross consideration.

Practical Example

A Malaysian private equity fund bought shares in an unlisted Indian technology company for INR 5 crore and sells them three years later for INR 9 crore, realising a long-term capital gain of INR 4 crore. Under Article 14(5), India retains the taxing right because the shares are of a company resident in India (and are not immovable-property-rich). India taxes the gain at 12.5% under section 197 of the Income-tax Act, 2025: INR 50 lakh. The fund would then claim a credit in Malaysia for the Indian tax paid, subject to Malaysia's own foreign tax credit rules and any applicable exemption under Malaysia's territorial tax system for foreign-sourced capital gains.

How Malaysia's Article 14 Compares

India's treaty network is mixed on portfolio share gains: some treaties (particularly older ones, and Mauritius pre-2017) gave the investor's residence state exclusive taxing rights on portfolio share gains, while newer treaties and renegotiated protocols increasingly favour source-state taxation, matching India's own preference. The India-Malaysia treaty sits firmly in the latter camp -- Article 14(5) gives India taxing rights over essentially all share gains, with no separate, more favourable rule for small or passive holdings. Investors comparing jurisdictions purely on capital gains treatment should not assume Malaysia offers any special protection here; the analysis instead turns on India's domestic rates and any credit or exemption available under Malaysian law.

Frequently Asked Questions

Does the India-Malaysia DTAA cap the capital gains tax rate?

No. Unlike dividends, interest, royalties, and FTS, Article 14 does not set a single percentage cap for capital gains. It instead allocates which state may tax a given gain, and that state then applies its own domestic rate.

Can India tax a Malaysian resident's gain on Indian company shares?

Yes. Article 14(5) allows the state where the company is resident -- India, for gains on Indian company shares -- to tax the gain, regardless of whether the Malaysian holder has a controlling stake or a small portfolio position, and regardless of listing status.

What is India's domestic long-term capital gains rate on unlisted shares?

12.5% without indexation, under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), following the Finance (No. 2) Act, 2024 changes.

Why is capital gains Article 14 instead of Article 13 in this treaty?

Because the India-Malaysia treaty gives fees for technical services its own stand-alone Article 13, which pushes capital gains to Article 14, independent personal services to Article 15, and dependent personal services to Article 16.

How are gains on ships and aircraft in international traffic taxed?

Article 14(3) taxes such gains only in the state of which the alienator (the seller) is a resident -- a residence-based rule, not a rule based on the place of effective management of the shipping or airline business.

Can a Malaysian seller apply for a lower withholding certificate on a share sale?

Yes. Under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), a Malaysian seller can apply to the Indian Assessing Officer for a certificate authorising withholding based on the actual taxable gain rather than the gross sale consideration.