Capital Gains Tax Between India and South Korea Under DTAA

Quick answer: Under Article 13 of the revised India-South Korea DTAA (signed 18 May 2015, effective 12 September 2016), Korean investors holding at least 5% of an Indian company's capital face full Indian capital gains tax — 12.5% LTCG or 20% STCG on listed shares — with no treaty rate cap. Holdings of less than 5% are exempt from Indian tax entirely and taxable only in South Korea, based on the shareholding held at any point during the 12 months before the sale. Gains on Indian immovable property and shares in companies with more than 50% Indian immovable-property assets remain fully taxable in India regardless of shareholding size.

Key takeaways:

• Revised treaty signed 18 May 2015, effective 12 September 2016; capital gains under Article 13.
• Holdings of 5% or more of the capital: taxed in India at full domestic rates, no cap.
• Holdings of less than 5%: fully exempt from Indian tax, taxable only in South Korea.
• 5% threshold measured over the 12 months preceding the share sale, not just at sale.
• Listed shares: 12.5% LTCG, 20% STCG; unlisted shares taxed at slab rates for STCG.

Capital Gains Tax Rate Between India and South Korea

The revised India-South Korea Double Taxation Avoidance Agreement (DTAA), signed on 18 May 2015 during Prime Minister Modi's visit to Seoul and effective from 12 September 2016, introduced a fundamentally new approach to capital gains taxation under Article 13 (Capital Gains). The revised treaty replaced the 1985 agreement and introduced source-based taxation on capital gains from share transfers — a landmark change in India's treaty network with East Asian economies.

The most significant feature of Article 13 in the revised India-Korea DTAA is the 5% shareholding threshold: if a South Korean resident sells shares comprising at least 5% of the capital of an Indian company, India has the right to tax the resulting capital gains. For shareholdings of less than 5%, the gains are taxable only in South Korea (the alienator's state of residence). This threshold is lower than the 10% level commonly found in India's other treaties, reflecting India's aggressive stance on asserting source-country taxing rights.

For personalised guidance on optimising capital gains tax exposure under this treaty, consult Beacon Filing's tax advisory team.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13 of the revised India-South Korea DTAA establishes a nuanced framework for capital gains based on asset type and shareholding levels:

Immovable Property (Article 13(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 of the treaty, and this provision gives India complete taxing rights over real estate gains regardless of the investor's shareholding or residency.

Shares in Immovable Property Companies (Article 13(4))

Gains from the alienation of shares of a company whose property consists, directly or indirectly, of more than 50% immovable property situated in India may be taxed in India. This more-than-50% value test comes from paragraph 2 of the Protocol to the treaty and captures indirect real estate investments held through corporate structures.

Shares of 5% or More (Article 13(5))

This is the pivotal provision. Gains from the alienation of shares comprising at least 5% of the capital of an Indian-resident company may be taxed in India. India applies its full domestic capital gains rates:

Shares Below 5% (Article 13(6))

Gains from shares representing less than 5% of the capital are taxable only in South Korea. This is a significant benefit for Korean portfolio investors with small holdings in Indian listed companies — they are exempt from Indian capital gains tax on such disposals.

Other Property (Article 13(6))

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

Who Qualifies for the Reduced Rate

The 5% threshold creates a clear dividing line between taxable and non-taxable capital gains for Korean investors in India:

Portfolio Investors (Below 5%)

Korean portfolio investors — including mutual funds, pension funds, and individual investors — who hold less than 5% of an Indian company's capital are exempt from Indian capital gains tax on the sale of those shares. This is a genuine treaty benefit that goes beyond what India's domestic law provides. To claim this benefit, the Korean investor must establish their treaty eligibility through a Tax Residency Certificate and Form 41 (formerly Form 10F).

Strategic Investors (5% or More)

Korean strategic investors, private equity funds, or corporate entities holding at least 5% face full Indian domestic capital gains tax. In these cases, double taxation relief comes through the foreign tax credit mechanism — the Korean investor pays Indian tax and claims a credit against their Korean tax liability.

Limitation of Benefits

The revised treaty includes a Limitation of Benefits article that prevents treaty shopping. Korean entities must demonstrate genuine economic substance and cannot claim treaty benefits if their primary purpose is to obtain tax advantages. The MLI's Principal Purpose Test (PPT) adds an additional layer of anti-abuse scrutiny.

Capital Gains-Specific Treaty Provisions

The 5% Threshold — Measurement and Application

The 5% threshold is measured against the capital of the Indian company, in the words of Article 13(5). Key considerations include:

• Capital, not paid-up equity alone: Article 13(5) refers to 5 per cent of the capital of the company
• Direct and indirect holdings: Both direct and indirect shareholdings are considered when computing the 5% threshold
• 12-month lookback: The gains are taxable in India if the alienator held, directly or indirectly, at least 5% of the capital at any time during the 12-month period preceding the alienation

Immovable Property Companies

The 50% immovable property test under Article 13(4) requires that more than 50% of the company's total asset value derives from immovable property situated in India. Paragraph 2 of the Protocol defines the treaty wording (shares whose property consists principally of immovable property) as shares deriving more than 50 per cent of their value, directly or indirectly, from immovable property, giving a clear quantitative benchmark.

Business Property and PE

Under Article 13(2), gains from movable property forming part of a permanent establishment that a Korean enterprise has in India may be taxed in India. This includes gains from the alienation of the PE itself.

Documentation Required

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

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the National Tax Service of Korea is essential to establish treaty eligibility. For investors holding less than 5%, the TRC is critical to claiming the exemption from Indian capital gains tax.

Form 41

The Korean resident must furnish Form 41 on India's Income Tax e-filing portal, providing details of status, nationality, Korean TIN (Taxpayer Identification Number), and period of residential status.

Self-Declaration of Beneficial Ownership

A self-declaration confirming beneficial ownership of the shares and the absence of any arrangement to circumvent the 5% threshold may be required, particularly where the holding is close to the threshold.

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

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

Withholding Procedure for Indian Payers

Indian entities making payments to Korean 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):

TDS on Share Transactions — 5% or More

Where the Korean seller holds at least 5% of the Indian company's capital, TDS must be deducted 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 for individuals; 35% for foreign companies

TDS on Share Transactions — Below 5%

Where the Korean seller holds less than 5%, no TDS should be deducted if the seller provides a valid TRC, Form 41, and self-declaration establishing treaty eligibility. In practice, Indian payers may still request these documents before releasing payment without TDS.

Section 395(1) Lower Deduction Certificate

If the actual tax liability is lower than the TDS rate, the Korean 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).

Common Disputes and Judicial Precedents

Determining the 5% Threshold

Disputes may arise regarding the computation of the 5% threshold, particularly where the Korean investor holds shares through multiple entities or where the Indian company has issued different classes of shares. The treaty refers simply to the capital of the company, without specifying whether that includes preference shares, convertible instruments, or employee stock options.

Indirect Transfers

India's domestic law under Section 9(2)(c) of the Income-tax Act, 2025 (section 9(1)(i) of the Income-tax Act, 1961) asserts taxing rights over indirect transfers of Indian company shares. Where a Korean investor sells shares of a Korean or third-country holding company whose value derives substantially from Indian assets, India may claim capital gains tax. The interplay between this domestic provision and Article 13 of the treaty is an area of potential dispute.

Rights Entitlements

Whether a renounced rights entitlement is a share for treaty purposes, or a separate property right, is unsettled. If it is not a share, it sits outside Article 13(5) and falls into the residuary rule in Article 13(6), so the gain would be taxable only in the alienator's state of residence. Korean investors dealing in rights entitlements should settle their position before the transaction rather than after it.

MLI and PPT Impact

The MLI's Principal Purpose Test may be invoked by Indian tax authorities where they suspect that a Korean entity's investment structure has been established primarily to exploit the 5% threshold. For example, if a Korean entity splits its holding across multiple group companies to keep each below 5%, this could trigger a PPT challenge.

Practical Examples and Calculations

Example 1: Korean Fund Holding 3% in Indian Listed Company (Below Threshold)

A Korean pension fund holds 3% of the capital of an Indian listed company, acquired for INR 20,00,00,000. The shares are sold for INR 35,00,00,000 after 18 months.

• Shareholding: 3% — below the 5% threshold
• Treaty treatment: Gains taxable only in South Korea under Article 13(6)
• Indian tax: NIL — no TDS applicable
• South Korea treatment: Gain of INR 15,00,00,000 (converted to KRW) taxed under Korean domestic capital gains law

Example 2: Korean Conglomerate Holding 8% in Indian Company (Above Threshold)

A Korean conglomerate holds 8% of an Indian private company, acquired for INR 50,00,00,000. The shares are sold after 30 months for INR 90,00,00,000.

• Shareholding: 8% — above the 5% threshold
• Capital gain: INR 40,00,00,000
• Classification: Long-term (held more than 24 months for unlisted shares)
• Tax in India: 12.5% of INR 40,00,00,000 = INR 5,00,00,000
• South Korea treatment: Gain also reportable in Korea; foreign tax credit of INR 5,00,00,000 (converted to KRW) claimed against Korean tax liability

Example 3: Korean Individual Selling Indian Property

A Korean national sells a residential apartment in Bangalore purchased in 2021 for INR 1,50,00,000, sold in 2026 for INR 2,50,00,000.

• Capital gain: INR 2,50,00,000 - INR 1,50,00,000 = INR 1,00,00,000
• Classification: Long-term (held more than 24 months)
• Tax in India: 12.5% of INR 1,00,00,000 = INR 12,50,000
• TDS deducted by buyer: 12.5% under Section 393(2)
• South Korea treatment: Gain reported in Korea; credit for Indian tax claimed

Frequently Asked Questions

What is the 5% shareholding threshold in the India-South Korea DTAA?

Under Article 13(5) of the revised India-South Korea DTAA, if a Korean investor sells shares comprising at least 5% of the capital of an Indian company, India has the right to tax the capital gains at domestic rates. For holdings of less than 5%, the gains are taxable only in South Korea.

Does the treaty provide a reduced capital gains tax rate?

No. The treaty does not cap capital gains tax rates. For holdings of 5% or more, India applies its full domestic rates (12.5% LTCG, 20% STCG on listed shares). The treaty benefit lies in the 5% threshold below which India cannot tax at all.

How does a Korean investor claim the 5% exemption?

The Korean investor must provide a valid Tax Residency Certificate from the National Tax Service of Korea, file Form 41 on India's e-filing portal, and submit a self-declaration of beneficial ownership confirming the holding is less than 5% of the capital.

Is the 5% threshold measured at the time of sale?

The threshold is assessed based on the shareholding at any time during the 12-month period preceding the alienation. If the Korean investor held at least 5% at any point during this period, India can tax the gains even if the holding is below 5% at the time of sale.

How does a Korean strategic investor avoid double taxation?

A Korean investor holding at least 5% pays capital gains tax in India at domestic rates and then claims a foreign tax credit in South Korea against their Korean tax liability on the same income. This prevents the same income from being taxed twice.

Does the MLI affect capital gains under this treaty?

Yes. Both India and South Korea have ratified the MLI and notified this DTAA as a Covered Tax Agreement. The Principal Purpose Test (PPT) applies, meaning India can deny treaty benefits — including the 5% exemption — if the primary purpose of an arrangement is to obtain tax advantages.

Are mutual fund units covered under the 5% threshold?

Mutual fund units are not shares in a company and may fall under Article 13(6) (other property), making gains taxable only in South Korea. However, India's domestic law may still assert taxing rights, and this area remains subject to interpretation and potential litigation.