Capital Gains Tax Between India and South Korea Under DTAA

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 more than 5% of the paid-up share capital of an Indian company, India has the right to tax the resulting capital gains. For shareholdings of 5% or less, 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 BeaconFiling'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(2))

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 50% value threshold is measured at the time of the alienation and captures indirect real estate investments through corporate structures.

Shares Exceeding 5% Participation (Article 13(4))

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

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

Gains from shares representing 5% or less of paid-up 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 (5% or Less)

Korean portfolio investors — including mutual funds, pension funds, and individual investors — who hold 5% or less of an Indian company's paid-up share 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 10F.

Strategic Investors (More than 5%)

Korean strategic investors, private equity funds, or corporate entities holding more than 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 paid-up share capital of the Indian company. Key considerations include:

• Point-in-time measurement: The threshold is assessed at the time of alienation, not at the time of acquisition
• 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(2) requires that more than 50% of the company's total asset value derives from immovable property situated in India. This is stricter than the "principally" test used in some older OECD model treaties, providing a clear quantitative benchmark.

Business Property and PE

Under Article 13(3), 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 5% or less, the TRC is critical to claiming the exemption from Indian capital gains tax.

Form 10F

The Korean resident must furnish Form 10F 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.

Form 15CA and Form 15CB

When sale proceeds are remitted from India to South Korea, Form 15CA (declaration of remittance) and Form 15CB (CA certificate) must be filed. Form 15CB 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 195:

TDS on Share Transactions — Above 5% Threshold

Where the Korean seller holds more than 5% of the Indian company's paid-up capital, TDS must be deducted 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 — 5% or Below

Where the Korean seller holds 5% or less, no TDS should be deducted if the seller provides a valid TRC, Form 10F, and self-declaration establishing treaty eligibility. In practice, Indian payers may still request these documents before releasing payment without TDS.

Section 197 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 197.

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 to "paid-up share capital" without specifying whether this includes preference shares, convertible instruments, or employee stock options.

Indirect Transfers

India's domestic law under Section 9(1)(i) Explanation 5 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

In recent ITAT jurisprudence involving the India-Saudi Arabia DTAA (which has a similar structure), tribunals have ruled that rights entitlements are distinct from shares and fall under the residuary clause, making them taxable only in the alienator's residence state. Korean investors with rights entitlements in Indian companies may be able to rely on similar reasoning under Article 13(6).

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 paid-up 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(5)
• 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 195
• 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(4) of the revised India-South Korea DTAA, if a Korean investor sells shares comprising more than 5% of the paid-up share capital of an Indian company, India has the right to tax the capital gains at domestic rates. For holdings of 5% or less, 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 above 5%, 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 10F on India's e-filing portal, and submit a self-declaration of beneficial ownership confirming the holding is 5% or less of paid-up share 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 more than 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 more than 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.