Capital Gains Tax on Shares Under the India-UAE DTAA

Quick answer: Under Article 13 of the India-UAE DTAA (signed 29 April 1992, effective 22 September 1993), gains from selling shares of Indian companies are fully taxable in India at domestic rates — 12.5% LTCG or 20% STCG on listed shares — under Article 13(4). But Article 13(5)'s residual clause exempts gains on assets not classed as 'shares' — mutual fund units, bonds, derivatives — taxing them only in the UAE, which levies no capital gains tax on individuals even after introducing a 9% corporate tax in June 2023. ITAT rulings on this residual wording have held that mutual fund units fall outside "shares" because they are issued by trusts, not companies — a Tribunal-level position the revenue can still contest on appeal.

Key takeaways:

• Signed 29 April 1992; effective 22 September 1993; capital gains governed by Article 13.
• Article 13(4): Indian company shares taxed in India at full rates — 12.5% LTCG, 20% STCG.
• Article 13(5) residual clause exempts non-share assets, taxable only in the UAE (0% for individuals).
• ITAT rulings: mutual fund units are trust-issued, not shares, so fall under Article 13(5).
• UAE introduced a 9% corporate tax in June 2023 but exempts most investment capital gains.

Capital Gains Tax Rate Between India and UAE

Capital gains arising from cross-border investments between India and the UAE are governed by Article 13 of the India-UAE Double Taxation Avoidance Agreement (DTAA). The treaty, originally signed on 29 April 1992 and effective from 22 September 1993, provides a distinctive framework for capital gains taxation that differs significantly from many of India's other tax treaties.

The India-UAE DTAA contains specific provisions for different categories of capital assets — immovable property, shares deriving value from immovable property, shares of Indian companies, and a critical residual clause that has become the basis for significant tax planning opportunities. The 2007 Protocol amendment and the Multilateral Instrument (MLI) have introduced important modifications, including a Limitation of Benefits (LOB) clause.

For UAE residents — including NRIs, investors, funds, and companies with Indian assets — understanding Article 13's nuanced provisions is essential. The UAE historically did not levy any income tax (including capital gains tax), and even after introducing a 9% corporate tax in June 2023, capital gains on qualifying shareholdings and other investments remain largely exempt from UAE taxation. This creates potential for significant tax advantages when combined with the DTAA's provisions.

Treaty Rate vs Domestic Rate: Detailed Comparison

Unlike the India-Singapore DTAA (which underwent a three-phase amendment removing capital gains exemption), the India-UAE DTAA takes a different approach. Article 13 allocates taxing rights based on the type of asset, not the date of acquisition:

Article 13(1) — Immovable Property

Capital gains from alienation of immovable property situated in India are taxable in India at domestic rates. This covers land, buildings, and rights over immovable property.

Article 13(3) — Shares in Immovable Property Companies

Gains from shares of a company whose property consists directly or indirectly principally of immovable property in India are also taxable in India. This prevents circumvention of Article 13(1) by selling shares of a holding company instead of selling the property directly. (Article 13(2) separately covers movable property forming part of a permanent establishment or fixed base.)

Article 13(4) — Shares of Indian Companies

Gains from alienation of shares of a company resident in India may be taxed in India. This means India has the right to levy capital gains tax on such share transfers at domestic rates:

Article 13(5) — Residual Clause (The Key Advantage)

This is the most significant provision for UAE residents. Gains from the alienation of any property other than those referred to in paragraphs 1-4 are taxable only in the country of residence of the alienator. Since the UAE does not levy capital gains tax on individuals and exempts qualifying investment gains for corporate entities, the effective tax rate under this clause is 0%.

The residual clause covers:

• Mutual fund units — Issued by trusts, not companies, so they are not "shares" under Article 13(4)
• Bonds and debentures — Debt instruments that are not shares
• Derivatives and other financial instruments — Not covered by Articles 13(1)-(4)
• Movable property not forming part of a PE's business property

Who Qualifies for the Reduced Rate

To claim benefits under Article 13 of the India-UAE DTAA — particularly the residual clause exemption — a UAE resident must satisfy several conditions:

Tax Residency in the UAE

The person must be a resident of the UAE for treaty purposes. Article 4(1)(b), as substituted by the 2007 Protocol, sets its own test that is distinct from the UAE's domestic residency rules:

• Individuals: presence in the UAE for periods totalling at least 183 days in the calendar year concerned.
• Companies: a cumulative dual test — the company must be incorporated in the UAE and managed and controlled wholly in the UAE.

Since the introduction of UAE corporate tax in June 2023, and with tax residency certificates now issued by the UAE Federal Tax Authority (a function moved across from the Ministry of Finance by Cabinet Resolution 65 of 2020), evidencing UAE residency has become more formalized.

Tax Residency Certificate (TRC)

A valid Tax Residency Certificate issued by the UAE Federal Tax Authority is mandatory. The TRC must cover the relevant financial year and be provided to the Indian payer or filed with the Indian tax return.

Form 41 (formerly Form 10F)

A self-declaration filed electronically on the Indian income tax portal — electronic filing of the predecessor Form 10F had been mandatory since 16 July 2022 — containing the taxpayer's details, UAE tax identification number, and period of residency.

Beneficial Ownership

The beneficial owner of the capital asset and the resulting gains must be the UAE resident. Nominee or conduit arrangements where gains are passed through to third-country residents will not qualify for treaty benefits.

Limitation of Benefits (LOB) Clause

The 2007 Protocol introduced an LOB clause providing that DTAA benefits shall not be available if the main purpose or one of the main purposes of creating the entity was to obtain treaty benefits. This is further reinforced by the MLI's Principal Purpose Test (PPT).

Capital Gains-Specific Treaty Provisions (Article 13)

Article 13 of the India-UAE DTAA is structured as follows:

Paragraph 1 — Immovable Property

"Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other State." This gives India the right to tax gains on Indian real estate.

Paragraph 2 — Movable Property of a PE or Fixed Base

Gains from alienation of movable property forming part of the business property of a permanent establishment in India, or of movable property pertaining to a fixed base available for performing independent personal services, may be taxed in India. This includes the PE or fixed base itself when it is alienated.

Paragraph 3 — Shares of Land-Rich Companies

"Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State." Note that the India-UAE treaty has no ships-and-aircraft paragraph in Article 13 — gains on ships operated in international traffic are dealt with by Article 8 (Shipping), which treats gains on the alienation of ships, containers and related equipment owned and operated by the enterprise as shipping profits taxable only in the enterprise's State.

Paragraph 4 — Shares of Indian Companies

"Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State may be taxed in that State."

Read together, paragraphs 3 and 4 give India the right to tax both: (a) shares in companies whose property consists principally of Indian immovable property, and (b) shares of any Indian-resident company. Both paragraphs were substituted for the original single paragraph 3 by the 2007 Protocol.

Paragraph 5 — Residual (Everything Else)

"Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 above shall be taxable only in the Contracting State of which the alienator is a resident."

This residual clause is exclusive — it gives sole taxing rights to the country of residence (UAE), eliminating India's right to tax gains on assets not covered by paragraphs 1-4.

Documentation Required

To claim capital gains benefits under the India-UAE DTAA, the following documents must be arranged:

1. Tax Residency Certificate (TRC) — Issued by the UAE Federal Tax Authority for the relevant financial year. For individuals, this requires demonstrating 183+ days of UAE presence. Application is made through the FTA's online portal (EmaraTax).
2. Form 41 (which replaced Form 10F from FY 2026-27) — Self-declaration filed electronically on the Indian income tax e-filing portal. Contains details such as name, status, nationality, UAE TIN, period of residential status, and the relevant DTAA article being invoked.
3. Self-Declaration — Confirming beneficial ownership of the asset and gains, absence of a permanent establishment in India to which the gains are attributable, and that the arrangement does not have treaty benefit as a principal purpose.
4. Demat statements / acquisition records — Proof of the nature of the asset (shares vs mutual fund units vs bonds), acquisition date, cost, and holding period to establish which paragraph of Article 13 applies.
5. Indian PAN — Where the UAE resident does not hold an Indian PAN, the higher no-PAN withholding rate can be avoided only if the prescribed alternative particulars — name, email, contact number, address in the UAE, UAE tax identification number and TRC — are furnished to the Indian payer.

Withholding Procedure for Indian Payers (Section 393(2))

When capital gains arise from transactions involving a UAE resident seller, the Indian buyer or intermediary must follow specific withholding procedures:

TDS on Share Transfers

For off-market share transfers, the Indian buyer must deduct TDS under Section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) on the capital gains component, at the rates in force. If the UAE seller furnishes a valid TRC and Form 41, the buyer applies the appropriate rate — which for shares under Article 13(4) is the Indian domestic rate (12.5% LTCG or 20% STCG for listed shares).

For assets falling under Article 13(5) (mutual fund units, bonds), the seller — as the payee — can apply for a nil withholding certificate under Section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) if the gains are not taxable in India under the DTAA. (The Indian payer's own route is an application under Section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961), not Section 395(1).)

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

For remitting sale consideration to the UAE:

• Form 146 — A Chartered Accountant's certificate certifying the nature of payment, DTAA provisions applicable, and TDS deducted or exemption claimed. Required for payments exceeding INR 5 lakh per financial year.
• Form 145 — Online undertaking filed with the Income Tax Department before the remittance. Part A (for payments below INR 5 lakh) or Part C (when Form 146 is obtained) must be filed.

The authorized dealer bank requires a valid Form 145 before processing the outward remittance. Non-compliance attracts a penalty under Section 462 of the Income-tax Act, 2025 (section 271-I of the Income-tax Act, 1961).

Common Disputes and Judicial Precedents

Several important rulings have shaped the interpretation of Article 13 of the India-UAE DTAA:

Mutual Fund Units — Article 13(5) Exemption

The most significant recent development is the line of ITAT rulings holding that capital gains on Indian mutual fund units are not taxable in India where the treaty assigns residual gains to the alienator's State of residence. Tribunals have held that:

• Mutual fund units are issued by trusts under SEBI regulations, not by companies
• Units are therefore not "shares" within the meaning of Article 13(4)
• They fall under the residual clause of Article 13(5), giving exclusive taxing rights to the UAE
• Since the UAE does not tax capital gains (for individuals), the effective rate is 0%

This ruling has significant implications for UAE-based NRIs and investors. However, the Indian revenue authorities may appeal these rulings to higher courts, so the position carries some litigation risk.

Shares vs Units — The Critical Distinction

Article 13(4) applies to "shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State" — the phrase "shares of the capital stock of a company" appears in Article 13(3) — so both paragraphs turn on the asset being shares in a company. Indian mutual funds, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs) issue "units" (not shares) and are structured as trusts (not companies). This structural distinction is the basis for the Article 13(5) exemption claim.

Hyatt Case — PE and Capital Gains

The Supreme Court's 2025 ruling in Hyatt International confirmed that active participation and control over core operations of an Indian entity can establish a fixed place PE under Article 5(1) of the India-UAE DTAA. If a PE exists, capital gains attributable to the PE's business property are taxable in India under Article 13(2), not the residual clause.

GAAR and Anti-Avoidance

India's General Anti-Avoidance Rule can override treaty provisions if an arrangement lacks commercial substance and is designed primarily to obtain a tax benefit. The LOB clause introduced by the 2007 Protocol and the MLI's Principal Purpose Test provide additional anti-avoidance safeguards.

Practical Examples and Calculations

Example 1: Listed Shares — Article 13(4)

Mr. Ahmed (UAE tax resident NRI) purchased listed shares of an Indian company on NSE in January 2024 for INR 30 lakh. He sells them in March 2026 for INR 55 lakh (holding period: over 12 months, STT paid).

• Capital gain: INR 25 lakh
• Exemption: INR 1.25 lakh (Section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961))
• Taxable LTCG: INR 23.75 lakh
• Tax at domestic rate (12.5%): INR 2,96,875
• DTAA treatment: Taxable in India under Article 13(4) — full domestic rate applies
• UAE tax: 0% (no capital gains tax on individuals)
• Total tax: INR 2,96,875

Example 2: Mutual Fund Redemption — Article 13(5)

Mrs. Fatima (UAE tax resident) redeems equity mutual fund units worth INR 80 lakh, with a cost of INR 50 lakh (holding period: 20 months).

• Capital gain: INR 30 lakh
• Domestic treatment (LTCG): 12.5% on gains above INR 1.25 lakh = INR 3,59,375
• DTAA treatment (Article 13(5)): Taxable only in the UAE — mutual fund units are not "shares" per ITAT precedent
• UAE tax: 0%
• Effective tax: INR 0 (if ITAT position is upheld)
• Tax saving: INR 3,59,375

Note: This position is based on ITAT rulings and may face challenge. Professional tax advisory is recommended.

Example 3: Immovable Property — Article 13(1)

Al Rashid Holdings LLC (UAE company) sells a commercial property in Mumbai for INR 5 crore (original cost INR 2 crore, held for 4 years).

• Capital gain: INR 3 crore
• LTCG at 12.5%: INR 37,50,000
• DTAA treatment: Taxable in India under Article 13(1) — no treaty benefit on immovable property gains
• UAE corporate tax: Potentially exempt as qualifying income under UAE CT law
• Total tax: INR 37,50,000

Frequently Asked Questions

What is the capital gains tax rate under the India-UAE DTAA?

The DTAA does not prescribe a single rate. For shares of Indian companies, India can tax at full domestic rates (12.5% LTCG, 20% STCG for listed shares). For immovable property, Indian domestic rates apply. For other assets like mutual fund units and bonds, gains are taxable only in the UAE under Article 13(5) — effectively 0% since the UAE does not tax capital gains on individuals.

Are mutual fund gains exempt from Indian tax for UAE residents?

Based on recent ITAT rulings, yes. Mutual fund units are not "shares" and fall under Article 13(5), making gains taxable only in the UAE. Since the UAE does not tax individual capital gains, the effective rate is 0%. However, this position may be challenged by Indian tax authorities in higher courts.

Does the UAE levy capital gains tax?

The UAE introduced a 9% corporate tax from 1 June 2023, but capital gains on qualifying shareholdings and most investment assets remain exempt for corporate entities. Individuals are not subject to capital gains tax in the UAE. There is no personal income tax in the UAE.

What documents do UAE residents need to claim DTAA benefits on capital gains?

A Tax Residency Certificate from the UAE Federal Tax Authority, Form 41 (which replaced Form 10F from FY 2026-27) filed electronically on the Indian income tax portal, a self-declaration of beneficial ownership, and proof of the asset type (shares vs units) to establish which Article 13 paragraph applies.

Does the absence of an FTS article in the India-UAE DTAA affect capital gains?

Not directly. The absence of a Fees for Technical Services (FTS) article means FTS payments are treated as business profits (taxable only if a PE exists). Capital gains are governed separately by Article 13, regardless of the FTS treatment.

Can GAAR override the Article 13(5) exemption?

Yes. India's General Anti-Avoidance Rule can deny treaty benefits if an arrangement is primarily designed to obtain tax advantages and lacks commercial substance. The LOB clause and MLI's Principal Purpose Test provide additional anti-avoidance measures.

How does the 2007 Protocol amendment affect capital gains?

The 2007 Protocol rewrote Article 13 itself: it replaced the original single paragraph 3 with new paragraphs 3, 4 and 5, so India may now tax gains on shares of a land-rich company and on shares of any Indian-resident company, leaving only the residual paragraph 5 to residence-state taxation. The same Protocol also inserted the Limitation of Benefits article (Article 29), under which treaty benefits are denied if the main purpose, or one of the main purposes, of creating an entity was to obtain them.