Capital Gains Tax Between India and UAE Under DTAA

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(2) — Shares in Immovable Property Companies

Gains from shares of a company whose assets consist 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(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 tax resident of the UAE under UAE domestic law. Since the introduction of UAE corporate tax in June 2023 and the issuance of tax residency certificates by the UAE Ministry of Finance (previously the Federal Tax Authority), the concept of UAE tax residency has become more formalized.

For individuals, this generally requires:

• Physical presence in the UAE for at least 183 days in a calendar year, or
• Having a primary place of residence and center of financial/personal interests in the UAE

Tax Residency Certificate (TRC)

A valid Tax Residency Certificate issued by the UAE Federal Tax Authority (or Ministry of Finance) 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 10F

A self-declaration filed electronically on the Indian income tax portal (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

"Income or gains derived by a resident of a Contracting State from the alienation of immovable property referred to in 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

Gains from alienation of movable property forming part of the business property of a permanent establishment in India may be taxed in India. This includes the PE itself when it is alienated.

Paragraph 3 — Ships and Aircraft

Gains from ships or aircraft operated in international traffic are taxable only in the country of residence of the enterprise.

Paragraph 4 — Shares of Indian Companies

"Income or gains derived by a resident of a Contracting State 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 the other Contracting State may be taxed in that other State. Furthermore, income or gains from the alienation of shares other than those mentioned above in a company which is a resident of the other Contracting State may be taxed in that other State."

This paragraph gives India the right to tax both: (a) shares in companies with primarily immovable property in India, and (b) shares of any Indian-resident company.

Paragraph 5 — Residual (Everything Else)

"Income or gains from the alienation of any property, other than the property referred to in paragraphs 1, 2, 3, and 4, 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 10F — 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 or Form 10F in lieu — If the UAE resident does not have an Indian PAN, the tax identification details in Form 10F serve as a substitute.

Withholding Procedure for Indian Payers (Section 195)

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 195 on the capital gains component. If the UAE seller furnishes a valid TRC and Form 10F, 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 can apply for a nil withholding certificate under Section 197 if the gains are not taxable in India under the DTAA.

Form 15CA/15CB

For remitting sale consideration to the UAE:

• Form 15CB — 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 15CA — Online undertaking filed with the Income Tax Department before the remittance. Part A (for payments below INR 5 lakh) or Part C (when Form 15CB is obtained) must be filed.

The authorized dealer bank requires a valid Form 15CA before processing the outward remittance. Non-compliance attracts penalties under Section 271-I.

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 ITAT's ruling that capital gains on Indian mutual fund units held by UAE residents are not taxable in India. In multiple cases, including the Mumbai ITAT's ruling in 2024, 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) specifically uses the term "shares of the capital stock of 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 112A)
• 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 10F 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 introduced the Limitation of Benefits clause to the India-UAE DTAA, providing that treaty benefits are denied if the main purpose of creating an entity was to obtain those benefits. This prevents treaty shopping through UAE shell entities.