Capital Gains Tax Between India and UK Under DTAA

Capital Gains Tax Rate Between India and UK

The India-UK Double Taxation Avoidance Agreement (DTAA), signed on 25 January 1993 and effective from 25 October 1994, addresses capital gains taxation under Article 14 (Capital Gains). Similar to many of India's DTAAs, Article 14 of the India-UK treaty preserves each country's right to tax capital gains under its own domestic law, with limited exceptions for shipping and air transport income. This means there is no treaty-imposed cap on capital gains rates, and double taxation is avoided through the tax credit method rather than rate reduction.

A critical distinction from the India-USA DTAA's capital gains provisions is that the India-UK DTAA has been modified by the Multilateral Instrument (MLI). Both India and the UK signed and ratified the MLI, which introduced the Principal Purpose Test (PPT) and other anti-avoidance measures. While these do not change the basic Article 14 framework (each country taxes per domestic law), the PPT can deny treaty benefits in cases where a principal purpose of an arrangement is to obtain a tax advantage.

For UK investors evaluating Indian investments, understanding the interaction between Article 14, India's domestic capital gains regime, and the MLI modifications is essential. BeaconFiling's tax advisory team specialises in helping UK businesses navigate these provisions.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 14 of the India-UK DTAA provides a straightforward framework:

Article 14 — General Rule

Except as provided in Article 8 (Air Transport) and Article 9 (Shipping), each contracting state may tax capital gains in accordance with the provisions of its domestic law. This gives India full authority to tax capital gains arising from the transfer of Indian assets by UK residents at domestic rates, and the UK retains the same right for UK-situated assets.

Immovable Property (Article 14, Paragraph 1)

Gains from the alienation of immovable property situated in India may be taxed in India. Additionally, gains from the alienation of shares in a company whose assets consist principally of immovable property situated in India may also be taxed in India. This provision was further strengthened by the 2013 Protocol, which explicitly covers indirect transfers through property-rich companies.

India's Domestic Capital Gains Rates for Non-Residents

India applies the following domestic rates to UK residents (post-Budget 2024):

These rates apply in full — the India-UK DTAA does not reduce them. The DTAA only ensures that double taxation is eliminated through the credit method.

UK Capital Gains Tax Rates

In the UK, Capital Gains Tax (CGT) rates for the 2025-26 tax year are 18% (basic rate taxpayers) and 24% (higher rate taxpayers) for most assets including shares. UK residents report Indian gains on their Self Assessment tax return and claim double tax relief for Indian taxes paid, limited to the UK CGT due on the same gains.

Who Qualifies for Relief on Capital Gains

Since Article 14 does not provide reduced rates, the relief mechanism is the tax credit method:

UK Residents: Double Tax Relief in the UK

A UK tax resident who pays Indian capital gains tax on the sale of Indian assets claims double tax relief (DTR) on their UK Self Assessment return. The relief is computed as the lower of the Indian tax paid and the UK CGT due on the same gain. HMRC allows DTR either under the treaty or unilaterally under Section 18 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

Indian Residents: Relief Under Section 90

Indian residents who pay UK CGT on UK-situated gains claim relief under Section 90 of the Income Tax Act, read with Rule 128. The credit is limited to the lower of the UK tax paid or the Indian tax due on the UK-source income.

Principal Purpose Test (MLI Article 7)

The MLI's PPT can deny treaty benefits — including the credit method for capital gains — if one of the principal purposes of an arrangement or transaction was to obtain a treaty benefit. While the PPT does not change the Article 14 framework directly, it means that artificial structures designed solely to exploit the credit mechanism or to shift gains between jurisdictions could be challenged. The CBDT issued guidance on PPT application in Circular No. 01/2025 (dated 21 January 2025).

India-UK Disagreement on PPT Scope

There is a notable disagreement between India and the UK regarding the scope of the MLI's PPT provisions. The UK considers that Article 7 of the MLI replaces Article 28C of the DTAA and supersedes specific paragraphs of Articles 12 and 13. India takes a narrower view, considering that Article 7 of the MLI only replaces Article 28C. This interpretive difference could be relevant in specific capital gains scenarios where FTS or royalty provisions intersect with capital gains.

Capital Gains-Specific Treaty Provisions

Immovable Property and Property-Rich Companies

Article 14 gives India the right to tax gains from the alienation of immovable property situated in India. The 2013 Protocol to the India-UK DTAA extended this to shares in companies whose assets consist principally of immovable property. Under India's domestic law, Section 9(1)(i) Explanation 5 further reinforces this by deeming shares deriving value substantially from Indian assets to be situated in India.

Business Property Connected to a PE

Gains from the alienation of movable property forming part of the business property of a permanent establishment (PE) which an enterprise of the UK has in India are taxable in India under Article 14. This includes gains arising on the alienation of the PE itself.

Ships and Aircraft

Under Articles 8 and 9, gains from the alienation of ships or aircraft operated in international traffic are taxable only in the state where the enterprise's place of effective management is situated.

Shares of Indian Companies

For UK investors holding Indian shares, India's domestic law applies in full:

• Listed Indian shares: LTCG at 12.5% (above INR 1.25 lakh), STCG at 20%
• Unlisted Indian shares: LTCG at 12.5%, STCG at slab rate (up to 30%)
• Property-rich company shares: Gains taxable in India under Article 14(1) and Section 9(1)(i)

UK investors can offset Indian taxes paid against their UK CGT liability through double tax relief.

Documentation Required

Proper documentation is critical for both tax compliance and claiming double tax relief:

HMRC Tax Residency Certificate

The UK resident must obtain a Tax Residency Certificate (Certificate of Residence) from HMRC using form RES1. HMRC issues a letter confirming UK tax residency for the relevant period. While the TRC does not reduce the Indian capital gains tax rate, it is required for establishing treaty residence and may be needed for Form 10F and Form 15CA/15CB compliance.

Form 10F

The UK resident must furnish Form 10F to the Indian payer or on the Income Tax e-filing portal. This form requires details including name, status, nationality, UK Unique Taxpayer Reference (UTR), and the period of residential status.

Form 15CA and Form 15CB

When sale proceeds are remitted from India to the UK, the remitter must file Form 15CA (declaration of remittance) online. For amounts exceeding INR 5 lakh, Form 15CB (CA certificate) is required, confirming that TDS has been deducted at the appropriate rate and referencing the applicable DTAA article.

UK Self Assessment and Double Tax Relief

The UK investor reports Indian capital gains on their UK Self Assessment tax return (form SA108 — Capital gains summary). Double tax relief is claimed by entering the Indian tax paid on the relevant gains. HMRC computes the DTR as the lower of the foreign tax paid and the UK CGT due on the same gains.

Withholding Procedure for Indian Payers

Indian entities making payments to UK residents arising from capital gains must comply with TDS obligations under Section 195:

TDS on Share Transactions

For unlisted share sales, the buyer must deduct TDS under Section 195 at the applicable capital gains rate. For listed shares where Securities Transaction Tax (STT) is paid, TDS is generally not deducted at the transaction level. The TDS rates mirror the capital gains rates:

• LTCG (listed/unlisted): 12.5%
• STCG (listed): 20%
• STCG (unlisted): Slab rate (up to 30% for non-residents)

TDS on Property Sales

For immovable property sold by UK non-residents, the buyer deducts TDS at the applicable capital gains rate. The buyer files quarterly TDS return in Form 27Q.

Section 197 Lower Deduction Certificate

A UK resident expecting a lower actual tax liability (due to cost adjustments or the INR 1.25 lakh LTCG exemption) can apply for a lower deduction certificate under Section 197 to avoid excess TDS withholding at source.

Common Disputes and Judicial Precedents

Indirect Transfers and Property-Rich Companies

Following the Vodafone case and the introduction of Section 9(1)(i) Explanation 5, the 2013 Protocol to the India-UK DTAA explicitly addresses shares in property-rich companies. This means UK investors selling shares of companies (even UK-incorporated ones) whose value derives substantially from Indian immovable property face Indian capital gains tax. The protocol closes a gap that existed under the original 1993 treaty.

MLI and Principal Purpose Test Challenges

Since the MLI's PPT entered into force for the India-UK DTAA from FY 2020-21, Indian tax authorities can potentially challenge capital gains arrangements where treaty benefits (including the credit mechanism) are claimed, if a principal purpose of the arrangement was to obtain a tax advantage. While no major capital gains PPT case has been decided yet between India and the UK, the risk exists for structured transactions.

Service PE and Capital Gains Interaction

If a UK enterprise has a PE in India (triggered by, for example, employees providing services for more than 90 days in any 12-month period), gains from the alienation of movable property forming part of the PE's business property are taxed as business profits under Article 7 rather than under Article 14. This has implications for UK service companies that also hold Indian investment assets.

GAAR Application

India's General Anti-Avoidance Rule (GAAR), effective from 1 April 2017, can override treaty provisions in cases of impermissible avoidance arrangements. UK investors structuring Indian investments through holding companies in third jurisdictions (such as Mauritius or Singapore) to minimise capital gains exposure should be aware that GAAR can recharacterise the arrangement and apply Indian tax at full domestic rates.

Practical Examples and Calculations

Example 1: UK Resident Selling Indian Listed Shares (LTCG)

A UK resident individual purchased 5,000 shares of an Indian listed company at INR 200 per share (INR 10,00,000 total) on 1 June 2022. They sell the shares on 1 December 2026 at INR 450 per share (INR 22,50,000).

• Capital gain: INR 22,50,000 - INR 10,00,000 = INR 12,50,000
• Exempt amount (Section 112A): INR 1,25,000
• Taxable LTCG: INR 11,25,000
• Indian tax: 12.5% of INR 11,25,000 = INR 1,40,625
• UK treatment: Gain reported on SA108. UK CGT at 24% (higher rate) on the equivalent GBP gain. Double tax relief claimed for INR 1,40,625 (converted to GBP at the exchange rate on disposal date), reducing UK CGT payable.

Example 2: UK Company Selling Shares in Indian Private Subsidiary

A UK company sells its 100% stake in an Indian private limited company. The shares were acquired 5 years ago for INR 5,00,00,000 and sold for INR 12,00,00,000.

• Capital gain: INR 12,00,00,000 - INR 5,00,00,000 = INR 7,00,00,000
• Classification: Long-term (held more than 24 months)
• Indian tax: 12.5% of INR 7,00,00,000 = INR 87,50,000
• UK treatment: UK corporation tax at 25% on the gain. The Substantial Shareholding Exemption (SSE) may apply if conditions are met, potentially exempting the gain from UK tax entirely. If SSE applies, the Indian tax becomes a final cost. If SSE does not apply, double tax relief is claimed.

Example 3: UK NRI Selling Indian Property

A UK-based NRI sells a flat in Bangalore purchased in 2019 for INR 80,00,000, selling in 2026 for INR 1,40,00,000.

• Capital gain: INR 1,40,00,000 - INR 80,00,000 = INR 60,00,000
• Classification: Long-term (held more than 24 months)
• Indian tax: 12.5% of INR 60,00,000 = INR 7,50,000
• TDS by buyer: 12.5% deducted at source under Section 195
• UK treatment: Gain reportable on UK Self Assessment. DTR claimed for INR 7,50,000 (in GBP equivalent) against UK CGT

Frequently Asked Questions

Does the India-UK DTAA reduce capital gains tax rates?

No. Under Article 14 of the India-UK DTAA, each country retains the right to tax capital gains according to its domestic law. India applies its full domestic capital gains rates to UK residents. Double taxation is avoided through the tax credit method, not rate reduction.

How does a UK investor avoid double taxation on Indian capital gains?

The UK investor pays capital gains tax in India at domestic rates and claims double tax relief (DTR) on their UK Self Assessment tax return. The relief equals the lower of the Indian tax paid or the UK CGT due on the same gain. HMRC allows relief under the treaty or unilaterally under TIOPA 2010.

How does the MLI affect capital gains under the India-UK DTAA?

The MLI introduced the Principal Purpose Test (PPT), which can deny treaty benefits if a principal purpose of an arrangement was to obtain a tax advantage. While the PPT does not change the basic Article 14 framework, it means artificial structures designed to exploit capital gains provisions could be challenged by Indian tax authorities.

What is the LTCG rate on Indian shares for UK residents?

UK residents pay 12.5% LTCG tax on gains from Indian listed equity shares (held over 12 months, above INR 1.25 lakh exemption) and 12.5% on unlisted shares (held over 24 months). These are India's full domestic rates — the DTAA does not reduce them.

Can a UK company benefit from the Substantial Shareholding Exemption on Indian share sales?

Yes, in the UK. If a UK company sells a substantial shareholding (at least 10% of ordinary share capital held for at least 12 months) in a trading company or holding company of a trading group, the gain may be exempt from UK corporation tax under the SSE. The Indian capital gains tax still applies and is not refundable.

What documents does a UK investor need for Indian capital gains compliance?

A Tax Residency Certificate from HMRC (form RES1), Form 10F on India's e-filing portal, and a self-declaration of beneficial ownership. For remittances, Form 15CA and Form 15CB are required. In the UK, gains are reported on form SA108 with DTR claimed.

Are gains from selling shares of a UK company with Indian property taxable in India?

Yes. Under Article 14 of the DTAA and Section 9(1)(i) Explanation 5 of the Income Tax Act, shares in a company (regardless of its country of incorporation) whose value derives substantially from immovable property situated in India are deemed to be situated in India, and gains are taxable in India.