Capital Gains Tax Between India and USA Under DTAA

Capital Gains Tax Rate Between India and USA

The India-USA Double Taxation Avoidance Agreement (DTAA), signed on 12 September 1989 and effective from 1 January 1991, addresses capital gains taxation under Article 13 (Gains from the Alienation of Property). Unlike most other income types in the treaty where specific reduced withholding rates apply, Article 13 of the India-USA DTAA takes a fundamentally different approach: it preserves each country's right to tax capital gains under its own domestic law. This means there is no treaty-imposed cap on capital gains tax rates, and relief from double taxation comes exclusively through the foreign tax credit mechanism rather than reduced source-country rates.

This structure has significant implications for US investors holding Indian shares, real estate, or other capital assets. India taxes capital gains at domestic rates without treaty reduction, and the US investor must then claim a foreign tax credit in the United States for taxes paid in India. Understanding the interplay between Article 13 and each country's domestic capital gains regime is essential for tax-efficient cross-border investing.

For personalised guidance on structuring investments to minimise capital gains tax exposure, consult BeaconFiling's tax advisory team.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13 of the India-USA DTAA provides a simple but often misunderstood framework for capital gains:

Article 13 — General Rule

Except as provided in Article 8 (shipping and air transport), each contracting state may tax capital gains in accordance with the provisions of its domestic law. This means India can tax capital gains arising from the transfer of Indian assets by US residents at full domestic rates, and the US can likewise tax capital gains arising from US assets held by Indian residents.

Immovable Property (Article 13(1))

Gains from the alienation of immovable property situated in India (or the US) may be taxed by the country where the property is located. The term "immovable property" is defined by the domestic law of the state where the property is situated. This gives India full taxing rights over gains from Indian real estate sold by US residents.

No Treaty Rate Cap

Unlike dividends (Article 10) or interest (Article 11) where the treaty specifies maximum withholding rates of 15-25% or 10-15%, Article 13 does not limit the rate at which capital gains can be taxed. India applies its full domestic capital gains tax rates to US residents:

Note: The rates above reflect the post-Budget 2024 amendments. Prior to 23 July 2024, LTCG on listed equities was 10% (above INR 1 lakh), and STCG was 15%. Non-residents do not get the benefit of the basic exemption limit for STCG under Section 111A.

Who Qualifies for Relief on Capital Gains

Since Article 13 does not provide reduced rates, the relevant question is not "who qualifies for a lower rate" but rather "how does double taxation get eliminated." The answer lies in the foreign tax credit (FTC) mechanism:

US Residents: Foreign Tax Credit in the USA

A US resident (citizen, green card holder, or substantial presence test qualifier) who pays capital gains tax in India on the sale of Indian assets can claim a Foreign Tax Credit on their US tax return using IRS Form 1116 (Foreign Tax Credit). The credit offsets the Indian tax against US tax liability on the same income, preventing double taxation. The FTC is limited to the lower of the actual foreign tax paid or the US tax attributable to the foreign-source income.

Indian Residents: Relief Under Section 90/91

Indian residents who pay US capital gains tax (relatively rare for stock sales, as the US generally does not tax non-resident aliens on stock sales) can claim relief under Section 90 of the Income Tax Act. The credit method under Section 90, read with Rule 128, allows the Indian taxpayer to deduct foreign taxes paid from their Indian tax liability.

Limitation of Benefits (Article 24)

While Article 24 (Limitation of Benefits) primarily affects other income types, it can indirectly impact capital gains arrangements. If a US entity is established primarily to achieve tax benefits (including capital gains planning), and it fails the LOB tests — active trade or business test, ownership/base-erosion test, or competent authority determination — the arrangement's overall tax treatment may be challenged. The LOB clause is unique to the India-USA DTAA and is one of the most stringent in India's treaty network.

Capital Gains-Specific Treaty Provisions

Immovable Property Gains

Article 13(1) specifically addresses gains from the alienation of immovable property. Where a US resident sells immovable property (land, buildings) situated in India, India has full taxing rights. The US also taxes the gain as worldwide income, but the US investor claims an FTC for Indian taxes paid. This provision also extends to shares in companies whose assets consist principally of immovable property ("immovable property companies").

Business Property Connected to a PE

Under Article 13(2), gains from the alienation of personal property forming part of the business property of a permanent establishment (PE) in India are taxed as business profits under Article 7. This includes gains on the alienation of the PE itself.

Ships and Aircraft

Under Article 13(3), gains from the alienation of ships or aircraft operated in international traffic, or personal property pertaining to their operation, are taxable only in the state where the enterprise's place of effective management is situated.

Shares of Indian Companies

India's domestic law asserts taxing rights over gains from the sale of shares in Indian companies, regardless of where the transaction takes place. For US residents, this means:

• Listed Indian shares: LTCG at 12.5% (above INR 1.25 lakh threshold) and STCG at 20%
• Unlisted Indian shares: LTCG at 12.5% and STCG at applicable slab rate
• Shares deriving value from immovable property: Gains are taxable in India under Article 13(1) and domestic law Section 9(1)(i)

Documentation Required

To ensure proper tax compliance for capital gains transactions between India and the USA, the following documentation is critical:

Tax Residency Certificate (TRC)

Although the TRC does not reduce the capital gains tax rate (since Article 13 preserves domestic rates), a Tax Residency Certificate from the IRS (Form 6166) is still essential. It establishes the taxpayer's residence for treaty purposes, which is necessary for claiming the foreign tax credit in the US and may be relevant for any LOB analysis.

Form 10F

The US resident must furnish Form 10F on India's Income Tax e-filing portal, providing details such as status, nationality, TIN, and period of residential status.

Form 15CA and Form 15CB

When sale proceeds are remitted from India to the US, the Indian buyer or authorised dealer bank requires Form 15CA (declaration of remittance) and Form 15CB (CA certificate confirming tax deduction at the appropriate rate). For property sales exceeding INR 50 lakh, TDS must be deducted under Section 194-IA at 1% (for residents) or Section 195 at applicable rates (for non-residents).

IRS Form 1116 (Foreign Tax Credit)

The US investor must file IRS Form 1116 with their US tax return to claim the Foreign Tax Credit for Indian capital gains tax paid. This form requires reporting the foreign-source income, foreign taxes paid, and computing the FTC limitation.

Withholding Procedure for Indian Payers

Indian entities making payments to US residents on account of capital gains must comply with TDS obligations under Section 195:

TDS on Share Transactions

When a US resident sells Indian shares, the buyer (if identifiable) is required to deduct TDS at the applicable capital gains rate. For listed shares, TDS is typically not deducted at the transaction level (as STT is paid), but for unlisted shares, the buyer must deduct TDS under Section 195. The rates are:

• 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 Property Transactions

For immovable property sold by US non-residents, the buyer must deduct TDS at 12.5% for LTCG or the applicable rate for STCG under Section 195. The buyer files Form 27Q quarterly reporting the TDS deducted.

Section 197 Lower Deduction Certificate

If the actual tax liability is lower than the TDS rate (for example, due to cost of acquisition adjustments or indexation benefits), the US seller can apply for a lower deduction certificate under Section 197 before the transaction to avoid excess TDS.

Common Disputes and Judicial Precedents

Indirect Transfers — Vodafone and Beyond

The landmark Vodafone International Holdings BV v. Union of India (2012) case established that India could not retrospectively tax indirect transfers of Indian company shares through offshore transactions. However, the Finance Act, 2012, introduced Section 9(1)(i) Explanation 5, which clarifies that shares deriving their value substantially from assets in India are deemed to be situated in India. For US investors, this means that selling shares of a US holding company whose value derives substantially from Indian assets could trigger Indian capital gains tax.

Beneficial Ownership in Capital Gains Context

While beneficial ownership is more commonly litigated in the context of dividends and interest, it is increasingly relevant for capital gains. Indian tax authorities have challenged arrangements where the legal seller of Indian assets is a US entity, but the economic benefit flows to residents of a third country. The LOB clause under Article 24 provides additional tools for the revenue authorities to deny treaty benefits in such cases.

Grandfathering of Cost (Section 112A)

For listed equity shares, the cost of acquisition is "grandfathered" to the higher of the actual cost or the fair market value as of 31 January 2018. This reduces the taxable LTCG for shares acquired before that date. US investors holding Indian listed shares since before February 2018 benefit from this provision.

GAAR and Capital Gains Avoidance

India's General Anti-Avoidance Rule (GAAR), effective from 1 April 2017, empowers the tax authorities to disregard or recharacterise transactions undertaken primarily to obtain a tax benefit. This has implications for US investors who structure their Indian investments through intermediary entities to minimise capital gains exposure.

Practical Examples and Calculations

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

A US resident purchased 10,000 shares of an Indian listed company at INR 100 per share (INR 10,00,000 total) on 1 March 2020. They sell the shares on 1 October 2026 at INR 250 per share (INR 25,00,000 total). FMV on 31 January 2018 was INR 90 per share.

• Cost of acquisition (grandfathered): Higher of actual cost (INR 100) or FMV on 31/01/2018 (INR 90) = INR 100 per share
• Capital gain: INR 25,00,000 - INR 10,00,000 = INR 15,00,000
• Exempt amount: INR 1,25,000 (threshold under Section 112A)
• Taxable LTCG: INR 13,75,000
• Tax in India: 12.5% of INR 13,75,000 = INR 1,71,875
• US treatment: The gain is also reportable in the US. The investor claims a Foreign Tax Credit of INR 1,71,875 (converted to USD) against their US capital gains tax liability.

Example 2: US Resident Selling Unlisted Shares (STCG)

A US resident holds shares in an Indian private company, purchased 18 months ago for INR 50,00,000. The shares are sold for INR 80,00,000.

• Capital gain: INR 80,00,000 - INR 50,00,000 = INR 30,00,000
• Classification: Short-term (held less than 24 months for unlisted shares)
• Tax in India: STCG taxed at the applicable slab rate for non-residents. At the highest bracket: ~30% = INR 9,00,000 (plus surcharge and cess)
• US treatment: FTC claimed on Form 1116 for the Indian tax paid

Example 3: US Resident Selling Indian Property

A US NRI sells an apartment in Mumbai purchased in 2018 for INR 1,20,00,000, selling in 2026 for INR 2,00,00,000.

• Capital gain: INR 2,00,00,000 - INR 1,20,00,000 = INR 80,00,000
• Classification: Long-term (held more than 24 months)
• Tax in India: 12.5% of INR 80,00,000 = INR 10,00,000
• TDS deducted by buyer: 12.5% at source under Section 195
• US treatment: Gain reported on US tax return; FTC of INR 10,00,000 (converted to USD) claimed on Form 1116

Frequently Asked Questions

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

No. Article 13 of the India-USA DTAA does not impose any treaty-level cap on capital gains tax rates. Each country may tax capital gains according to its domestic law. Relief from double taxation comes through the foreign tax credit mechanism rather than reduced rates at source.

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

A US investor pays capital gains tax in India at domestic rates and then claims a Foreign Tax Credit on their US tax return (IRS Form 1116). The credit offsets the Indian tax against US tax on the same income, limited to the lower of the actual foreign tax paid or the US tax attributable to the foreign-source income.

What is the LTCG rate on Indian listed shares for US residents?

US residents pay 12.5% LTCG tax on gains from Indian listed equity shares held for more than 12 months, with an exemption threshold of INR 1,25,000 per financial year under Section 112A. This is the full domestic rate — the DTAA does not reduce it.

Are indirect transfers of Indian company shares taxable?

Yes. Under Section 9(1)(i) read with Explanation 5, shares or interests in entities deriving their value substantially from assets situated in India are deemed to be situated in India. This means a US investor selling shares of a US holding company whose value derives primarily from Indian assets could trigger Indian capital gains tax.

Does the MLI affect capital gains taxation under the India-USA DTAA?

No. The United States has not signed the OECD Multilateral Instrument (MLI), so the India-USA DTAA is not modified by MLI provisions. Article 13 continues to apply in its original form, preserving each country's domestic law taxing rights on capital gains.

Can a US investor apply for a lower TDS certificate on capital gains?

Yes. Under Section 197 of the Income Tax Act, a non-resident can apply to the Assessing Officer for a lower deduction certificate if the actual tax liability is expected to be lower than the TDS rate. This is particularly useful for property sales where the cost of acquisition significantly reduces the taxable gain.

What are the reporting obligations for US investors on Indian capital gains?

US investors must report Indian capital gains on their US tax return (Schedule D and Form 8949), claim the Foreign Tax Credit on Form 1116, and may need to file FBAR (FinCEN Form 114) and FATCA Form 8938 reporting Indian financial assets. In India, the buyer deducts TDS and files Form 27Q; the seller may need to file an Indian income tax return to claim refunds or adjustments.