Capital Gains Tax Between India and USA Under DTAA

Quick answer: Under Article 13 of the India-USA DTAA (signed 12 September 1989, in force from 18 December 1990), there is no treaty-imposed cap on capital gains — each country taxes gains under its own domestic law, so India applies full rates to US residents' Indian gains (12.5% LTCG above INR 1.25 lakh, 20% STCG on listed shares). Double taxation is relieved solely through the US Foreign Tax Credit (IRS Form 1116), not through any treaty rate reduction. Unlike India's UK or Netherlands treaties, the India-USA DTAA is unaffected by the MLI's Principal Purpose Test, since the US has not signed the MLI.

Key takeaways:

• Signed 12 September 1989; in force 18 December 1990 (effective in India from 1 April 1991); capital gains under Article 13, no rate cap.
• India taxes US residents at full domestic rates: 12.5% LTCG (above INR 1.25 lakh), 20% STCG.
• Relief comes only via the US Foreign Tax Credit, claimed on IRS Form 1116.
• The US has not signed the MLI, so no Principal Purpose Test applies to this treaty.
• For shares acquired before 1 February 2018, listed-share cost basis is grandfathered to the 31 January 2018 FMV, reducing taxable LTCG.

Capital Gains Tax Rate Between India and USA

The India-USA Double Taxation Avoidance Agreement (DTAA), signed on 12 September 1989 and in force since 18 December 1990, 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 Beacon Filing'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 is a single provision with no separate immovable-property paragraph — but because each state taxes gains under its own law, gains from the alienation of immovable property situated in India are fully taxable in India under the Income Tax Act. The term "immovable property" takes its meaning from the law of the state where the property is situated (Article 6(2)). 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 196. Debt mutual fund units acquired on or after 1 April 2023 are "specified mutual funds" under Section 76 of the Income-tax Act, 2025 (section 50AA of the Income-tax Act, 1961) — gains are deemed short-term and taxed at slab rates regardless of holding period; the 24-month/12.5% row applies only to units acquired before that date.

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 159/160

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 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961), with unilateral relief under Section 160 (section 91 of the Income-tax Act, 1961) where no agreement applies. The credit method under Section 159, read with the prescribed foreign tax credit rules, 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 comprehensive LOB article in the India-USA DTAA is one of the most stringent in India's treaty network.

Capital Gains-Specific Treaty Provisions

Immovable Property Gains

Where a US resident sells immovable property (land, buildings) situated in India, India has full taxing rights under its domestic law — Article 13 imposes no restriction. The US also taxes the gain as worldwide income, but the US investor claims an FTC for Indian taxes paid. Under Section 9(2)(c) of the Income-tax Act, 2025 (section 9(1)(i) of the Income-tax Act, 1961), Indian taxing rights extend to shares in companies whose assets consist principally of immovable property in India ("immovable property companies").

Business Property Connected to a PE

Unlike the OECD Model, Article 13 contains no separate paragraph for business property of a permanent establishment (PE). Because each state taxes gains under its own domestic law, gains on assets forming part of a US enterprise's Indian PE — including gains on the alienation of the PE itself — are fully taxable in India under the Income Tax Act.

Ships and Aircraft

The only treaty carve-out is the one Article 13 itself makes for Article 8: under Article 8(6), gains from the alienation of ships, aircraft, or containers owned and operated by an enterprise whose income from their operation is taxable only in its state of residence are taxed only in that state. This is a residence-of-the-enterprise rule — the India-USA treaty does not use the OECD "place of effective management" test here.

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 (which preserves domestic-law taxing rights) and Section 9(2)(c)

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 41 (formerly Form 10F)

The US resident must furnish Form 41 on India's Income Tax e-filing portal, providing details such as status, nationality, TIN, and period of residential status.

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

When sale proceeds are remitted from India to the US, the Indian buyer or authorised dealer bank requires Form 145 (declaration of remittance) and Form 146 (CA certificate confirming tax deduction at the appropriate rate). For property sales exceeding INR 50 lakh, TDS must be deducted under Section 393(1) of the Income-tax Act, 2025 (Table, Sl. No. 3(i); section 194-IA of the Income-tax Act, 1961) at 1% (for residents), or under Section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) at the rates in force (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 393(2):

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 393(2). The rates are:

• LTCG on listed shares: 12.5% (Section 198)
• LTCG on unlisted shares: 12.5% (Section 197)
• STCG on listed shares: 20% (Section 196)
• 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 393(2). The buyer files Form 144 (formerly Form 27Q) quarterly reporting the TDS deducted.

Section 395(1) 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 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) 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 Explanation 5 to section 9(1)(i) of the Income-tax Act, 1961 (from 1 April 2026, Section 9(2)(c) of the Income-tax Act, 2025), 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 198)

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 198)
• 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 393(2)
• 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 198. This is the full domestic rate — the DTAA does not reduce it.

Are indirect transfers of Indian company shares taxable?

Yes. Under Section 9(2)(c), 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 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), 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 144; the seller may need to file an Indian income tax return to claim refunds or adjustments.