Dividend Tax Rate Between India and Malaysia Under DTAA

Quick answer: Under the India-Malaysia DTAA, dividends are taxed at a flat 5% withholding rate under Article 10(2), regardless of shareholding percentage, versus India's domestic rate of 20% under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) -- a 75% reduction. The treaty was signed 9 May 2012 at Putrajaya, entered into force 26 December 2012, and became effective in India from 1 April 2013. Claiming the rate requires a Tax Residency Certificate from the Inland Revenue Board of Malaysia (LHDN) and Form 41 (formerly Form 10F). The 5% rate is a single flat cap with no participation threshold -- unusual among India's treaties, most of which tier the rate by shareholding.

Key takeaways:

• Flat 5% DTAA dividend rate vs 20% domestic rate -- a 75% reduction, one of the lowest dividend rates India has agreed with any treaty partner
• No shareholding tiers -- the same 5% cap applies whether the Malaysian holder owns 1% or 100% of the Indian company
• Treaty signed 9 May 2012 at Putrajaya, entered into force 26 December 2012, effective in India from 1 April 2013
• Requires a TRC from the Inland Revenue Board of Malaysia (LHDN) plus electronically filed Form 41 (formerly Form 10F)
• Since Dividend Distribution Tax was abolished on 1 April 2020, dividends are taxed in the shareholder's hands, so the 5% treaty cap applies directly to the withholding at source
• The MLI's Principal Purpose Test applies to this treaty in India from 1 April 2022, and clause 2 of the Protocol denies treaty benefits to Malaysian Labuan entities unless they elect into normal Malaysian income tax

Dividend Tax Rate Between India and Malaysia

The Double Taxation Avoidance Agreement (DTAA) between India and Malaysia, signed on 9 May 2012 at Putrajaya, entered into force on 26 December 2012, and became effective in India from 1 April 2013, replaced an earlier 2001 agreement (which had itself replaced a 1976 treaty). Under Article 10 of the current treaty, the maximum withholding tax on dividends paid between the two countries is capped at 5% of the gross amount -- among the lowest dividend rates anywhere in India's treaty network, and markedly lower than the 10-15% rates found in many comparable agreements.

This reduced rate applies to dividends flowing in either direction: from Indian companies to Malaysian shareholders, and from Malaysian companies to Indian residents. Unlike most Indian DTAAs, which set a lower rate for substantial (parent-subsidiary) holdings and a higher rate for portfolio holdings, the India-Malaysia treaty applies a single flat 5% rate irrespective of the size of the shareholding.

For Malaysian holding companies and portfolio investors in Indian equities, and for Indian investors in Malaysian companies, this flat structure simplifies planning considerably: there is no threshold to cross, no minimum holding period, and no separate rate for indirect holdings.

Treaty Rate vs Domestic Rate: Detailed Comparison

The gap between the treaty rate and India's domestic withholding rate on dividends is substantial, making the DTAA route valuable for any Malaysian shareholder of an Indian company.

Domestic Rate (Without DTAA)

Under Indian domestic law, dividends paid by an Indian company to a non-resident shareholder are subject to withholding tax at 20% (plus applicable surcharge and health and education cess) under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). This flat 20% applies to all foreign shareholders regardless of country of residence, unless a more favourable treaty rate is available and properly claimed.

DTAA Rate (With Treaty)

Article 10(2) of the India-Malaysia DTAA provides that "the tax so charged shall not exceed 5 per cent of the gross amount of the dividends," provided the recipient is the beneficial owner of the dividend income. This is a 75% reduction from the domestic rate, and there is no participation-based tiering: the same 5% cap applies to a one-share portfolio holder and a wholly-owning parent company alike.

Effective Tax Savings

For a Malaysian company receiving INR 1 crore in dividends from its Indian subsidiary, the DTAA reduces withholding tax from INR 20 lakh to INR 5 lakh -- a saving of INR 15 lakh. Because the DTAA rate operates as an all-inclusive cap, no surcharge or health and education cess is added on top of the 5% once the treaty rate is validly applied; those additions apply only where tax is withheld at the domestic 20% rate because treaty documentation is missing or incomplete.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The 5% cap is available only to the beneficial owner of the dividend -- a nominee or conduit that merely passes the income through to another party does not qualify. Article 10(4) removes the benefit entirely where the shareholding is effectively connected with a business the recipient carries on through a permanent establishment, or independent personal services performed from a fixed base, in the state where the paying company is resident: the treaty text provides that paragraphs 1 and 2 do not apply where "the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base." In that case the dividend is taxed as business profits under Article 7 (or under Article 15) rather than at the 5% capped rate.

Tax Residency Certificate from Malaysia

A Malaysian shareholder claiming the 5% rate must hold a valid Tax Residency Certificate (TRC) issued by the Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri Malaysia, LHDN), covering the relevant year of assessment and confirming Malaysian tax residence under the treaty. Indian residents claiming the treaty rate on dividends from a Malaysian company similarly require a TRC from India's jurisdictional Assessing Officer.

No Permanent Establishment

Where the shares are held through, or connected with, a permanent establishment in the state of the paying company, the dividend loses the benefit of the capped rate and is instead taxed as business profits at ordinary corporate rates. A no-PE self-declaration is standard supporting documentation for the treaty claim.

Anti-Abuse Rules: MLI PPT and the Labuan Carve-Out

Principal Purpose Test

Both India and Malaysia are parties to the Multilateral Instrument (MLI), with the India-Malaysia treaty listed as a Covered Tax Agreement for both. Because of India's Article 35(2) option substituting the taxable-period trigger, the MLI's provisions -- including the Principal Purpose Test (PPT) and the treaty's new preamble -- apply in India from 1 April 2022 for this treaty. Under the PPT, treaty benefits (including the 5% dividend cap) can be denied where obtaining that benefit was one of the principal purposes of an arrangement or transaction, unless granting the benefit would be in accordance with the object and purpose of the treaty. The MLI does not itself alter the stated 5% rate; it only conditions access to it on genuine economic substance.

The Labuan Carve-Out

Clause 2 of the Protocol signed the same day as the Agreement (9 May 2012) addresses Malaysia's Labuan International Business and Financial Centre: persons whose income is taxed under the Labuan Business Activity Tax Act 1990 are denied treaty benefits altogether, unless they irrevocably elect to be taxed under the ordinary Malaysian Income Tax Act 1967 instead. A Malaysian holding vehicle set up in Labuan under the preferential Labuan regime therefore cannot claim the 5% dividend rate (or any other treaty benefit) unless it has made -- and can evidence -- that election. This is a separate, additional gate on top of the MLI's Principal Purpose Test, and it predates the MLI by several years.

Article 10 Provisions in Detail

Article 10(1): Residence State Taxation

Article 10(1) provides that "dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State" -- confirming that the shareholder's residence state always retains a right to tax the dividend, with relief from double taxation given through a foreign tax credit for the Indian (or Malaysian) tax withheld at source.

Article 10(2): Source State Cap at 5%

Article 10(2) then limits how much the source state -- the state where the paying company is resident -- may charge: "the tax so charged shall not exceed 5 per cent of the gross amount of the dividends," provided the recipient is the beneficial owner. This is the operative cap for Indian withholding on dividends paid to Malaysian shareholders.

Article 10(4): Permanent Establishment Exception

As set out above, Article 10(4) withdraws the capped rate where the underlying shareholding is effectively connected with a permanent establishment or fixed base the beneficial owner has in the paying company's state -- in that scenario the dividend is folded into business-profits taxation under Article 7, at ordinary domestic corporate rates, rather than the 5% cap.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

A TRC from the Inland Revenue Board of Malaysia (for Malaysian recipients) or from the Indian Assessing Officer (for Indian recipients) is the foundational document for any DTAA claim, and must be obtained before the dividend payment date wherever possible.

Form 41 (formerly Form 10F)

Form 41 must be filed electronically on the Indian Income Tax e-filing portal, giving the recipient's name, status, address, Malaysian tax identification number, period of residence, and the nature of the income. PAN is not mandatory to file Form 41 under the non-PAN registration route.

Self-Declaration and No-PE Certificate

A self-declaration confirming beneficial ownership, the absence of a permanent establishment or fixed base connected with the shareholding, and the genuine commercial purpose of the holding structure (addressing the MLI's PPT) rounds out the standard documentation package. Labuan entities must additionally be able to demonstrate their election into the ordinary Malaysian Income Tax Act 1967, if treaty benefits are to be claimed.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

The Indian company paying the dividend must deduct tax at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), applying the 5% treaty rate once the recipient's documentation is on file.

Forms 145 and 146

The Indian payer must electronically file Form 145 (formerly Form 15CA) before remitting the dividend, and obtain Form 146 (formerly Form 15CB) from a chartered accountant where the remittance exceeds INR 5 lakh and no lower-deduction certificate is on file.

Section 395(1): Lower Withholding Certificate

Where there is uncertainty about applying the treaty rate directly, the Malaysian recipient can apply to the Indian Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate authorising withholding at the certified lower (or nil) rate, which the Indian payer can then rely on directly.

Practical Example

A Malaysian holding company owns 30% of the shares of an Indian manufacturing subsidiary. The Indian company declares a dividend of INR 2 crore for the year, of which the Malaysian holder's share is INR 60 lakh. With a valid TRC and Form 41 on file, and no PE or fixed base connecting the holding to India, the Indian company withholds tax at 5% under Article 10(2): INR 3 lakh, leaving INR 57 lakh for remittance. Without the treaty documentation, the same payment would suffer 20% withholding -- INR 12 lakh -- a difference of INR 9 lakh that the Malaysian holder would have to claim back by Indian tax return, a materially slower route than getting the paperwork in place before the dividend is paid.

How Malaysia's 5% Compares

India's treaty network generally splits dividend rates into a lower tier for substantial (parent-subsidiary) holdings and a higher tier for portfolio holdings -- for example, several European treaties cap substantial holdings at 5-10% but portfolio holdings at 15-20%. Malaysia's flat 5% for every holding size, with no minimum shareholding requirement, is unusually favourable for portfolio investors specifically, since most other treaties reserve the lowest rate for large, controlling stakes.

For the full treaty text and every other income category, see our India-Malaysia DTAA complete guide and the withholding tax rates summary for India to Malaysia.

Frequently Asked Questions

What is the withholding tax rate on dividends under the India-Malaysia DTAA?

Article 10(2) caps the withholding tax on dividends at 5% of the gross amount, provided the recipient is the beneficial owner and a resident of the other Contracting State. This applies regardless of the size of the shareholding.

Does the 5% rate depend on how many shares the Malaysian shareholder holds?

No. Unlike many Indian DTAAs that tier the rate by shareholding percentage, the India-Malaysia treaty applies a single flat 5% rate to all dividend payments, whether the holding is a small portfolio stake or a controlling interest.

What documents does a Malaysian shareholder need to claim the 5% rate?

A Tax Residency Certificate issued by the Inland Revenue Board of Malaysia (LHDN), Form 41 (formerly Form 10F) filed on the Indian e-filing portal, and a self-declaration of beneficial ownership and no permanent establishment in India.

Can a Labuan entity claim the 5% dividend rate?

Only if it has irrevocably elected to be taxed under Malaysia's ordinary Income Tax Act 1967 instead of the Labuan Business Activity Tax Act 1990. Clause 2 of the Protocol to the treaty denies treaty benefits to Labuan entities that remain under the Labuan regime.

How does the MLI's Principal Purpose Test affect the 5% rate?

Since 1 April 2022, the MLI's Principal Purpose Test applies to this treaty in India. It can deny the 5% rate where obtaining that benefit was one of the principal purposes of an arrangement, even though the MLI does not change the 5% figure itself.

What happens if the dividend is connected to a permanent establishment in India?

Article 10(4) removes the 5% cap where the shareholding is effectively connected with a permanent establishment or fixed base the Malaysian recipient has in India. The dividend is then taxed as business profits under Article 7 at ordinary corporate rates instead.