India-Nepal DTAA: Complete Guide to the Double Taxation Avoidance Agreement

Quick answer: The India-Nepal DTAA, signed 27 November 2011 and in force since 16 March 2012, caps dividends at 5% for a beneficial-owner company holding at least 10% of the payer's shares and 10% otherwise, caps interest at a flat 10% with exemptions for central banks and governments, and caps royalties at 15% — but it has no fees-for-technical-services article at all. Cross-border service fees are instead business profits under Article 7, taxed only if a permanent establishment exists in India. Nepal has never signed the MLI, so the treaty is unmodified by it; anti-abuse rests on the treaty's own Article 28 main-purpose test and India's domestic GAAR.

Key takeaways:

• Dividends: 5% at ≥10% shareholding, 10% otherwise (Article 10)
• Interest: flat 10% cap, 0% for RBI, Nepal Rashtra Bank, and either Government (Article 11)
• Royalties: 15% — above the 10% cap in most Indian treaties, below the 20% domestic rate (Article 12)
• No FTS article: technical fees are business profits under Article 7, taxed only with a PE
• Nepal has not signed the MLI, so this treaty is unaffected by the Principal Purpose Test

Overview and Treaty History

The India-Nepal DTAA was signed at Kathmandu on 27 November 2011 (Hindi, Nepali and English texts, English prevailing) and entered into force on 16 March 2012, the date of the later of the two countries' notifications under Article 30(2). In India it has effect for fiscal years beginning on or after 1 April 2013 (S.O. 1322(E), dated 12 June 2012); in Nepal, for fiscal years beginning on or after mid-July 2013 (1 Shrawan) — a mismatch worth flagging for cross-border planning. It replaced an earlier treaty signed 8 January 1987, which under Article 30(4) continues to govern any action or proceeding already initiated before this Agreement came into force.

A single Protocol, signed the same day and forming "an integral part of the Agreement," has only two paragraphs — a domestic-law-if-more-beneficial rule and a royalty-only most-favoured-nation clause, both discussed below. No amending protocol has ever been signed.

The treaty follows a Hybrid model: an OECD-style spine with UN Model features including a 90-day services PE test, a preparatory/auxiliary carve-out that drops "delivery" from the storage-and-display safe harbour, a stand-alone insurance PE, and a source-state gambling clause. Taxes covered are India's income tax (including surcharge) and Nepal's income tax under its Income Tax Act, 2058 B.S. — there is no capital or wealth tax article.

Who the Treaty Covers and the Residence Tie-Breaker

Article 1 applies the Agreement to residents of India, Nepal, or both, using each country's domestic liability-to-tax test (Article 4(1)). An individual dual-resident is tied to one State by the standard sequence: permanent home, then centre of vital interests, then habitual abode, then nationality, and finally mutual agreement (Article 4(2)). For a non-individual dual-resident, Article 4(3) resolves the tie by place of effective management — and since the MLI does not apply to this treaty, this remains the original test rather than the MAP-by-agreement replacement the MLI introduced elsewhere. The competent authority is the Finance Minister (or authorised representative) on each side (Article 3(1)(g)).

Permanent Establishment Rules (Article 5)

Article 5 defines a permanent establishment as a fixed place of business through which an enterprise's business is wholly or partly carried on, including a place of management, branch, office, factory, workshop, or place of extraction of natural resources. The listed examples also include, in UN Model style, a sales outlet (Article 5(2)(f)), a third-party storage warehouse (Article 5(2)(g)), and a farm or plantation.

Construction PE — more than 183 days

A building site, construction, installation or assembly project, or supervisory activities connected with it, becomes a PE only if it lasts more than 183 days — stated in days, not the 6-month or 9-month formula found in some other Indian treaties.

Services PE — more than 90 days

Article 5(3)(b) creates a PE where an enterprise furnishes services, including consultancy services, through personnel, if activities for the same or a connected project aggregate more than 90 days within any 12-month period. This is the gate for whether Nepalese consultancy or technical-personnel fees become taxable in India, given the absence of an FTS article.

No "delivery" safe harbour, and an insurance PE

Article 5(4) excludes from PE status facilities or stock held solely "for the purpose of storage, or display" — "delivery" is absent from this list, so a delivery warehouse is not sheltered as it would be under the OECD Model. Article 5(5) creates an agency PE for a dependent agent who habitually concludes contracts, delivers from a maintained stock of goods, or "habitually secures orders... wholly or almost wholly for the enterprise itself," with no extension to associated enterprises. Article 5(6) adds a stand-alone insurance PE for an enterprise that collects premiums or insures local risks through a non-independent person. There is no oil-and-gas deemed-PE paragraph.

Business Profits (Article 7)

Business profits of an enterprise of one State are taxable only in that State unless it carries on business through a PE in the other, in which case only profits attributable to that PE are taxed there on an arm's-length, net basis. Because this treaty has no FTS article, Article 7 (with the Article 5 PE tests above) is the operative gateway for most cross-border service income between India and Nepal.

Dividends, Interest and Royalties

Dividends — Article 10

Dividends are capped at 5% of the gross amount where the beneficial owner is a company holding at least 10% of the shares (not capital) of the paying company, and at 10% in every other case. The 10%-shareholding threshold for the 5% tier is unusually low and generous by the standards of India's treaty network, where 25%-plus thresholds are common.

Interest — Article 11

Interest is capped at a flat 10%, with no separate lower tier for banks or financial institutions. Article 11(3) exempts interest entirely where beneficially owned by the Reserve Bank of India or the Nepal Rashtra Bank (11(3)(a)), or by the Government, a political sub-division, or a local authority of the other State (11(3)(b)). Article 11(3)(c) leaves open a further exemption for institutions agreed "through exchange of letters" — a mechanism, not a published list, so no institution can be named here. Interest connected with a PE is carved out at Article 11(5) and taxed as business profits instead.

Royalties — Article 12

Royalties are capped at 15% — higher than the 10% ceiling in most modern Indian treaties, though still below India's 20% domestic rate. Article 12(3) reaches the use of industrial, commercial or scientific equipment and know-how, so equipment hire and know-how licensing are royalties even though services are not. The PE carve-out sits at Article 12(4), not 12(5) — Article 12 has only six paragraphs. Article 12(5)(b) also has a place-of-use source rule: royalties not otherwise arising in either State, but relating to a right used in one, are deemed to arise there.

Fees for Technical Services: Why There Isn't One

This is the single most important structural fact about the India-Nepal DTAA. The words "technical," "fees for technical services," and "FTS" do not appear anywhere in the Agreement or its Protocol. The article list runs Article 10 Dividends, Article 11 Interest, Article 12 Royalties, Article 13 Capital Gains — no combined royalty/FTS article and no separate FTS article. This treaty sits in the small minority of Indian treaties that never received an FTS clause.

The consequence: technical, managerial and consultancy fees paid to a Nepalese enterprise are business profits under Article 7, taxable in India only if the enterprise has a PE here — most commonly through the 90-day services-PE test in Article 5(3)(b). Anything not caught by Article 7 (or Article 14, for an individual's independent personal services) falls into Article 22(1) Other Income: "Items of income of a resident of a Contracting State, wherever arising, not dealt within the foregoing Articles of this Agreement shall be taxable only in that State" — the OECD residence-only form, not the UN source-state form used in many other Indian treaties. There is no 10% or 15% gross withholding on Nepalese technical fees; the only gate is the PE test, or the 183-day/fixed-base test in Article 14 for individuals.

Capital Gains (Article 13)

Article 13(5) is the standout provision: it gives India an unconditional right to tax a Nepalese resident's gains on shares of an Indian company, with no minimum-shareholding condition and no grandfathering date. There is no LOB gate specific to the capital-gains article.

Other Distinctive Provisions

Article 20 exempts a visiting professor, teacher or research scholar's remuneration for up to two years; Article 21 caps a student's exemption at six consecutive years. Article 22(3) carves a source-state taxing right for lottery, gambling and gaming winnings out of an otherwise residence-only Other Income article. Article 24(2) preserves India's right to tax a Nepalese company's PE at a higher rate than a domestic company (the standard Indian branch-rate reservation), and Article 27 provides for assistance in the collection of taxes in full OECD form — unusual for an Indian treaty of this vintage.

Relief from Double Taxation

Article 23(2) gives ordinary credit-method relief symmetrically: India allows a deduction for Nepalese tax paid, capped at the Indian tax attributable to that income, and Nepal does the same in reverse. There is no exemption method and no tax-sparing clause. Protocol paragraph 1 separately provides a treaty-level rule that the more beneficial domestic law applies where it exceeds the treaty's own relief — mirroring, at treaty level, section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961).

Anti-Abuse: Article 28 and the MLI

Article 28 is a one-paragraph, treaty-native main-purpose test: "A resident of a Contracting State shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement." This was written into the 2011 treaty itself and is not the MLI's Principal Purpose Test.

India did notify this Agreement under the Multilateral Instrument (entry 56 on India's Covered Tax Agreements list), but Nepal has never signed the MLI. A treaty is modified only where both parties notify it, so the India-Nepal DTAA is not modified by the MLI: no Principal Purpose Test overlay, no Article 4(3) tie-breaker replacement, no synthesised text. Domestic GAAR (section 159(6) of the Income-tax Act, 2025; section 90(2A) of the Income-tax Act, 1961) applies alongside Article 28.

Protocol paragraph 2 also contains a narrow most-favoured-nation clause limited to royalties: if, under any agreement, convention or protocol between Nepal and a third State, Nepal limits its own source taxation of royalties to a lower rate or a more restricted scope than this Agreement provides, that rate or scope also applies under this treaty from the date the Nepal-third-State instrument enters into force. The trigger is Nepal's own treaty network, not India's. Whether any Nepal-third-State treaty has triggered this is not publicly confirmed, and under the Supreme Court's ruling in Assessing Officer (International Taxation) v. Nestlé SA (19 October 2023), an MFN benefit is enforceable in India only through a formal notification — so no unnotified benefit should be assumed.

How to Claim Treaty Benefits

To claim India-Nepal DTAA rates, a Nepalese recipient of Indian-source income should follow these steps:

Step 1: Tax Residency Certificate and Form 41

Obtain a Tax Residency Certificate (TRC) from the country of residence (required under section 159(8) of the Income-tax Act, 2025; section 90(4) of the Income-tax Act, 1961), and electronically file Form 41 (formerly Form 10F), giving status, tax identification, and period of residence.

Step 2: Self-Declaration on Beneficial Ownership and PE

Confirm beneficial ownership of the income and, where relevant, that no PE or fixed base exists in India — particularly important given the 90-day services-PE test that stands in for the missing FTS article.

Step 3: Payer Withholds and Files Forms 145 and 146

The Indian payer withholds under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) at the treaty rate and files Form 145 (formerly Form 15CA) before remitting, adding a chartered accountant's Form 146 (formerly Form 15CB) only for Part C of Form 145 — a taxable remittance above INR 5 lakh made without a section 395 certificate.

Step 4: Lower-Deduction Certificate, if Needed

Where the correct rate is uncertain — for instance, whether a services PE has arisen — the Nepalese payee applies under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a lower- or nil-deduction certificate. The Indian payer's own route is section 395(2) (section 195(2) of the Income-tax Act, 1961), which determines the proportion of the payment chargeable to tax.

Worked Examples

Example 1: Dividend at the 5% tier

An Indian subsidiary declares a dividend of ₹50,00,000 to its Nepalese parent, which holds 12% of its shares. Article 10(2)(a) caps withholding at 5%: TDS of ₹2,50,000, against ₹10,00,000 at the domestic 20% rate under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 — a saving of ₹7,50,000.

Example 2: Royalty for equipment use

A Nepalese licensor receives ₹20,00,000 for the right to use machinery from an Indian licensee, within Article 12(3)'s equipment-use limb. Article 12(2) caps withholding at 15%: TDS of ₹3,00,000, against ₹4,00,000 at the domestic 20% rate under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 — a saving of ₹1,00,000.

Example 3: Consultancy fees with no PE

A Nepalese engineering firm sends personnel to India for 60 days on a single project for a consultancy fee of ₹15,00,000. Since the presence is under the 90-day Article 5(3)(b) threshold, no services PE arises; with no FTS article and no PE, Article 7 gives India no taxing right over the fee. The Indian payer should still support the position with Form 41 and a no-PE declaration. Had the project instead run past 90 days, a services PE would arise and the fee would become business profits taxable in India on a net basis.

Common Mistakes

• Applying a 10% "FTS rate" to Nepalese service fees. No such rate exists in this treaty.
• Assuming Article 11(3)(c) covers a named bank. It is an open-ended exchange-of-letters mechanism, not a published list.
• Citing Article 12(5) for the royalty PE carve-out. The correct paragraph is 12(4).
• Treating construction PE as a 6-month test. Article 5(3)(a) uses 183 days, not a calendar-month formula.
• Assuming the MLI's Principal Purpose Test applies. Nepal has never signed the MLI; the applicable rule is the treaty's own Article 28.
• Assuming a delivery warehouse is preparatory or auxiliary. Article 5(4) omits "delivery" from the safe harbour.

Frequently Asked Questions

What is the India-Nepal DTAA?

The India-Nepal DTAA is a bilateral tax treaty signed on 27 November 2011 at Kathmandu and in force since 16 March 2012. It has effect in India for fiscal years beginning on or after 1 April 2013. It caps withholding on dividends and royalties, sets a single interest cap, and — unlike most Indian treaties — has no fees-for-technical-services article at all.

What is the dividend withholding rate under the India-Nepal DTAA?

Article 10(2)(a) caps dividends at 5% where the beneficial owner is a company holding at least 10% of the shares (not capital) of the paying company. Article 10(2)(b) caps every other dividend at 10%. Both rates are well below India's 20% domestic rate under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025.

Is there a fees-for-technical-services rate under the India-Nepal DTAA?

No. The Agreement has no fees-for-technical-services article — Article 12 is headed "Royalties" only. Technical, managerial and consultancy fees paid to a Nepalese enterprise are business profits under Article 7, taxable in India only if the enterprise has a permanent establishment here, most commonly through the 90-day services-PE test in Article 5(3)(b).

Does the MLI modify the India-Nepal DTAA?

No. India notified this treaty under the Multilateral Instrument, but Nepal has never signed the MLI. A treaty is a Covered Tax Agreement only if both parties notify it, so the India-Nepal DTAA is not modified by the MLI. There is no MLI Principal Purpose Test here — anti-abuse relies on the treaty's own Article 28 main-purpose test and India's domestic GAAR.

How are capital gains on shares taxed under the India-Nepal DTAA?

Article 13(5) gives an unconditional source-state taxing right over gains from shares in a resident company, with no minimum-shareholding threshold and no grandfathering date, so India can tax a Nepalese resident's gains on Indian-company shares at domestic rates. Article 13(4) separately lets either State tax gains on land-rich shares, with no stated percentage threshold for "principally."

How do I claim India-Nepal DTAA benefits?

The Nepalese recipient obtains a Tax Residency Certificate, electronically files Form 41 (formerly Form 10F), and gives a self-declaration on beneficial ownership and PE status. The Indian payer withholds at the treaty rate under section 393(2) of the Income-tax Act, 2025 and files Form 145 before remitting, adding Form 146 only where Part C applies: a taxable remittance above INR 5 lakh made without a section 395 certificate. If the rate is uncertain the recipient can apply for a lower-deduction certificate under section 395(1), and the payer can apply under section 395(2) to have the chargeable proportion determined.

For a detailed, article-by-article breakdown of every rate, see our withholding tax rates page for India to Nepal. See also our DTAA glossary entry, withholding tax glossary entry, and our DTAA master guide for the general treaty-claim process.