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

Quick answer: The India-Sri Lanka DTAA caps dividends at a flat 7.5% — one of India's lowest treaty dividend rates — with no shareholding tiers, interest at 10% (0% for the Government, central bank and named institutions), and royalties and FTS together at 10% under one combined article with no make-available test. Signed 22 January 2013 and in force from 22 October 2013, the treaty carries a full Limitation of Benefits article from day one. Sri Lanka has never signed the MLI, so this treaty is not a Covered Tax Agreement — but a bilateral Protocol signed 16 December 2024, in force 19 June 2026, inserts a Principal Purpose Test of its own.

Key takeaways:

• Dividends capped at a flat 7.5% (Article 10(2)) — no shareholding-based tiers
• Interest capped at 10% (Article 11(2)), with a 0% exemption for government, central bank and named institutions (Article 11(3))
• Royalties and FTS share one combined article (Article 12) at 10%, with no make-available test and managerial services covered
• Article 13(5) gives India an unconditional right to tax a Sri Lankan resident's gains on Indian company shares — no minimum shareholding, no grandfathering
• Article 28's built-in LOB is joined by a bilateral PPT from the 2024 Protocol, but Sri Lanka has never joined the MLI

Overview of the India-Sri Lanka DTAA

The Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka allocates taxing rights between the two countries and reduces withholding tax on cross-border dividends, interest, royalties and fees for technical services. Signed on 22 January 2013 in New Delhi — together with a Protocol signed the same day, in Hindi, Sinhala and English, with English prevailing — it entered into force on 22 October 2013 and has effect in India from FY 2014-15 onward. It replaced an earlier Convention signed on 27 January 1982.

The treaty's headline feature is its unusually low flat 7.5% dividend rate — among the lowest in any of India's tax treaties — set out in a Protocol clause reviewable after three years but never revised; the clause self-executes, so 7.5% continues. This guide covers residence, PE, the four passive-income articles, capital gains, anti-abuse rules, and how to claim treaty benefit.

Treaty History and Current Status

The India-Sri Lanka DTAA was notified in India by Notification No. 23/2014 / S.O. 956(E), dated 28 March 2014; Sri Lanka published it in Gazette No. 1828/9 of 17 September 2013, operative from year of assessment 2014/2015.

A bilateral Protocol signed 16 December 2024 at New Delhi entered into force on 19 June 2026 and was notified in India by Notification No. 88/2026 / S.O. 3926(E), dated 16 July 2026, under section 159(1) of the Income-tax Act, 2025 (30 of 2025). Its Article 3(2) sets entry into force at the thirtieth day after the later of the two diplomatic notifications, while the gazette notification records 19 June 2026 as the entry-into-force date. It makes exactly two changes: Article 1 replaces the preamble, and Article 2 substitutes a Principal Purpose Test (PPT) for the old Article 28(6) (see Anti-Abuse below). Nothing else — no rate, no PE rule, no capital-gains provision — was touched.

The Protocol's own Article 3(3)(a) is imperfectly drafted on when the PPT bites. It gives effect "in respect of income derived in any fiscal year beginning on or after the first day of April next following the calendar year in which the Agreement enters into force" — saying "the Agreement" where "this Protocol" is evidently meant, and the gazette recital repeats the slip. The opening words of Article 3(3), "shall thereupon have effect," tie the clause to the Protocol's own entry into force, which puts the first affected year at 1 April 2027 onward — FY 2027-28. The notification fixes no India-effect date of its own, and the Income Tax Department's consolidated text stamps both substitutions "w.e.f. 16-7-2026," which is the gazette date rather than the date the PPT starts applying to income. Treat FY 2027-28 as a reasoned reading, not a settled one.

Both countries are also parties to a SAARC Limited Multilateral Agreement (in force 19 May 2010), but it is purely administrative — information exchange, collection assistance, tax-policy cooperation — with no rate or PE article; its conflict rule gives priority to the more recently amended bilateral treaty, i.e. this one.

Who the Treaty Covers, Residence and PE

Article 1 applies to residents of one or both States; Article 2 covers, on the Sri Lankan side, income tax including the turnover-based tax on Board of Investment-licensed enterprises. India's competent authority is "the Finance Minister, Government of India, or his authorised representative"; Sri Lanka's is the Commissioner General of Inland Revenue.

For dual-resident individuals, Article 4(2) applies the usual cascade — permanent home, vital interests, habitual abode, nationality, then mutual agreement. For a dual-resident company, Article 4(3) resolves the tie by place of effective management (POEM) — untouched by the 2024 Protocol and by the MLI, which does not apply to this treaty at all (see Anti-Abuse below).

Permanent establishment — Article 5

Beyond the ordinary fixed-place list, the UN Model influence adds a farm or plantation, a sales outlet, and a warehouse for storing others' goods as PEs (5(2)(g)-(i)). A construction PE arises where a building site, construction, installation or assembly project, or a drilling rig, lasts more than 183 days (5(3)(a)). A services PE arises where personnel work on the same or a connected project aggregating more than 90 days within any 12-month period (5(3)(b)) — with no carve-out for FTS, so both can apply to the same engagement.

Article 5(4)'s preparatory/auxiliary exclusions are pre-BEPS (untouched by the MLI, which Sri Lanka never joined). Article 5(5) creates an agency PE (also pre-BEPS), lost under 5(7) where the agent works wholly or almost wholly for one enterprise. Article 5(6) adds an insurance PE (other than re-insurance) for premiums collected or risks covered through a non-independent agent. Article 14 sets independent personal services at a fixed base, or a stay of 183 days or more in any twelve-month period — not the 90-day enterprise test.

Business Profits — Article 7

Business profits are taxed only in the residence State unless a PE exists, and then only the profits attributable to it. The treaty has no force-of-attraction rule. Article 7(3) disallows notional head-office charges and notional interest, except for a bank. Protocol clause (i) restricts PE profit attribution on survey, supply, services, construction or installation contracts to the part the PE actually carries out.

Dividends, Interest, Royalties and Fees for Technical Services

See our India to Sri Lanka withholding tax rates page for a full rate-by-rate breakdown.

Dividends — Article 10

Dividends are taxable in the source State but "shall not exceed 7.5 per cent of the gross amount," to a beneficial owner resident in the other State (Article 10(2)). There is no shareholding-based tier — well below the usual 10%/15% split in many Indian treaties. The three-year review clause self-executes: "In case this rate is not reviewed after 3 years, the agreed rate of 7.5% will continue." PE-connected dividends fall into Article 7 or 14 (Article 10(4)).

Interest — Article 11

Interest is capped at 10% (Article 11(2)) — no bank tier. Article 11(3) exempts interest beneficially owned by (a) the Government, a political subdivision or local authority of either State; (b) the RBI, EXIM Bank of India or the National Housing Bank (India-source), or the Central Bank of Sri Lanka (Sri Lanka-source); or (c) any further institution the competent authorities may agree by exchange of letters — dormant, none added. Only three Indian institutions are named; IDBI, IFCI and SIDBI are not.

Article 11(4) defines interest broadly but excludes late-payment penalty charges. Interest on ship/aircraft-related investments is instead Article 8 profit where integral to that business (Article 8(5)). PE-connected interest goes to Article 7 or 14 (Article 11(5)).

Royalties and Fees for Technical Services — Article 12

Unusually, royalties and FTS sit in one combined article, both capped at 10% (Article 12(2)). The royalty definition (12(3)(a)) is OECD-style, reaching films, broadcast tapes/discs and equipment royalties. The FTS definition (12(3)(b)) covers managerial, technical or consultancy services, including personnel, excluding only Article 14 and 15 income. There is no "make available" test and managerial services are covered. Article 12(5)(a) sources income to the payer's residence; 12(5)(b) deems it to arise where the right is used or services performed. PE-connected royalties/FTS go to Article 7 or 14 (Article 12(4)).

Capital Gains — Article 13

Article 13(5) matters most in practice: India can tax a Sri Lankan resident's gain on Indian company shares regardless of shareholding size or holding period — no Mauritius- or Singapore-style grandfathering here. India applies section 198 (section 112A, 1961 Act) at 12.5% without indexation for long-term listed-equity gains above the exemption threshold, section 196 (section 111A) at 20% for short-term listed-equity gains, or section 197 (section 112) at 12.5% without indexation for other long-term gains.

Shipping, Students and Other Distinctive Rules

Article 8 splits ships from aircraft: aircraft profits are residence-only (8(1)), but ship profits "may be taxed in the first mentioned State, but the tax so charged shall be reduced by an amount equal to 50 per cent thereof" (8(2)) — a source-state right at half tax; containers get the same relief (8(4)) unless used solely within the other State.

Article 21 caps a student's exempt employment income at US$3,000 per annum for up to six years — never indexed. Article 20 exempts professors and research scholars for two years. Publicly-funded artistes and sportspersons (17(3)) are taxed only in their residence State. Article 22(3) lets the source State tax "other income" not dealt with elsewhere. Article 24(2) preserves India's right to tax a PE at a higher rate than a similar domestic company.

Relief from Double Taxation

Both States relieve double taxation by ordinary credit — Article 23(2) India, Article 23(3) Sri Lanka — with no tax sparing. An Indian resident claiming the Article 23(2) credit for Sri Lankan tax paid must file Form 67 under Rule 128(9) of the Income-tax Rules, 1962 (governing years before 1 April 2026), due by the end of the relevant assessment year, or on filing an updated return under section 139(8A).

Article 25 provides a Mutual Agreement Procedure: a case may be presented within three years of first notification, implemented "notwithstanding any time limits in the domestic law." The treaty has no arbitration clause, and no MLI Part VI arbitration either.

Anti-Abuse: Limitation of Benefits, the PPT and the MLI

Article 28 has carried a full Limitation of Benefits (LOB) article since 2013, independent of the MLI. Articles 28(1)-(2) restrict benefits to a "qualified person": a governmental entity; a listed company or one 50%+ owned by resident individuals or qualifying entities; a partnership/AOP with 50%+ beneficial interest similarly held; or a charitable/tax-exempt entity active in either State.

A base-erosion proviso strips benefits where over 50% of gross income is paid to non-residents as deductible payments, carved out for arm's-length payments and bank-PE financial obligations. Article 28(3) offers an active-trade-or-business route, and 28(4) lets the competent authority grant benefits anyway where obtaining them was not the principal purpose.

Sri Lanka has never signed the MLI — absent from the OECD's 107-jurisdiction signatories list (status 18 June 2026). India is a signatory (MLI in force for India from 1 October 2019), but a treaty is only modified where both sides notify it. So the India-Sri Lanka DTAA is not a Covered Tax Agreement: Article 4(3)'s POEM tie-breaker and Articles 5(4)/5(5)'s pre-BEPS wording are untouched, and there is no MLI Part VI arbitration on top of the treaty's own lack of one.

What the treaty has instead is a genuinely bilateral PPT, substituted into Article 28(6) by the 2024 Protocol: "a benefit under this Agreement shall not be granted... if it is reasonable to conclude... that obtaining that benefit was one of the principal purposes of any arrangement or transaction... unless it is established that granting that benefit... would be in accordance with the object and purpose" of the treaty — wording modelled on the MLI's own Article 7(1) PPT but adopted bilaterally, as was the replaced preamble. The treaty layers this objective LOB with the PPT, on top of India's domestic GAAR under section 159(6) of the Income-tax Act, 2025. There is also no most-favoured-nation clause anywhere in the Agreement or Protocol — the phrase never appears.

How to Claim Treaty Benefits

A Sri Lankan resident needs a Tax Residency Certificate from Sri Lanka's Inland Revenue Department (Secretariat division, Colombo); an Indian resident claiming Sri Lanka-side relief applies for an Indian TRC on Form 42. The recipient must also electronically file Form 41 (formerly Form 10F) — treaty benefit at source requires this filing, not the TRC alone — and confirm, in writing, beneficial ownership and the absence of a permanent establishment.

The Indian payer deducts TDS under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) — applying whichever rate is more beneficial per section 159(4) (section 90(2) of the 1961 Act) — and files Form 145 (formerly Form 15CA) before remitting. A chartered accountant's Form 146 (formerly Form 15CB) is not needed on every remittance — only for Part C of Form 145, a taxable remittance above INR 5 lakh made without a section 395 certificate. Where the rate is uncertain, the recipient can apply under section 395(1) (section 197 of the 1961 Act) for a certificate in advance.

Worked Example

An Indian subsidiary pays its Sri Lankan parent a dividend of INR 1,00,00,000, interest of INR 50,00,000 on a foreign-currency loan, and a technical fee of INR 20,00,000, with a valid TRC and Form 41 on file and no PE in India:

The treaty rates cut combined withholding from INR 34,00,000 to INR 14,50,000 — a saving of INR 19,50,000. Treaty rates are final, all-inclusive figures; the domestic column is the 20% base under section 207(1) before surcharge and cess. Had the loan been rupee-denominated, the 20% in Table Sl. No. 3 would not apply to it and the domestic comparison for the interest would instead be the 35% rate in force for a foreign company. Had the parent's personnel already spent more than 90 days in India on a connected project, the technical fee would instead be PE business profits under Article 7 at 35% net.

Common Mistakes

• Importing another treaty's dividend tiers. Article 10(2) is a flat 7.5%, whatever the shareholding.
• Naming institutions the treaty doesn't name. Article 11(3) covers only the Government, the Central Bank of Sri Lanka, the RBI, EXIM Bank of India and National Housing Bank — not IDBI, IFCI or SIDBI.
• Applying a make-available test to FTS. Article 12(3)(b) has none.
• Assuming the MLI applies. Sri Lanka has never signed it; anti-abuse rests on Article 28's own LOB and, from June 2026, its bilateral PPT.
• Overstating when the new PPT bites. "W.e.f. 16-7-2026" is the gazette date, not necessarily the first fiscal year the PPT applies — more reasonably FY 2027-28.
• Treating Article 13(5) as conditional. There is no minimum-shareholding threshold or grandfathering.

Frequently Asked Questions

What is the India-Sri Lanka DTAA?

The India-Sri Lanka DTAA is a bilateral tax treaty signed on 22 January 2013 and in force since 22 October 2013 that allocates taxing rights between the two countries and reduces withholding tax on cross-border dividends, interest, royalties and fees for technical services. It replaced an earlier 1982 Convention and was amended by a 2024 Protocol that inserted a Principal Purpose Test.

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

Article 10(2) caps Indian withholding tax on dividends paid to a Sri Lankan resident at a flat 7.5% of the gross amount, with no shareholding-based tiers — well below India's usual 10%/15% treaty rates and the 20% domestic rate under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025. The rate applies equally regardless of ownership percentage.

Does the MLI apply to the India-Sri Lanka DTAA?

No. Sri Lanka has never signed the OECD's Multilateral Instrument (MLI), so the treaty is not a Covered Tax Agreement and none of the MLI's provisions modify it. The treaty's anti-abuse protection instead comes from its own built-in Article 28 Limitation of Benefits, plus a Principal Purpose Test that a bilateral 2024 Protocol inserted directly into Article 28(6), independent of the MLI.

What did the 2024 Protocol change, and has it taken effect?

The Protocol, signed 16 December 2024, entered into force on 19 June 2026 and was notified in India on 16 July 2026. It replaces the treaty's preamble and substitutes a Principal Purpose Test in Article 28(6) — nothing else changed. On the Protocol's own wording, the new test most reasonably applies to income from fiscal years beginning on or after 1 April 2027.

How does the treaty tax capital gains on shares of an Indian company?

Under Article 13(5), gains on shares of an Indian company held by a Sri Lankan resident may be taxed in India without any minimum-shareholding threshold, grandfathering, or capped rate — an unconditional source-state right. India applies its ordinary domestic capital-gains provisions, currently 12.5% for long-term gains on listed equity above the exemption threshold and 20% for short-term gains on listed equity.

What documents does a Sri Lankan resident need to claim treaty benefits in India?

A Tax Residency Certificate from Sri Lanka's Inland Revenue Department, an electronically filed Form 41 (formerly Form 10F) declaring status, tax identification number and residence period, and a self-declaration of beneficial ownership and no permanent establishment in India. The Indian payer must also file Form 145 before remitting; a chartered accountant's Form 146 is needed only for a taxable remittance above INR 5 lakh made without a section 395 certificate.