Interest Tax Rate Between India and Malaysia Under DTAA

Quick answer: Under the India-Malaysia DTAA, interest is capped at 10% under Article 11(2), versus India's domestic rate of 20% under section 207(1) (Table, Sl. No. 3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) -- a 50% reduction. Interest derived and beneficially owned by the Government of Malaysia, Bank Negara Malaysia, or one of the other bodies named in Article 11(3) -- nine Malaysian entries and ten Indian ones -- is fully exempt. There is no separate preferential tier for ordinary commercial banks -- the 10% rate applies uniformly to private-sector lending. The treaty was signed 9 May 2012, entered into force 26 December 2012, and became effective in India from 1 April 2013.

Key takeaways:

• Flat 10% DTAA interest rate vs 20% domestic rate for foreign-currency debt -- a 50% reduction
• Full exemption under Article 11(3) for interest derived and beneficially owned by named government and institutional recipients on both sides -- but only those specific recipients, not 'any institution wholly owned by the Government'
• No preferential tier for commercial banks -- Malaysian and Indian private-sector lenders both pay the general 10% rate
• Article 11(4) excludes penalty charges for late payment from the definition of interest, and contains no domestic-law assimilation clause
• Rupee-denominated (NRO) interest paid to non-residents falls outside the 20% domestic figure and is instead withheld at the rates in force -- 30% for non-corporate recipients, 35% for foreign companies -- before the treaty rate is applied
• The MLI's Principal Purpose Test applies to this treaty in India from 1 April 2022, and Labuan entities lose treaty benefits unless they elect into ordinary Malaysian income tax

Interest Tax Rate Between India and Malaysia

Article 11 of the India-Malaysia DTAA -- signed 9 May 2012 at Putrajaya, in force from 26 December 2012, and effective in India from 1 April 2013 -- governs cross-border interest payments between the two countries. The treaty sets a general cap of 10% on source-state withholding, and layers on top of that a recipient-side exemption for a specific list of government bodies and development banks named in Article 11(3).

Unlike some of India's other treaties (for example with Singapore), the India-Malaysia DTAA does not give commercial banks a separate, lower rate tier. Every private-sector lender -- bank or otherwise -- is subject to the same 10% cap; only the specifically named public institutions qualify for the 0% exemption.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Under section 207(1) (Table, Sl. No. 3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), interest paid to a non-resident on money borrowed in foreign currency is withheld at 20% (plus applicable surcharge and cess). This 20% figure is specifically scoped to foreign-currency-denominated debt of the Government or an Indian concern -- rupee-denominated interest owed to a non-resident (for example, on an NRO account or a rupee-denominated loan) falls outside that entry and is instead taxed at the rates in force under section 207(1) (Table, Sl. No. 8): 30% for individuals and other non-corporate recipients, 35% for foreign companies.

DTAA Rate (With Treaty)

Article 11(2) provides that "the tax so charged shall not exceed 10 per cent of the gross amount of the interest," provided the recipient is the beneficial owner. This is a flat 50% reduction from the 20% foreign-currency-debt domestic rate, and a still larger reduction against the 30%/35% rates that would otherwise apply to rupee-denominated interest paid to a non-resident.

Effective Tax Savings

For a Malaysian lender receiving INR 50 lakh in interest on a foreign-currency loan to an Indian borrower, the treaty reduces withholding from INR 10 lakh (at 20%) to INR 5 lakh (at 10%) -- a saving of INR 5 lakh, assuming the lender is not one of the named institutions that qualify for a full exemption instead.

The Article 11(3) Exemption: Named Recipients Only

Article 11(3) is a recipient-side exemption -- it depends entirely on who receives the interest, not on how the loan is guaranteed or structured. There is no exemption in this treaty for loans merely guaranteed or insured by a government; only interest "derived and beneficially owned by" one of the specifically named bodies is exempt.

Malaysian Recipients (Article 11(3)(a))

Interest is exempt where it is derived and beneficially owned by: the Government of Malaysia, the State Governments, local authorities, a statutory body wholly owned by the Government, Bank Negara Malaysia, Export-Import Bank of Malaysia Berhad, Bank Pembangunan Malaysia Berhad (Development Bank of Malaysia), SME Bank of Malaysia Berhad, or Malaysia Industrial Development Finance Berhad.

Indian Recipients (Article 11(3)(b))

The mirror list on the Indian side covers: the Government of India, political sub-divisions, statutory bodies wholly owned by the Government, local authorities, the Export-Import Bank of India, the Reserve Bank of India, IFCI, IDBI, the National Housing Bank, and SIDBI.

Article 11(3)(c): Any Other Agreed Institution

The treaty text adds a catch-all: "any other institution as may be agreed from time to time between the competent authorities of the Contracting States." This lets India and Malaysia extend the exemption to additional institutions by mutual agreement, but until such an agreement is made public, only the entities named in 11(3)(a) and (b) qualify -- a Malaysian or Indian commercial bank cannot claim this exemption simply because it is state-influenced or partly government-owned; the exemption is confined to the entities actually named (or a competent-authority agreement extending it), not to 'any institution wholly owned by the Government.'

Article 11(4): Definition of Interest

Article 11(4) defines interest broadly as "income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits," and specifically includes income from government securities and from bonds or debentures, including premiums and prizes attaching to them. Two points are worth flagging: penalty charges for late payment are expressly carved out of the definition, and the treaty contains no clause assimilating interest to whatever the source state's domestic law happens to treat as "income from money lent" -- unlike some other Indian treaties (such as Canada's, whose Article 11(4) expressly extends to "income assimilated to income from money lent by the taxation laws of the State in which the income arises"), Article 11(4) stands on its own definition without deferring to domestic law.

Article 11(5): Permanent Establishment Exception

Where the beneficial owner of the interest carries on business in the state where the interest arises through a permanent establishment, or performs independent personal services from a fixed base there, and the underlying debt-claim is effectively connected with that PE or fixed base, Article 11(5) withdraws the 10% cap: the interest is then taxed as business profits under Article 7 (or under Article 15) instead, on a net basis at ordinary rates.

Article 11(6) and 11(7): Source Rule and Arm's Length Adjustment

Article 11(6) provides that interest is deemed to arise in a Contracting State when the payer is a resident of that State -- a straightforward payer-residence source rule. Article 11(7) contains the standard arm's length safeguard: where a special relationship between payer and beneficial owner inflates the interest above what independent parties would have agreed, the treaty's 10% cap applies only to the arm's length portion; any excess remains taxable under each state's domestic law.

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

Both India and Malaysia list this treaty as a Covered Tax Agreement under the Multilateral Instrument (MLI). Because of India's Article 35 substitution, the MLI's provisions -- including the Principal Purpose Test (PPT) -- apply in India from 1 April 2022 for this treaty, meaning the 10% cap (and the 11(3) exemption) can be denied where obtaining the benefit was one of the principal purposes of an arrangement lacking genuine economic substance. Separately, clause 2 of the Protocol signed alongside the Agreement denies treaty benefits to Malaysian entities taxed under the Labuan Business Activity Tax Act 1990, unless they irrevocably elect into the ordinary Malaysian Income Tax Act 1967 -- relevant wherever Labuan-incorporated lending vehicles are used.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the Inland Revenue Board of Malaysia (LHDN), covering the relevant year, is required before the 10% rate (or the 11(3) exemption) can be applied.

Form 41 (formerly Form 10F)

Form 41 must be filed electronically on the Indian Income Tax e-filing portal, stating the lender's name, status, Malaysian tax identification number, period of residence, and the nature of the income.

Self-Declaration and No-PE Certificate

A self-declaration of beneficial ownership, confirmation that the debt-claim is not effectively connected with a permanent establishment in India, and (for the named institutions) evidence of the recipient's identity as one of the Article 11(3) entities complete the standard documentation.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

The Indian borrower 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 10% treaty rate (or nil, for exempt recipients) once documentation is on file.

Forms 145 and 146

The Indian payer must file Form 145 (formerly Form 15CA) electronically before remittance, and obtain Form 146 (formerly Form 15CB) from a chartered accountant where the remittance exceeds INR 5 lakh.

Section 395(1): Lower Withholding Certificate

Where the payer cannot apply the treaty rate directly, the Malaysian lender 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.

Practical Example

A Malaysian bank (not one of the named 11(3) institutions) lends USD 2 million to an Indian manufacturing company at 6% annual interest, generating roughly INR 1 crore in interest for the year. With a valid TRC and Form 41 on file, and no PE in India, Indian withholding is capped at 10% under Article 11(2): INR 10 lakh, instead of the 20% domestic rate that would apply to a foreign-currency loan (INR 20 lakh) -- a saving of INR 10 lakh. Had the same loan instead been made by Bank Negara Malaysia, Article 11(3)(a) would exempt the interest entirely, reducing Indian withholding to nil.

How Malaysia's Interest Article Compares

Several of India's other treaties (for example, with Singapore, whose Article 11(2)(a) sets 10% for loans granted by a bank or similar financial institution against 15% in all other cases) give commercial banks their own lower-rate tier separate from the general interest rate. The India-Malaysia treaty does not: it treats every private lender -- bank or otherwise -- the same, reserving the 0% rate strictly for the named public institutions in Article 11(3). This makes the treaty comparatively simple for ordinary commercial lending (a flat 10%) but offers no additional discount for Malaysian banks specifically.

Common Mistakes to Avoid

Assuming government guarantee equals exemption. The most frequent error is applying the Article 11(3) exemption to any loan the Malaysian or Indian government has guaranteed or insured. The exemption is recipient-based, not guarantee-based -- if the actual lender is a private bank, the 10% rate applies even where a government agency has guaranteed repayment.

Treating the exemption list as open-ended. Article 11(3)(a) and (b) name specific institutions. A statutory body that is wholly government-owned but not on the list, or a development finance institution created after the treaty was signed, does not automatically qualify -- it needs a specific competent-authority agreement under Article 11(3)(c), which is not something a taxpayer can assert unilaterally.

Applying the wrong domestic comparison rate. Because section 207(1)'s 20% figure is scoped to foreign-currency debt, comparing the 10% treaty rate against 20% is correct for a foreign-currency loan but understates the saving on rupee-denominated lending, where the domestic rate would otherwise be 30% or 35%. Getting this comparison right matters when quantifying the benefit of claiming the treaty rate versus letting default withholding apply.

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 interest under the India-Malaysia DTAA?

Article 11(2) caps the withholding tax on interest at 10% of the gross amount, provided the recipient is the beneficial owner and a resident of the other Contracting State.

Is there a lower rate for Malaysian banks specifically?

No. The India-Malaysia treaty does not give commercial banks a separate tier -- the general 10% rate applies to all private-sector lenders. Only the specific government bodies and development banks named in Article 11(3) qualify for a full exemption.

Does a government guarantee on the loan make the interest exempt?

No. Article 11(3) is a recipient-side exemption based on who beneficially owns the interest, not on how the loan is guaranteed. A loan merely guaranteed or insured by a government does not qualify unless the actual recipient is one of the named institutions.

What is excluded from the definition of interest under Article 11(4)?

Penalty charges for late payment are expressly excluded from the definition of interest under Article 11(4). The treaty also has no clause assimilating interest to domestic-law definitions -- the Article 11(4) definition stands on its own.

What withholding rate applies to rupee-denominated (NRO) interest paid to a non-resident?

The 20% figure under section 207(1) is scoped to foreign-currency-denominated debt. Rupee-denominated interest paid to a non-resident is withheld at the rates in force instead -- 30% for non-corporate recipients, 35% for foreign companies -- before any DTAA rate is applied.

How does the MLI affect the Article 11(3) exemption?

Since 1 April 2022, the MLI's Principal Purpose Test applies to this treaty in India and can deny both the 10% rate and the Article 11(3) exemption where obtaining the benefit was a principal purpose of an arrangement lacking genuine economic substance.