Interest Tax Rate Between India and Poland Under DTAA

Quick answer: Under Article 12(2) of the India-Poland DTAA, interest paid to a Polish beneficial owner is capped at 10% of the gross amount -- one flat rate covering banks, financial institutions and ordinary lenders alike, versus India's domestic rate of 20% under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). Interest derived and beneficially owned by the Polish Government, its political sub-divisions, local authorities, or the National Bank of Poland is fully exempt under Article 12(3)(a) (recipient-side test only). A second exemption under Article 12(3)(b) covers interest on loans or credits extended or endorsed by Bank Gospodarstwa Krajowego or the Exim Bank of India for export-import financing, or any loan approved by the Government of the source State. These rates stem from the 2013 Protocol, effective in India from 1 April 2015.

Key takeaways:

• Flat 10% DTAA interest rate vs 20% domestic rate -- no separate bank/financial-institution tier
• Government and central bank interest: fully exempt, but only on a recipient-side test (Article 12(3)(a))
• Export-financing/approved-loan interest: fully exempt under Article 12(3)(b), with no "guaranteed or insured" leg
• Rates apply from the 2013 Protocol, effective in India from 1 April 2015
• Anti-abuse: bilateral LOB under Article 28A plus the MLI Principal Purpose Test, effective for India from 1 April 2020

Interest Tax Rate Between India and Poland

Interest flows between India and Poland -- on intercompany loans, external commercial borrowings, bonds, and bank facilities -- are governed by Article 12 of the India-Poland DTAA, originally signed 21 June 1989 and substantially revised by the 2013 Protocol (in force 1 June 2014; effective in India from 1 April 2015). Article 12(2), as substituted by the Protocol, caps the source-State withholding tax on interest at 10% of the gross amount, compared to India's domestic rate of 20% under section 207(1) of the Income-tax Act, 2025.

Unlike many of India's older treaties, the India-Poland DTAA does not carve out a separate, lower rate for banks or financial institutions -- the single 10% cap applies uniformly to interest paid to any Polish beneficial owner, subject to the two specific exemptions discussed below. Polish lenders financing Indian borrowers, and Indian lenders financing Polish counterparties, both benefit from this simplified structure. Our cross-border payments team helps structure compliant interest flows and documentation from the first disbursement.

See our India-Poland DTAA complete guide for the treaty's PE, capital gains, and MAP provisions, and withholding tax rates: India to Poland for a full comparison across income types.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Interest paid by an Indian resident to a non-resident is generally taxable at 20% under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) where it relates to foreign-currency-denominated debt; where the borrowing or deposit is not foreign-currency-debt-scoped, ordinary rupee/NRO interest of non-residents is taxed at the rates in force -- 30% for individuals and 35% for foreign companies (FY 2024-25 onward) -- absent treaty relief.

DTAA Rate (With Treaty)

Article 12(2) caps the source-State tax at 10% of the gross amount: "such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest." This 10% ceiling applies regardless of whether the recipient is a bank, another type of financial institution, or an ordinary commercial lender -- there is no tiered structure comparable to some of India's other treaties.

Effective Tax Savings

On a loan carrying INR 50 lakh of annual interest paid to a Polish bank, the treaty saves INR 5 lakh in Indian withholding tax (10% instead of 20%) per year, before accounting for the government and export-financing exemptions below, which can eliminate the Indian withholding altogether for qualifying flows.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The 10% cap, and both exemptions, apply only where the Polish resident is the beneficial owner of the interest -- the economic recipient entitled to use the income, not a conduit obliged to pass it on to a third party.

Tax Residency Requirement

The lender must be a resident of Poland under Article 4 of the treaty, established through incorporation or effective management for companies, and through the standard permanent-home/centre-of-vital-interests/habitual-abode/nationality tie-breaker cascade in Article 4(2) for individuals.

Anti-Abuse Rules: MLI PPT and Bilateral LOB (Article 28A)

Two independent anti-abuse tests apply. The treaty's own Limitation of Benefits clause, inserted by the 2013 Protocol at Article 28A, denies benefits to a non-individual resident, or to an arrangement or transaction, where obtaining the benefit was a main purpose. Separately, as a Covered Tax Agreement under the Multilateral Instrument (MLI) for both countries, the treaty is also subject to the MLI's Principal Purpose Test, effective for India's withholding taxes from 1 April 2020. A back-to-back loan routed through a Polish shell company purely to access the 10% cap (or an exemption) is squarely the kind of arrangement both tests target.

No Permanent Establishment Connection

Article 12(5) withdraws the 10% cap where the beneficial owner carries on business in India through a permanent establishment, or performs independent personal services from a fixed base, and the underlying debt-claim is effectively connected with it. The interest is then taxed as business profits under Article 7 (or under Article 15), not at the treaty rate.

Interest-Specific Treaty Provisions Under Article 12

Article 12(1): Residence-State Taxation

Article 12(1) lets the recipient's State of residence tax interest: "interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State."

Article 12(2): The 10% Source-State Cap

Paragraph 2 then permits source-State taxation as well, capped at 10% of the gross amount where the recipient is the beneficial owner -- the operative rate for most cross-border loans.

Article 12(3)(a): Government and Central Bank Exemption (Recipient-Side)

Interest is fully exempt in the source State where it is "derived and beneficially owned by" the Government, a political sub-division, a local authority, or the Central Bank of the other Contracting State. This is a recipient-side test only: there is no corresponding payer-side exemption for interest on Indian government securities held by a private Polish investor -- that interest remains subject to the 10% cap, not an exemption.

Article 12(3)(b): Export-Financing and Approved-Loan Exemption

A second exemption covers interest beneficially owned by a resident of the other State "in connection with a loan or credit extended or endorsed by" -- for interest arising in India -- Bank Gospodarstwa Krajowego (BGK, to the extent attributable to export-import financing) or, more generally, any institution in charge of public financing of external trade, or any other lender where the loan or credit is approved by the Government of the source State. On the Indian side, the mirror-image exemption applies to loans extended or endorsed by the Export-Import Bank of India for export-import financing. Notably, there is no "guaranteed or insured" leg in this exemption -- only loans actually extended or endorsed, or approved by the source-State government, qualify; a loan merely insured or guaranteed by an eligible institution does not.

Article 12(4): Definition of Interest

"Interest" is defined broadly as "income from debt-claims of every kind... and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes"; penalty charges for late payment are expressly excluded from the definition.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

The Polish lender must obtain a Tax Residency Certificate from the Krajowa Administracja Skarbowa (Polish National Revenue Administration) for the relevant financial year, per section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Where the TRC lacks the prescribed particulars, the Polish lender must also file Form 41 electronically with the Indian tax authorities before the first interest payment.

Self-Declaration and Exemption Evidence

For the general 10% rate, a self-declaration of beneficial ownership and no-PE status suffices. Claims under the government/central-bank exemption (Article 12(3)(a)) or the export-financing exemption (Article 12(3)(b)) require documentary evidence identifying the qualifying lender (e.g. confirmation the loan was extended, endorsed, or government-approved) alongside the standard TRC and Form 41.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

Indian borrowers must deduct tax at source on interest paid to a non-resident under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) -- at 10% (or nil, where an exemption applies) with valid documentation, or 20% by default without it.

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

Before remitting interest abroad, the Indian payer files Form 145 online, and obtains Form 146 from a Chartered Accountant where the remittance exceeds INR 5 lakh in a financial year.

Section 395(1): Lower Withholding Certificate

Where the actual Indian tax liability on the interest is lower than the treaty rate would produce -- for example on an exempt loan not yet fully documented -- the Polish lender can apply to the Assessing Officer for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) authorising deduction at a lower or nil rate.

Common Compliance Pitfalls

Indian payers frequently default to the general 10% rate even where an exemption under Article 12(3)(a) or (b) applies, resulting in unnecessary withholding that the Polish lender must then claim back through an Indian tax return or the Mutual Agreement Procedure under Article 26 (case to be presented within three years of receipt of notice of the action giving rise to non-compliant taxation). Conversely, some payers assume the export-financing exemption covers any loan "guaranteed or insured" by BGK or Exim Bank -- it does not; only loans actually extended, endorsed, or government-approved qualify, so the underlying financing documents should be checked carefully before applying nil withholding.

Practical Examples and Calculations

Example 1: Polish Bank Financing an Indian Manufacturer

Bank Polski S.A. lends to an Indian manufacturing company, generating INR 40 lakh of annual interest.

• Without DTAA: TDS at 20% (foreign-currency-debt-scoped) = INR 8 lakh.
• With DTAA: TDS at 10% = INR 4 lakh, on production of a valid TRC and Form 41.
• Saving: INR 4 lakh per year.

Example 2: BGK Export-Financing Facility

Bank Gospodarstwa Krajowego extends export-financing credit to an Indian importer of Polish machinery, generating INR 15 lakh of interest.

• Qualifying exemption: If the loan is attributable to export-import financing under Article 12(3)(b), the interest is fully exempt from Indian withholding -- INR 15 lakh received in full, subject to documentation confirming BGK extended or endorsed the credit for that purpose.

Example 3: Indian Government Security Held by a Private Polish Investor

A private Polish investment fund holds Indian sovereign bonds generating INR 10 lakh of interest.

• No payer-side exemption: Because Article 12(3)(a) is a recipient-side test limited to the Government, its sub-divisions, local authorities, and the central bank of the other State, a private fund does not qualify for the exemption merely because the debtor is the Indian Government -- the general 10% cap applies instead, i.e. TDS of INR 1 lakh.

Frequently Asked Questions

What is the interest withholding tax rate under the India-Poland DTAA?

Article 12(2) of the India-Poland DTAA caps withholding tax on interest at 10% of the gross amount for any beneficial owner resident in the other State -- there is no separate lower rate for banks or financial institutions. India's domestic rate without the treaty is 20% under section 207(1) of the Income-tax Act, 2025.

Is interest paid to the Polish government or central bank exempt from Indian tax?

Yes, but only on a recipient-side test. Article 12(3)(a) exempts interest derived and beneficially owned by the Government of Poland, its political sub-divisions, local authorities, or the National Bank of Poland. There is no matching payer-side exemption -- interest on Indian government securities held by a private Polish investor is taxed at the general 10% cap, not exempt.

Does the export-financing exemption cover loans merely guaranteed or insured by BGK?

No. Article 12(3)(b) exempts interest on loans or credits "extended or endorsed" by Bank Gospodarstwa Krajowego (for export-import financing) or approved by the source-State government -- there is no "guaranteed or insured" leg. A loan only insured or guaranteed by an eligible institution does not qualify for the exemption.

Can the 10% interest rate be denied even where the recipient is the beneficial owner?

Yes. The treaty's bilateral Limitation of Benefits clause (Article 28A) and the MLI's Principal Purpose Test (effective for India from 1 April 2020) can each independently deny treaty benefits where obtaining the reduced rate or exemption was a main purpose of the financing arrangement.

What documents does a Polish lender need to claim the reduced rate or an exemption?

A Tax Residency Certificate from the Krajowa Administracja Skarbowa, Form 41 filed electronically, and a self-declaration of beneficial ownership and no-PE status for the general 10% rate; documentary evidence of the qualifying government or export-financing relationship is additionally required to claim either exemption under Article 12(3).

What happens if the Polish lender has a permanent establishment in India?

If the debt-claim generating the interest is effectively connected with a PE (or fixed base) of the Polish lender in India, Article 12(5) withdraws the 10% cap and the interest is instead taxed as business profits under Article 7.