Interest Tax Rate Between India and Switzerland Under DTAA

Interest Tax Rate Between India and Switzerland

Article 11 of the India-Switzerland Double Taxation Avoidance Agreement (DTAA), signed on 2 November 1994, governs the taxation of interest income flowing between the two countries. The treaty provides a reduced withholding tax rate of 10% compared to India's domestic rate of 20% (plus applicable surcharge and 4% health and education cess) under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). For the related income category, see India-Switzerland DTAA fees for technical services (Article 12).

Cross-border interest taxation between India and Switzerland is particularly significant given Switzerland's role as a global financial centre. Swiss banks manage over USD 4 trillion in private assets, and Swiss entities are major lenders in international debt markets. The treaty's interest provisions affect External Commercial Borrowings (ECBs), intercompany loans, NRO/NRE deposits, corporate bond investments, and government-backed lending facilities between the two countries. For a comprehensive overview of the full treaty, see our India-Switzerland DTAA complete guide. For dividend taxation details, refer to our dividend tax rate guide for India-Switzerland.

Unlike some other Indian DTAAs that differentiate between bank interest and general interest (such as the India-USA treaty with 10%/15% tiers), the India-Switzerland DTAA applies a uniform 10% cap to interest, with no separate bank or financial-institution tier — subject to the direction-specific exemptions in Article 11(3), which for interest leaving India cover credits backed by the Swiss Export or Investment Risk Guarantee and loans approved by the Government of India.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 11 of the India-Switzerland DTAA establishes a two-level framework — a single 10% cap on source taxation, plus a closed set of complete exemptions:

10% Rate for General Interest

Under Article 11(2), interest arising in one contracting state and paid to a resident of the other contracting state may be taxed in the state where the interest arises, but the tax shall not exceed 10% of the gross amount of the interest if the beneficial owner is a resident of the other state. This rate applies uniformly to:

• Interest on corporate loans and syndicated lending
• Interest on ECBs from Swiss lenders to Indian borrowers
• Interest on NRO fixed deposits held by Swiss-resident NRIs
• Interest on corporate bonds and debentures
• Interest on intercompany loans between Swiss and Indian entities
• Interest on private lending arrangements and listed debt securities

0% Rate for Guarantee-Backed and Approved Loans (Article 11(3))

Article 11(3) overrides the 10% cap in four situations. Each limb is direction-specific — which state the interest arises in decides which limb can apply:

• Article 11(3)(a): interest arising in Switzerland and paid to an Indian resident is taxable only in India where the loan or credit is made, guaranteed or insured by the Government, a political sub-division, a statutory body or a local authority of India, or by the Export-Import Bank of India, the Reserve Bank of India, IFCI, IDBI, the National Housing Bank or SIDBI (or an institution agreed in letters exchanged between the competent authorities). This limb does not exempt interest flowing out of India.
• Article 11(3)(b): interest arising in India and paid to a Swiss resident is taxable only in Switzerland where the loan or credit is made, guaranteed or insured under the Swiss provisions regulating the Export or Investment Risk Guarantee, or by an agreed institution.
• Article 11(3)(c): interest paid to a resident of the other state engaged in the operation of ships or aircraft in international traffic is taxable only in that other state, to the extent it is paid on funds connected with that activity.
• Article 11(3)(d): interest arising in India and paid to a Swiss resident is exempt from Indian tax where the debt is an "approved loan" — defined as any loan or other indebtedness approved by the Government of India in this behalf.

For interest flowing from India to Switzerland, therefore, the exemptions that matter are limbs (b) and (d): a facility backed by the Swiss Export or Investment Risk Guarantee, or a loan approved by the Government of India. The Export-Import Bank of India list is in limb (a) and operates in the opposite direction, on interest arising in Switzerland.

The Former Matching-Credit Clause Is No Longer in Force

Older commentary describes a Swiss matching credit for Indian interest covered by Sections 10(4), 10(4B), 10(15)(iv) and 80L of the Income Tax Act, under which Switzerland allowed relief equal to 10% of the gross interest. That sub-paragraph of the elimination-of-double-taxation article was omitted by Notification S.O. 2903(E) dated 27 December 2011, which gave effect to the 2010 amending protocol. It cannot be relied on today — Swiss relief now follows the ordinary elimination article. (Section 80L was itself omitted from Indian law with effect from assessment year 2006-07.)

The treaty rates in this table are all-inclusive — no surcharge or health and education cess is added on top of the 10%. The domestic comparators are not: 20% under section 207(1) (Table, Sl. Nos. 1–3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) becomes roughly 20.8% to 21.84% once the applicable surcharge and 4% cess are applied.

Who Qualifies for the Reduced Rate

The reduced rates under Article 11 are available only when specific conditions are met:

Beneficial Ownership Requirement

The interest must be beneficially owned by a resident of the other contracting state. The beneficial owner concept requires that the recipient has the legal and economic right to use, enjoy, and dispose of the interest income independently. Conduit arrangements, back-to-back loan structures, and nominee arrangements do not qualify for treaty benefits. Swiss financial intermediaries acting as agents or fiduciaries for third-party accounts would not be considered beneficial owners unless they bear the economic risk of the lending activity.

Tax Residency Confirmation

The interest recipient must qualify as a tax resident of Switzerland under Article 4 of the treaty. For Swiss entities, this requires being subject to Swiss tax by reason of domicile, residence, place of management, or place of incorporation. For individuals, Swiss tax residency is established through habitual abode, domicile, or registration with cantonal authorities.

No Specific LOB Clause

The India-Switzerland DTAA does not contain a standalone Limitation of Benefits (LOB) article. Nor does the MLI supply a Principal Purpose Test here: Switzerland's definitive MLI position, filed on ratification, does not list India, so this treaty is not a Covered Tax Agreement and the MLI anti-abuse rules do not reach it. The safeguards that do apply are the treaty's own anti-conduit provision (added by the 2010 amending protocol, covering Articles 10, 11, 12 and 22) and India's domestic GAAR (sections 178 to 184 of the Income-tax Act, 2025; sections 95 to 102 of the Income-tax Act, 1961). A Swiss entity that is established primarily to route interest income and obtain treaty benefits without genuine commercial substance may be denied the 10% rate.

Interest-Specific Treaty Provisions

Source Rules for Interest (Article 11(6))

Interest is deemed to arise in a contracting state when the payer is a resident of that state. Additionally, if the person paying interest has a permanent establishment in a contracting state and the debt obligation was incurred in connection with that PE, the interest is deemed to arise in the state where the PE is situated, regardless of the payer's residence. This provision is particularly relevant for Swiss companies with Indian PEs that take on local debt financing.

Arm's Length Requirement (Article 11(7))

Where the amount of interest exceeds the arm's length amount due to a special relationship between the payer and the beneficial owner (or between either of them and a third party), the excess portion is not eligible for the treaty rate. Only the arm's length amount qualifies for the 10% rate. The excess is taxed under domestic law, subject to the other provisions of the treaty. This anti-avoidance provision directly intersects with India's transfer pricing rules under sections 161 to 173 of the Income-tax Act, 2025 (sections 92 to 92F of the Income-tax Act, 1961).

PE Attribution Exception (Article 11(5))

If the beneficial owner carries on business through a PE in the source country and the debt-claim generating the interest is effectively connected with that PE, the interest is taxed as business profits under Article 7 rather than under Article 11. This means interest income attributable to a Swiss entity's PE in India is taxed at the applicable corporate tax rate (typically 35% for foreign companies) rather than the 10% withholding rate.

Documentation Required

To claim the reduced 10% DTAA rate on interest, the following documentation is mandatory:

Tax Residency Certificate (TRC)

The Swiss resident must obtain a Tax Residency Certificate from the Swiss cantonal tax authority or the Swiss Federal Tax Administration. The TRC confirms tax residency in Switzerland for the relevant period and is the foundational document for claiming treaty benefits in India.

Form 41 (formerly Form 10F)

Form 41 must be furnished to the Indian payer, providing the recipient's status, nationality, Swiss tax identification number (Steuernummer/AHV number), period of residential status, and address. Form 41 can be filed electronically on India's income tax e-filing portal.

Self-Declaration

A self-declaration confirming beneficial ownership, the absence of a permanent establishment in India, and the arm's length nature of the interest payment is typically required. The declaration should confirm that the lending arrangement has genuine commercial substance.

RBI/FEMA Documentation (for ECBs)

External Commercial Borrowings from Swiss lenders to Indian borrowers must comply with FEMA regulations and RBI guidelines. Loan Registration Numbers (LRN), ECB reporting forms, and compliance with the pricing norms in Notification FEMA 3(R)(5)/2026-RB (in force 16 February 2026) are additional requirements beyond the DTAA documentation. That notification removed the all-in-cost ceiling for ECB with an average maturity of three years or more, which is now priced in line with prevailing market conditions; ECB with an average maturity under three years must stay within the Trade Credit ceiling of the benchmark rate plus 300 basis points for foreign-currency ECB (250 basis points for rupee ECB).

Withholding Procedure for Indian Payers

Indian entities paying interest to Swiss residents must comply with section 393(2) of the Income-tax Act, 2025:

TDS Deduction and Deposit

The Indian payer must deduct TDS at 10% (the DTAA rate) at the time of credit or payment to the Swiss entity, whichever is earlier. The TDS must be deposited with the government by the 7th of the following month. For March deductions, the deadline is 30th April.

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

For interest remittances exceeding INR 5 lakh in a financial year:

• Form 146: A Chartered Accountant must file Form 146 on the Income Tax portal, certifying that TDS has been deducted at the correct rate under Article 11 of the India-Switzerland DTAA.
• Form 145 Part C: The remitter then files Form 145 Part C online, referencing the Form 146 acknowledgement number.
• For remittances up to INR 5 lakh: Only Form 145 Part A is required.

Lower Withholding Certificate (Section 395(1))

A Swiss resident expecting regular interest income from India can apply to the Assessing Officer for a lower withholding certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961). This certificate authorises the Indian payer to deduct TDS at the DTAA rate (or a lower rate if the AO determines the actual tax liability will be lower based on available deductions and exemptions).

Common Disputes and Judicial Precedents

Transfer Pricing on Intercompany Loans

A major area of dispute involves the arm's length interest rate on loans between Swiss and Indian entities. Indian transfer pricing authorities often challenge the interest rate charged on intercompany loans, particularly where Swiss parent companies lend to Indian subsidiaries at rates above comparable market benchmarks. Under Article 11(7), the excess interest above the arm's length amount is denied treaty benefits. Courts have generally upheld the application of transfer pricing provisions to determine the arm's length rate, using comparable uncontrolled price (CUP) or credit rating-based benchmarking methodologies.

Guarantee Fees and Commitment Charges

Disputes frequently arise over whether guarantee fees, commitment fees, standby charges, and similar payments constitute "interest" under Article 11 or are separately taxable as business income or fees for included services. Indian courts have generally held that guarantee fees paid by an Indian subsidiary to its Swiss parent for guaranteeing a third-party loan constitute a separate service and are not "interest" under the treaty. However, if such fees are embedded in the overall lending arrangement, they may be treated as part of the interest cost.

MFN Clause Impact on Interest

The interest rate under the India-Switzerland DTAA is 10%, and the most-favoured-nation clause in paragraph 5 of the Protocol does not lower it. In Assessing Officer v. Nestle SA (19 October 2023) the Supreme Court held that MFN benefits are not self-executing: they take effect only through a notification under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961), and no such notification has been issued for this treaty. Claims to a reduced rate through the MFN route — including the 5% dividend rate once argued for via India's treaties with Slovenia, Lithuania and Colombia — therefore fail on the Indian side. Separately, Switzerland withdrew its own unilateral MFN application with effect from 1 January 2025, which raised Swiss withholding on Swiss-source dividends paid to Indian residents back to 10%. Neither development changes Indian withholding tax on interest.

PE Attribution Disputes

Where a Swiss bank or financial institution has a PE in India (such as a branch or representative office), Indian tax authorities may argue that interest income from certain Indian debt investments is attributable to that PE and should be taxed at corporate rates under Article 7, rather than at the 10% withholding rate under Article 11. The key question is whether the specific debt-claim generating the interest is "effectively connected" with the Indian PE. For professional guidance on structuring cross-border lending and PE risk management, consult our tax advisory services. Swiss companies establishing operations in India should also review our guide on registering a company in India from Switzerland.

Practical Examples and Calculations

Example 1: Swiss Bank ECB to Indian Company

A Swiss bank (regulated by FINMA) extends a USD 20 million ECB to an Indian infrastructure company at 5% annual interest. Annual interest payment: USD 1,000,000.

• Domestic rate: 20% = USD 200,000 (plus surcharge and cess)
• DTAA rate (Article 11(2)): 10% = USD 100,000
• Tax saving under DTAA: USD 100,000 per year

The Swiss bank provides TRC, Form 41, and beneficial ownership declaration. The Indian company deducts TDS at 10% and remits USD 900,000. The ECB must comply with RBI's ECB norms, including pricing in line with prevailing market conditions.

Example 2: Swiss Parent Intercompany Loan to Indian Subsidiary

A Swiss pharmaceutical company lends CHF 10 million to its Indian subsidiary at 6% interest. Annual interest payment: CHF 600,000.

• Domestic rate: 20% = CHF 120,000 (plus surcharge and cess)
• DTAA rate (Article 11(2)): 10% = CHF 60,000
• Tax saving under DTAA: CHF 60,000 per year

The interest rate must be at arm's length. If Indian transfer pricing authorities determine the arm's length rate is 4%, only interest on 4% qualifies for the treaty rate; the excess 2% is disallowed in the Indian payer's hands through a transfer pricing adjustment under sections 161 to 173.

Example 3: NRI with NRO Fixed Deposit

A Switzerland-resident NRI has an NRO fixed deposit of INR 50,00,000 with an Indian bank earning 7% interest. Annual interest: INR 3,50,000.

• Domestic rate: 30% plus surcharge and 4% cess = INR 1,05,000 before surcharge and cess. Rupee NRO deposit interest is not section 207(1) foreign-currency loan interest, so section 393(2) applies the residuary non-resident rate of 30% under Part II of the First Schedule to the Finance Act — not 20%.
• DTAA rate (Article 11(2)): 10% = INR 35,000, inclusive of surcharge and cess
• Tax saving under DTAA: INR 70,000 per year

The NRI furnishes TRC from the Swiss cantonal authority, Form 41, and self-declaration to the Indian bank. The bank deducts TDS at 10% instead of 30% plus surcharge and cess. In Switzerland, the NRI declares the gross interest income and claims Foreign Tax Credit for the 10% Indian tax paid. For a summary of all withholding rates under this treaty, see the India-Switzerland withholding tax rates page.

Frequently Asked Questions

What is the interest tax rate under the India-Switzerland DTAA?

The treaty provides a uniform rate of 10% on the gross amount of interest under Article 11(2), with no separate bank or financial-institution tier. Interest leaving India is completely exempt under Article 11(3) only in defined cases: a credit backed by the Swiss Export or Investment Risk Guarantee (11(3)(b)), a loan approved by the Government of India (11(3)(d)), or funds connected with operating ships or aircraft in international traffic (11(3)(c)). The Export-Import Bank of India limb in 11(3)(a) runs the other way, exempting Swiss-source interest paid to India.

Is the interest rate affected by the MFN clause suspension?

No. Interest has always been capped at 10% under Article 11(2), and the MFN clause never delivered a lower interest rate. After Assessing Officer v. Nestle SA (2023), MFN benefits require a notification under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) and none has been issued for this treaty. Switzerland's withdrawal of its unilateral MFN application from 1 January 2025 affected Swiss-source dividends paid to Indian residents, not Indian tax on interest.

Does the 10% rate apply to NRO fixed deposit interest?

Yes. Interest earned on NRO fixed deposits by Swiss-resident NRIs qualifies for the 10% DTAA rate under Article 11(2), provided the NRI furnishes a valid TRC from the Swiss cantonal authority and files Form 41. The Indian bank deducts TDS at 10% instead of the residuary non-resident rate of 30% plus surcharge and cess that section 393(2) would otherwise apply to rupee NRO interest.

What happens if intercompany interest exceeds the arm's length rate?

Under Article 11(7), if the interest paid exceeds the arm's length amount due to a special relationship between the parties, only the arm's length portion qualifies for the 10% treaty rate. The excess is taxed under domestic law and may be denied deduction by Indian transfer pricing authorities.

Are guarantee fees treated as interest under this treaty?

Generally, no. Indian courts have typically held that guarantee fees paid by an Indian subsidiary to its Swiss parent for guaranteeing third-party loans are a separate service, not "interest" under Article 11. However, fees embedded in an overall lending arrangement may be treated as part of the interest cost.

Does the MLI Principal Purpose Test apply to interest income under this treaty?

No. Switzerland's definitive MLI position, filed on ratification, does not list India, so the India-Switzerland DTAA is not a Covered Tax Agreement and the MLI Principal Purpose Test does not apply to it. Treaty benefits can still be denied under the anti-conduit provision added by the 2010 amending protocol (covering Articles 10, 11, 12 and 22) and under India's domestic GAAR, so back-to-back lending through a Swiss conduit remains vulnerable.

How do I claim the DTAA rate on interest from India?

Provide a valid Tax Residency Certificate from the Swiss cantonal authority, file Form 41 on India's e-filing portal, and submit a self-declaration of beneficial ownership to the Indian payer. For remittances exceeding INR 5 lakh, Forms 145 and 146 must also be filed by the remitter.