Interest Tax Rate Between India and Turkey Under DTAA

Quick answer: Article 11 of the India-Turkey DTAA caps interest withholding at 10% for loans from a bank or financial institution (Article 11(2)(a)), 15% for all other interest (Article 11(2)(b)), and provides a full exemption for interest beneficially owned by the Government, Central Bank, or the Turkish Exim Bank/EXIM Bank of India (Article 11(3)) -- against India's domestic 20% rate on foreign-currency borrowing under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). Rupee-denominated interest paid to non-residents outside this scope is taxed at the rates in force -- 30% for non-corporate recipients, 35% for foreign companies -- not at 20%. The treaty was signed 31 January 1995 and took effect from 1 February 1997; Turkey has signed but not ratified the MLI, so the Principal Purpose Test does not yet apply.

Key takeaways:

• Two-tier treaty cap: 10% for bank/financial-institution loans, 15% for all other interest
• Full exemption for government, central bank and named EXIM-bank interest under Article 11(3) -- a recipient-side test only, with no payer-side government-securities carve-out
• India's domestic 20% rate under section 207(1) is scoped to foreign-currency borrowing; rupee/NRO interest to non-residents is taxed at 30%/35% rates in force
• Treaty signed 31 January 1995, in force from 1 February 1997
• MLI signed by both countries in 2017 but not ratified by Turkey, so the PPT does not yet apply to this treaty

Interest Tax Rate Between India and Turkey

The India-Turkey Double Taxation Avoidance Agreement (DTAA), signed on 31 January 1995 and in force from 1 February 1997, provides a tiered structure for cross-border interest under Article 11 -- a lower rate for institutional lending, a higher rate for other interest, and a full exemption for specified government and development-bank interest. This structure directly affects the cost of Turkish bank lending into India and Indian borrowing from Turkish financial institutions.

Turkish banks and financial institutions financing Indian corporates, and Indian lenders extending credit to Turkish counterparties, both benefit from the treaty's reduced rates compared to India's standard 20% withholding tax on foreign-currency interest. For the treaty's full framework, see our India-Turkey DTAA complete guide and withholding tax rates page.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Interest on money borrowed in foreign currency by an Indian concern is taxed at 20% (plus surcharge and cess) under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). This 20% entry is scoped to foreign-currency debt; rupee-denominated interest owed to a non-resident lender falls outside it and is instead withheld at the rates in force -- 30% for non-corporate recipients, 35% for foreign companies.

DTAA Rate: Two-Tier Structure Under Article 11(2)

Where the recipient is the beneficial owner, Article 11(2) of the India-Turkey DTAA caps the source-state tax at (a) 10% of the gross amount if the interest is paid on any loan of whatever kind granted by a bank or a financial institution, and (b) 15% of the gross amount in all other cases. The treaty text uses "a bank or a financial institution" rather than "a bank" alone, so the lower 10% tier is available to regulated financial institutions and not only to licensed banks.

Government and Institutional Exemption -- Article 11(3)

Article 11(3) exempts interest that is "derived and beneficially owned by: (a) the Government, a political sub-division or a local authority of the other Contracting State; (b) the Central Bank of the other Contracting State; or (c) the Turkish Export-Import Bank (Exim Bank) and the EXIM Bank of India." This is a recipient-side test only -- it turns on who beneficially owns the interest, not on who pays it. Unlike several other Indian treaties, there is no separate exemption for interest on government securities held by any investor, no carve-out for insured or guaranteed loans, and no approved-loan exemption; the exempt category is limited to the three named recipients.

Effective Tax Savings

For a Turkish bank lending EUR 5 million to an Indian company at 6% per annum, annual interest is EUR 300,000. At the 10% treaty rate, TDS is EUR 30,000, against EUR 60,000 at the 20% domestic rate -- a saving of EUR 30,000 a year that directly lowers the cost of the facility for the Indian borrower or improves the net yield for the Turkish bank.

Who Qualifies for the Reduced or Exempt Rate

Beneficial Ownership Requirement

Article 11(2) and 11(3) both require the Turkish recipient to be the beneficial owner of the interest -- the person entitled to use and enjoy it, not a conduit passing it on to a third country. A back-to-back lending structure with no independent economic function in Turkey risks failing this test.

Tax Residency Requirement

The lender must be a tax resident of Turkey under Article 4 of the DTAA and must obtain a Tax Residency Certificate from the Gelir Idaresi Baskanligi (Turkish Revenue Administration) for the relevant financial year.

Anti-Abuse Rules: MLI Signed But Not Ratified by Turkey

Both India and Turkey signed the MLI on 7 June 2017. India ratified it (in force for India from 1 October 2019) and listed this treaty as a Covered Tax Agreement, but Turkey has not yet deposited its instrument of ratification, so the Principal Purpose Test does not currently apply. India's domestic GAAR, under section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961), remains available to deny benefits to arrangements lacking commercial substance.

No Permanent Establishment Attribution

Where the debt-claim generating the interest is effectively connected with a permanent establishment the Turkish lender has in India, Article 11's caps do not apply; the interest is instead taxed as business profits under Article 7.

Interest-Specific Treaty Provisions Under Article 11

Article 11(1): Residence State Taxation

Interest arising in one Contracting State and paid to a resident of the other may be taxed in that other (residence) State, establishing the residence country's primary taxing right.

Article 11(2)(a): Bank/Financial Institution Tier

The treaty text caps tax at 10% of the gross amount "if such interest is paid on any loan of whatever kind granted by a bank or a financial institution" of the other Contracting State -- a broader formulation than treaties that restrict the lower tier to banks alone.

Article 11(2)(b): General Tier

All other interest not falling within the bank/financial-institution tier is capped at 15% of the gross amount in all other cases -- the residual rate for bonds, debentures, supplier credit, shareholder loans, and inter-company financing that does not qualify for the 10% rate.

Article 11(3): The Exemption List

Interest is exempt from source-state tax where it is derived and beneficially owned by the Government, a political sub-division or local authority, or the Central Bank, of the other Contracting State, or by the Turkish Exim Bank and the EXIM Bank of India specifically. Because the article names both EXIM banks by name rather than describing a general class of development-finance institution, the exemption cannot be extended by analogy to other development banks not listed.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

The Turkish lender must obtain a TRC from the Gelir Idaresi Baskanligi confirming Turkish tax residency, required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

If the TRC lacks the prescribed details, the lender must file Form 41 electronically on the Indian income tax e-filing portal, including the Turkish tax identification number and period of residential status.

Self-Declaration and Loan Documentation

A self-declaration confirming beneficial ownership and no Indian PE, together with the loan agreement and interest computation, should be retained by the Indian borrower, particularly for related-party financing subject to transfer pricing scrutiny.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian borrower must deduct TDS at the time of credit or payment, whichever is earlier -- 10% or 15% with valid treaty documentation, or 20% (or the rates in force for rupee debt) without it.

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

Before remitting interest to Turkey, the payer must file Form 145 electronically, and obtain Form 146 from a Chartered Accountant for remittances exceeding INR 5 lakh in a financial year.

Section 395(1): Lower Withholding Certificate

A Turkish lender expecting a lower actual tax liability may apply for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961).

FEMA Compliance for Cross-Border Loans

Interest payments to Turkey must also satisfy FEMA's external commercial borrowing rules, substituted with effect from 16 February 2026 (Notification FEMA 3(R)(5)/2026-RB). Under the current framework there is no all-in-cost ceiling for ECB with an average maturity of three years or more, which is priced in line with prevailing market conditions, while ECB with an average maturity below three years must stay within the Trade Credit ceiling of benchmark rate plus 300 basis points for foreign-currency ECB or plus 250 basis points for rupee ECB. Form ECB-2 must be filed through the designated AD Category-I bank within seven calendar days from the end of the month in which proceeds were received or debt servicing was undertaken.

Common Compliance Points

Classifying the Lender Correctly

Because Article 11(2)(a) extends to "a financial institution" and not only to licensed banks, Indian borrowers should confirm the Turkish lender's regulatory status before applying the 10% rate -- a non-bank Turkish lender that is genuinely a regulated financial institution still qualifies, but an ordinary corporate lender does not and falls to the 15% general tier.

Do Not Import Another Treaty's Exemption Structure

Some Indian treaties exempt interest on government securities regardless of the holder, or carve out officially guaranteed or insured loans. Article 11(3) of the India-Turkey treaty does none of this -- it is a closed list of three named recipient categories, and no other lender, however similar in function, can claim the exemption by analogy.

Practical Examples and Calculations

Example 1: Turkish Bank Loan at 10%

Istanbul Kredi Bankasi A.S. lends INR 40 crore to an Indian manufacturer at 8% per annum. Annual interest is INR 3.2 crore.

• Without DTAA: TDS at 20% = INR 64 lakh.
• With DTAA (Article 11(2)(a)): TDS at 10% = INR 32 lakh.
• Annual saving: INR 32 lakh.

Example 2: General Interest on a Supplier Credit

A Turkish equipment supplier extends deferred-payment credit to its Indian buyer, generating INR 50 lakh in annual interest. As this does not qualify as a bank/financial-institution loan, it falls under Article 11(2)(b) at 15%: TDS = INR 7.5 lakh, against INR 10 lakh at the 20% domestic rate.

Example 3: Interest Paid to the Central Bank of the Republic of Turkey

An Indian issuer pays interest on a bond beneficially owned by the Central Bank of the Republic of Turkey. Under Article 11(3)(b), this interest is fully exempt from Indian withholding tax, making the effective rate 0% regardless of the amount involved.

Frequently Asked Questions

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

Article 11(2) of the India-Turkey DTAA sets a two-tier cap: 10% for interest on loans granted by a bank or financial institution, and 15% for all other interest. Both are reductions from India's domestic rate of 20% on foreign-currency borrowing under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

Is all government-related interest exempt under this treaty?

Only recipient-side government interest is exempt. Article 11(3) exempts interest beneficially owned by the Government, a political sub-division or local authority, or the Central Bank, of the other State, and interest owned by the Turkish Exim Bank or the EXIM Bank of India by name. There is no separate exemption for government securities held by any other investor, and no guaranteed-loan or approved-loan carve-out.

Why is the bank-loan rate lower than the general interest rate?

Article 11(2)(a) singles out interest on any loan of whatever kind granted by a bank or a financial institution for a 10% cap, five points below the 15% residual cap in Article 11(2)(b). The lower rate is available to financial institutions generally, not only to licensed banks, provided the lender is a resident of the other Contracting State.

What is the domestic withholding rate on rupee-denominated interest paid to a Turkish lender?

Section 207(1)'s 20% rate applies to interest on foreign-currency borrowing. Rupee-denominated interest paid to a non-resident outside that scope is taxed at the rates in force -- 30% for non-corporate recipients and 35% for foreign companies -- so the DTAA cap under Article 11 is the relevant comparator, not the 20% figure alone.

What documents does a Turkish lender need to claim the reduced rate?

A Tax Residency Certificate from the Gelir Idaresi Baskanligi, electronically filed Form 41 (formerly Form 10F), and a self-declaration of beneficial ownership confirming no Indian permanent establishment holds the debt-claim. The Indian borrower must file Form 145 and, for remittances over INR 5 lakh, obtain Form 146 from a Chartered Accountant.

Does the FEMA ECB framework affect the tax rate on a Turkish bank loan?

No -- the tax rate is governed solely by Article 11 of the DTAA. But the borrowing itself must also satisfy FEMA's external commercial borrowing rules: since 16 February 2026, ECB of three years' average maturity or longer carries no all-in-cost ceiling, while shorter ECB must stay within the Trade Credit ceiling, and Form ECB-2 is due within seven calendar days of the month-end through the AD Category-I bank.