Interest Tax Rate Between India and Vietnam Under DTAA

Quick answer: Under the India-Vietnam DTAA, ordinary interest is capped at 10% withholding under Article 11(2), and interest derived and beneficially owned by the Government, a political subdivision, a local authority, or the Central Bank (Reserve Bank of India / State Bank of Vietnam) of the other state is fully exempt under Article 11(3)(a). India's domestic rate for foreign-currency-debt interest is 20% under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961); rupee-denominated interest to non-residents outside that scope is withheld at the rates in force (30%/35%) instead. The treaty was signed 7 September 1994, in force from 2 February 1995, effective in India from 1 April 1996.

Key takeaways:

• General interest capped at 10% under Article 11(2), versus a 20% domestic rate on the same foreign-currency-debt category.
• Interest to the Government, a political subdivision, a local authority, or the Central Bank of the other state is fully exempt under Article 11(3)(a).
• A second, narrower exemption in Article 11(3)(b) covers other residents' interest, but only to the extent the source state's Government has approved both the exemption and the underlying transaction.
• India's rupee-denominated (NRO) interest to non-residents is taxed at the rates in force (30%/35%), not the 20% figure that is scoped to foreign-currency debt.
• Vietnam is a Covered Tax Agreement under the MLI; the Principal Purpose Test applies to India-source interest payments from 1 April 2024.

Interest Tax Rate Between India and Vietnam

The India-Vietnam Double Taxation Avoidance Agreement (DTAA), signed on 7 September 1994 in Hanoi and in force from 2 February 1995 (effective in India from 1 April 1996), provides substantial relief on interest income flowing between the two countries. Under Article 11 of the treaty, the maximum withholding tax rate on ordinary interest is capped at 10% of the gross amount, and interest paid to specified government and central-bank recipients is exempt entirely.

Interest is one of the most common categories of cross-border payment between India and Vietnam — covering supplier credit, inter-company loans, bond and debenture interest, and lending by financial institutions on both sides. For Vietnamese lenders financing Indian projects, and Indian lenders extending credit into Vietnam's fast-growing manufacturing sector, the treaty framework materially reduces the cost of cross-border capital.

Beacon Filing's FEMA and RBI compliance team assists with structuring cross-border loans between India and Vietnam so that the correct treaty rate is applied from the first disbursement.

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 is subject to withholding tax at 20% (plus applicable surcharge and health & education cess). That 20% figure is scoped to interest on money borrowed in foreign currency by the Government or an Indian concern. Rupee-denominated interest owed to non-residents — for example, ordinary NRO account interest — falls outside that scope and is instead withheld at the rates in force: 30% for non-corporate recipients and 35% for foreign companies. This distinction matters: the treaty's savings are largest precisely where the payment would otherwise fall into the higher rupee-interest bracket rather than the 20% foreign-currency bracket.

DTAA Rate (With Treaty)

Article 11(2) of the India-Vietnam DTAA caps the source country's right to tax interest at 10% of the gross amount, provided the recipient is the beneficial owner. This flat rate applies regardless of whether the underlying debt is a bank loan, a bond, a debenture, or trade credit, and regardless of whether the interest would otherwise fall into the 20% or the 30%/35% domestic bracket.

Full Exemptions Under Article 11(3)

Article 11(3) goes further than a rate cap and grants complete exemption in two distinct situations:

• Article 11(3)(a) — government and central bank interest: interest arising in a Contracting State is exempt from tax in that state where it is "derived and beneficially owned by" (i) the Government, a political subdivision, or a local authority of the other Contracting State, or (ii) the Central Bank of the other Contracting State — the Reserve Bank of India on the Indian side, the State Bank of Vietnam on the Vietnamese side. Unlike some of India's other DTAAs, this treaty does not name specific development-finance institutions (such as export-import banks) in this limb — the exemption is confined to government bodies, local authorities, and the central bank itself.
• Article 11(3)(b) — approved transactions of other residents: interest paid to any other resident of the other Contracting State is exempt "to the extent approved by the Government" of the source state, provided the transaction giving rise to the underlying debt-claim was itself approved by that Government. This is a discretionary, case-by-case exemption rather than an automatic category — it depends on a specific governmental approval of both the transaction and the tax exemption, and cannot be assumed to apply without that approval on file.

Penalty Charges Are Not "Interest"

Article 11(4), which defines "interest" for the purposes of the Article, closes with a clarifying rule: penalty charges for late payment are not regarded as interest under Article 11. Such charges therefore fall outside the treaty's interest provisions altogether and are taxed under whatever domestic or other treaty rule otherwise applies to them.

Effective Tax Savings

For a Vietnamese bank lending USD 5 million to an Indian company at 6% interest, the annual interest payment is USD 300,000. Where the loan qualifies as foreign-currency debt at the 20% domestic rate, the withholding falls from USD 60,000 to USD 30,000, so the DTAA saves USD 30,000 per year (10% instead of 20%). Where the debt is rupee-denominated and would otherwise sit in the 30%/35% bracket, the treaty saving is larger still.

Who Qualifies for the Reduced Rate or Exemption

Beneficial Ownership Requirement

Article 11(2) and 11(3) both require that the recipient be the beneficial owner of the interest — someone entitled to use and enjoy the income in their own right, not a conduit obligated to pass it on. A back-to-back arrangement in which a Vietnamese entity borrows from a third-country lender and on-lends into India with no independent economic function would likely fail this test.

Tax Residency

The recipient must be a tax resident of Vietnam or India, as the case may be, under Article 4 of the DTAA. For individuals, Vietnamese domestic law looks to 183 days or more of presence in a calendar year or 12 consecutive months, a habitual residence, or a leased dwelling of 183 days or more; for companies, incorporation or place of effective management governs.

Anti-Abuse Rules: MLI Principal Purpose Test

The India-Vietnam DTAA is a matched Covered Tax Agreement under the MLI. Vietnam's MLI ratification took effect 1 September 2023; on the taxable-period rules that follow from that date, the Principal Purpose Test applies to India-source interest payments from 1 April 2024 and to Vietnam-source payments from 1 January 2024. A financing arrangement whose principal purpose is to access the 10% cap or the Article 11(3) exemption, rather than to serve a genuine commercial financing need, is vulnerable to challenge under the PPT, independently of India's domestic GAAR.

No Permanent Establishment Connection

Where the interest is effectively connected with a permanent establishment that the beneficial owner has in the source state, Article 11's rate cap and exemptions do not apply; the interest is instead taxed as business profits under Article 7 at the applicable corporate rate.

Interest-Specific Treaty Provisions Under Article 11

Article 11(1) and (2): Shared Taxing Rights, Rate Cap

Interest arising in one Contracting State and paid to a resident of the other may be taxed in the recipient's state of residence. The source state may also tax the interest, at a rate not exceeding 10% of the gross amount, where the recipient is the beneficial owner.

Article 11(3): The Exemption Paragraph

As set out above, this paragraph carves out two exempt categories from the 10% cap entirely — government/central bank recipients under limb (a), and Government-approved transactions of other residents under limb (b).

Article 11(4): Definition of Interest

"Interest" is defined broadly to cover 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 in particular income from government securities and from bonds or debentures, including premiums and prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment are expressly excluded, as noted above.

Article 11(5): Permanent Establishment Exception

Where the beneficial owner carries on business in the source state through a PE and the debt-claim giving rise to the interest is effectively connected with that PE, Articles 11(2) and 11(3) do not apply and the interest is taxed as business profits under Article 7.

Article 11(6): Source Rule

Interest is deemed to arise in a Contracting State where the payer is a resident of that state, or, if the payer has a PE in connection with which the debt was incurred and which bears the interest cost, in the state where that PE is situated.

Article 11(7): Arm's-Length Adjustment

Where, because of a special relationship between payer and recipient (or between both and a third person), the interest paid exceeds the amount that would have been agreed at arm's length, the treaty's benefits apply only to the arm's-length amount; the excess remains taxable under each state's domestic law.

Documentation Required to Claim the Reduced Rate or Exemption

Tax Residency Certificate (TRC)

The Vietnamese lender must obtain a Tax Residency Certificate from Vietnam's General Department of Taxation, 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)

Where the TRC does not carry all prescribed particulars, the Vietnamese recipient must file Form 41 electronically on the Indian Income Tax portal; a PAN is not mandatory for this filing.

Government Approval Evidence for Article 11(3)(b)

Where exemption is claimed under the discretionary limb of Article 11(3)(b), the payer should retain documentary evidence of the source-state Government's approval of both the underlying transaction and the tax exemption — the exemption is not available on a self-assessment basis alone.

Self-Declaration

A declaration of beneficial ownership and the absence of an Indian PE to which the interest is attributable should also be kept on file.

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 payer must deduct tax at source on interest paid to a Vietnamese resident at the time of payment or credit, whichever is earlier, applying the treaty rate (or exemption) where documentation supports it, and the domestic rate otherwise.

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

Before remitting interest to Vietnam, the Indian payer must file Form 145 electronically; for remittances above INR 5 lakh, a Chartered Accountant's certificate in Form 146 is also required.

Lower Withholding Certificate (Section 395(1))

Where the actual tax liability is expected to be lower than the amount that would otherwise be deducted, the Vietnamese lender can apply for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) authorising a lower or nil rate of deduction.

Common Issues and Compliance Notes

Do Not Assume the Article 11(3)(b) Exemption Is Automatic

Unlike the government/central bank exemption in Article 11(3)(a), the exemption in Article 11(3)(b) for other residents applies only where the source-state Government has specifically approved the exemption and the underlying transaction. Treating it as a blanket carve-out for, say, any bank or financial institution is a common and costly error.

Do Not Apply the 20% Figure to Rupee Interest

Because section 207(1)'s 20% rate is scoped to foreign-currency debt, applying it (instead of the 30%/35% rates in force) to rupee-denominated NRO interest understates the domestic comparator and can lead to under-withholding if the treaty documentation later turns out to be defective.

MLI Timing Matters

Because the PPT's entry into effect for India-source payments runs from 1 April 2024, arrangements entered into and interest paid before that date fall outside the PPT's reach on India's side, though India's domestic GAAR could still apply independently from April 2017 onward.

Practical Examples and Calculations

Example 1: General Corporate Loan

A Vietnamese manufacturer lends USD 2 million to its Indian joint-venture partner at 7% annual interest (USD 140,000/year), structured as foreign-currency debt.

• Without DTAA: TDS at 20% = USD 28,000.
• With DTAA: TDS at 10% under Article 11(2) = USD 14,000.
• Saving: USD 14,000 per year, plus the Vietnamese lender's Vietnam-side credit for the Indian tax withheld.

Example 2: Central Bank Exemption

The State Bank of Vietnam holds Indian government securities paying INR 50 lakh in annual interest.

• Treaty position: Fully exempt under Article 11(3)(a), since the recipient is the Central Bank of the other Contracting State.
• Indian withholding: Nil, provided the exemption documentation is on file with the Indian paying agent.

Example 3: NRO Rupee Interest Without the Treaty

A Vietnamese individual holds an NRO fixed deposit in India earning INR 3 lakh in annual interest.

• Without any relief: Rupee-denominated NRO interest is outside the 20% foreign-currency-debt scope, so it would otherwise be withheld at 30% (individual rate in force) = INR 90,000.
• With DTAA: Article 11(2) caps the rate at 10% = INR 30,000, provided a valid TRC and Form 41 are furnished — a saving of INR 60,000.

For a full rate comparison across all income categories, see Beacon Filing's withholding tax rates page and the complete India-Vietnam DTAA guide.

Frequently Asked Questions

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

Under Article 11(2), ordinary interest paid across the border is capped at 10% of the gross amount, provided the recipient is the beneficial owner. This compares with a 20% domestic rate under section 207(1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) for foreign-currency debt, and 30%/35% for rupee-denominated interest to non-residents.

Is interest paid to the State Bank of Vietnam exempt from Indian withholding tax?

Yes. Interest derived and beneficially owned by the Central Bank of the other Contracting State — the State Bank of Vietnam on the Vietnamese side, the Reserve Bank of India on the Indian side — is fully exempt under Article 11(3)(a).

Does the treaty exempt interest paid to any Vietnamese financial institution?

No. Only the Government, political subdivisions, local authorities, and the Central Bank are automatically exempt under Article 11(3)(a). Interest to other Vietnamese residents can be exempt under Article 11(3)(b), but only to the extent the source-state Government has specifically approved both the exemption and the underlying transaction — it is not a general institutional carve-out.

Why does the domestic comparator differ between 20% and 30%/35%?

India's 20% rate under section 207(1) applies specifically to interest on foreign-currency debt owed by the Government or an Indian concern. Rupee-denominated interest to non-residents, such as ordinary NRO account interest, falls outside that scope and is taxed at the rates in force — 30% for individuals and other non-corporate recipients, 35% for foreign companies.

How has the MLI modified the India-Vietnam DTAA's interest provisions?

The India-Vietnam DTAA is a Covered Tax Agreement, so the Principal Purpose Test applies. For India-source interest, the PPT takes effect from 1 April 2024; for Vietnam-source interest, from 1 January 2024. Arrangements whose principal purpose is accessing the treaty rate or exemption, rather than a genuine financing need, can be denied treaty benefit under the PPT.

What documentation is required to claim the reduced interest rate?

The Vietnamese recipient must provide a Tax Residency Certificate from the General Department of Taxation and, where the TRC is incomplete, Form 41 filed electronically. The Indian payer must file Form 145 (and Form 146 for remittances above INR 5 lakh) before remitting the interest.