Withholding Tax Rates: India to Japan Under DTAA

India to Japan Withholding Tax Rates Under DTAA

When an Indian entity makes payments to a Japanese resident — whether dividends, interest, royalties, or fees for technical services — withholding tax must be deducted at source under Section 195 of the Income Tax Act, 1961. The India-Japan DTAA, signed on 7 March 1989, provides a uniform reduced rate of 10% across all these income categories, compared to India's domestic rate of 20%. This makes the India-Japan treaty one of the most favorable DTAAs for cross-border payments.

Under Section 90(2) of the Income Tax Act, taxpayers can apply whichever rate is more beneficial — the treaty rate or the domestic rate. Since the treaty rate of 10% is consistently lower than the domestic rate of 20% across all income categories, the treaty rate always applies for payments to Japanese residents with valid documentation.

Both India and Japan have ratified the OECD Multilateral Instrument (MLI), which modifies the treaty with anti-abuse provisions including the Principal Purpose Test (PPT). The synthesised text has been published by CBDT. For the full treaty analysis, see our India-Japan DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-Japan DTAA, dividends paid by an Indian company to a Japanese resident are subject to the following withholding rate:

Key points: Unlike many other Indian DTAAs (such as the India-USA DTAA which differentiates between 10%+ and below-10% shareholdings), the India-Japan treaty applies a flat 10% rate regardless of the shareholding level. This simplifies compliance and provides a consistent 10-percentage-point saving over the domestic rate of 20%.

Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are taxable in the hands of the recipient. Japanese institutional investors, including major trading houses and investment funds with Indian portfolio holdings, benefit significantly from this reduced rate. The dividend withholding rate is applied on the gross amount of dividends without deduction of expenses.

Japanese parent companies with Indian subsidiaries — such as those in the automotive, electronics, and infrastructure sectors — can repatriate profits at the favorable 10% rate, making India an attractive investment destination for Japanese capital.

Interest Withholding Rates

Article 11 of the treaty provides tiered interest rates with significant exemptions for government-related entities:

The interest provisions offer substantial benefits for Japanese lenders. The 2015 Protocol specifically lists the following Japanese entities as qualifying for the 0% exemption: Bank of Japan, Japan Bank for International Cooperation (JBIC), Japan International Cooperation Agency (JICA), and Nippon Export and Investment Insurance. Interest on debt-claims guaranteed, insured, or indirectly financed by these institutions is also exempt.

For commercial lending, a Japanese bank lending to an Indian company pays only 10% withholding tax instead of the domestic 20%, translating to significant cost savings on external commercial borrowings (ECBs). Japan is a major source of infrastructure financing for India, including through yen-denominated loans for projects like the Mumbai-Ahmedabad bullet train, Delhi Metro, and dedicated freight corridors. These government-backed loans benefit from the full tax exemption.

Interest is deemed to arise in India if the payer is the Government of India, a political subdivision, a local authority, or an Indian resident. Where interest is connected with a permanent establishment in India, it is deemed to arise in India regardless of the payer's residence.

Royalty and FTS Withholding Rates

Article 12 of the India-Japan DTAA covers both royalties and fees for technical services (FTS) under a single provision with a uniform rate:

No "make available" requirement: Unlike the India-USA treaty which only taxes service fees if they "make available" technical knowledge, the India-Japan DTAA applies the 10% rate to all fees for technical services — including routine management consulting, IT services, engineering support, and advisory services. This broader scope means virtually all cross-border service payments from India to Japan are subject to the 10% withholding rate.

For Japanese technology companies licensing intellectual property to Indian subsidiaries or providing technical support services, the 10% rate represents a 50% reduction from the domestic rate. Key sectors affected include automotive technology transfers (from Toyota, Honda, Suzuki), electronics licensing (Sony, Panasonic), and industrial equipment technology (Mitsubishi, Hitachi).

Indian courts have consistently held that surcharge and education cess cannot be levied on top of the treaty rate. The 10% rate is thus the all-inclusive effective rate, without additional surcharge or cess — a significant advantage over domestic rates where the effective rate including surcharge and cess can reach approximately 21.84%.

Capital Gains Treatment

Article 13 of the India-Japan DTAA provides rules for the taxation of capital gains based on the type of asset:

Immovable property: Gains from the alienation of immovable property situated in India are taxable in India at domestic rates — 12.5% for long-term capital gains (assets held over 24 months) and applicable slab rates for short-term gains.

Shares and securities: Gains from the sale of shares in an Indian company by a Japanese resident may be taxed in India per domestic law. For listed equity shares, long-term capital gains exceeding INR 1.25 lakh are taxed at 12.5%. For unlisted shares, the applicable rate depends on the holding period and classification.

Business assets: Gains from the alienation of movable property forming part of the business property of a PE are taxable in the state where the PE is located.

Ships and aircraft: Gains from the alienation of ships or aircraft operated in international traffic are taxable only in the state where the enterprise operating them is resident.

Japanese residents disposing of Indian assets should claim a foreign tax credit in Japan for Indian taxes paid to avoid double taxation. Japan follows the credit method for relief of double taxation.

How to Apply Reduced Rates

To apply the reduced 10% DTAA rate instead of the domestic 20% rate, both the Japanese recipient and the Indian payer must follow specific procedures:

For the Japanese Recipient

1. Obtain TRC from the Japanese NTA — The Tax Residency Certificate issued by the Japanese National Tax Agency certifying Japanese tax residency for the relevant fiscal year is the foundational document
2. Complete Form 10F — Furnish Form 10F electronically on the Indian Income Tax portal with prescribed details including name, status, nationality, tax identification number (My Number or corporate number), and period of residential status
3. Self-declaration — Provide a declaration confirming beneficial ownership of the income, absence of PE in India (if applicable), and compliance with the Principal Purpose Test (PPT) under the MLI

For the Indian Payer

1. Verify documentation — Ensure TRC, Form 10F, and self-declaration are on file before applying the reduced 10% rate
2. File Form 15CA online — Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB confirming the treaty rate applicability
4. Apply for lower withholding certificate — Under Section 197, the payer or payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding if applicable (especially relevant for government-exempt interest)

BeaconFiling's tax advisory team handles the complete documentation process for claiming DTAA benefits on cross-border payments to Japan.

Domestic Rates vs Treaty Rates Comparison

India's domestic withholding tax rates for non-residents (without surcharge and cess) compared against the India-Japan DTAA rates:

Important note on surcharge and cess: Under domestic law, the 20% withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective domestic rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate (as confirmed by multiple Indian tribunal rulings), making the effective savings even greater than the headline comparison suggests. For a Japanese company receiving royalty payments of INR 1 crore, the difference between the domestic effective rate (~21.84%) and the treaty rate (10%) translates to annual savings of approximately INR 11.84 lakh.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many payers apply the 10% treaty rate without collecting the Tax Residency Certificate first. The Income Tax Department can disallow the treaty benefit and demand tax at domestic rates (20% plus surcharge and cess) plus interest under Section 201(1A) if the TRC is not on record at the time of payment.

Mistake 2: Assuming All Service Payments are FTS

While the India-Japan DTAA has a broad FTS definition, not all service payments qualify. Reimbursement of expenses without any profit element, payments for goods rather than services, and payments for services that constitute business profits (if no PE exists) require careful characterization. Misclassification can lead to incorrect withholding.

Mistake 3: Ignoring MLI Principal Purpose Test

Post-MLI, the PPT applies to the India-Japan treaty. If one of the principal purposes of an arrangement is to obtain treaty benefits (such as routing payments through Japan to access the 10% rate), the benefit may be denied. Ensure arrangements have genuine economic substance.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (up to INR 1 lakh per default). The form must be filed electronically before the bank processes the outward remittance.

Mistake 5: Not Claiming Government Interest Exemption

Interest payments to Japanese government institutions (Bank of Japan, JBIC, JICA, Nippon Export and Investment Insurance) or on government-guaranteed debt qualify for 0% withholding. Payers sometimes apply the general 10% rate instead of claiming the full exemption, resulting in unnecessary tax costs that must be recovered through refund claims.

For end-to-end compliance support on cross-border payments between India and Japan, contact BeaconFiling's FEMA and RBI compliance team.

Frequently Asked Questions

What is the withholding tax rate on dividends paid from India to Japan?

The DTAA rate is 10% of the gross dividend amount, applied uniformly regardless of the shareholding percentage. This is lower than the domestic rate of 20%, so the treaty rate always applies for Japanese residents with valid documentation including TRC and Form 10F.

Is the 10% treaty rate inclusive of surcharge and cess?

Yes. Indian tribunals have consistently held that surcharge and education cess cannot be levied on top of the treaty rate. The 10% DTAA rate is the all-inclusive effective rate, unlike the domestic rate where the effective rate including surcharge and cess can reach approximately 21.84%.

How do Japanese government institutions benefit from the India-Japan DTAA?

Interest payments to Japanese government institutions — Bank of Japan, JBIC, JICA, and Nippon Export and Investment Insurance — are fully exempt (0%) under Article 11(3) as amended by the 2015 Protocol. Interest on debt-claims guaranteed or insured by these institutions also qualifies for the exemption, which is particularly significant for Japanese infrastructure financing in India.

Are software licensing payments to Japanese companies royalties or FTS?

This depends on the nature of the payment. Payments for the use of copyrighted software (end-user licenses) have been the subject of extensive litigation. Following the Supreme Court's decision in Engineering Analysis Centre of Excellence, payments for shrink-wrapped or off-the-shelf software are generally not royalties. Custom software development services may qualify as FTS under Article 12 at the 10% rate.

Can I apply for nil withholding on government-exempt interest?

Yes. Under Section 197 of the Income Tax Act, the payee or payer can apply to the Assessing Officer for a certificate authorizing nil withholding for interest payments that qualify for the 0% exemption under Article 11(3). This avoids the need for the Japanese government institution to seek a refund of withheld taxes.

What happens if the Indian payer deducts tax at the domestic rate instead of the treaty rate?

The Japanese recipient can file an income tax return in India claiming a refund of the excess tax deducted (20% minus 10% = 10% excess). Alternatively, the Japanese resident can claim the full amount of Indian tax as a foreign tax credit in Japan, though this reduces the available credit against Japanese tax liability. It is always preferable to apply the correct rate at source.