Withholding Tax Rates: India to Nepal Under DTAA

India to Nepal Withholding Tax Rates Under DTAA

When an Indian entity pays dividends, interest, royalties, or a services fee to a Nepalese resident, Tax Deducted at Source (TDS) must be withheld under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). The India-Nepal DTAA, signed 27 November 2011 and in force since 16 March 2012, caps the rate on dividends, interest and royalties below India's domestic rates — but, unusually among India's treaties, sets no rate at all for fees for technical services, because the Agreement has no FTS article. This page gives an article-by-article breakdown of every category.

Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), the taxpayer applies whichever is more beneficial — the domestic rate or the treaty rate.

Dividend Withholding Rates

Under Article 10 of the India-Nepal DTAA, dividends paid by an Indian company to a Nepalese beneficial owner are capped at two tiers.

The treaty text reads: "5 per cent of the gross amount of dividends if the beneficial owner is a company which owns at least 10 per cent of the shares of the company paying the dividends... 10 per cent of the gross amount of dividends in all other cases." Note that the threshold is measured in shares, not paid-up capital, and set at a comparatively low 10% — many Indian treaties require 25% or more for a reduced dividend tier. Beneficial ownership must still be established for either tier to apply.

Interest Withholding Rates

Article 11 caps interest at a flat 10%, with no separate lower tier for banks or financial institutions — unlike some other Indian treaties, there is no bank-specific rate here.

Do not assume Article 11(3)(c) names any specific institution — it is a mechanism for future agreement, not a published list, and no CBDT notification confirming a designated institution has been traced. If interest is instead effectively connected with a permanent establishment in India, it is removed from Article 11 entirely and taxed as business income under Article 7 at the standard foreign-company rate, plus applicable surcharge and cess.

Royalty Withholding Rates

Article 12 caps royalties — and only royalties, since there is no FTS article — at 15% of the gross amount.

The treaty caps royalties at 15% — "the tax so charged shall not exceed 15 per cent of the gross amount of the royalties" — which is higher than the 10% ceiling common in India's more recent treaties, though still a meaningful reduction from the 20% domestic rate under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). Article 12(3) defines royalties broadly enough to include the use of, or right to use, industrial, commercial or scientific equipment and information concerning industrial, commercial or scientific experience (know-how) — so equipment leasing and technology licensing from Nepal are royalties even though pure personnel-based services are not. The PE carve-out is at Article 12(4), not Article 12(5) as in some other treaties: Article 12 in this Agreement runs to only six paragraphs, with paragraph 5 instead setting the source-of-royalty rule, including a place-of-use extension in 12(5)(b) that deems royalties to arise in the State where the underlying right or property is used, if they do not otherwise arise in either State.

The Protocol's royalty-only MFN clause

Protocol paragraph 2 provides that if, under any agreement, convention or protocol between Nepal and a third State, Nepal limits its own source taxation of royalties to a lower rate or a more restricted scope than this Agreement provides, that rate or scope also applies under the India-Nepal treaty from the date the Nepal-third-State instrument enters into force. Read this clause carefully: the trigger is Nepal's treaty network, not India's — a payer cannot import a lower rate India has granted some other country. Whether any Nepal-third-State treaty has actually triggered this clause is not publicly confirmed. Following the Supreme Court's ruling in Assessing Officer (International Taxation) v. Nestlé SA (19 October 2023, 2023 INSC 928), an MFN benefit is enforceable in India only through a notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961) — so payers should continue applying the stated 15% rate unless and until such a notification is issued.

Fees for Technical Services: No Treaty Rate

This is the point most likely to trip up a payer used to India's other tax treaties. The India-Nepal Agreement has no fees-for-technical-services article — the words "technical" and "FTS" do not appear anywhere in it. There is consequently no 10% or 15% gross withholding rate to apply to management, consultancy or technical fees paid to a Nepalese resident.

Instead, such fees are business profits under Article 7, taxable in India only if the Nepalese enterprise has a permanent establishment here. The most relevant gate is the 90-day services PE in Article 5(3)(b): furnishing services, including consultancy services, through personnel, for periods aggregating more than 90 days on the same or a connected project within any 12-month period. Below that threshold, and absent any other PE, the Indian payer has no withholding obligation on such fees under the treaty. Above it, the fee becomes business profits attributable to the PE, taxed on a net basis at the standard foreign-company rate rather than at any gross rate. Any technical fee that somehow falls outside Article 7 (and outside Article 14 for an individual) defaults to Article 22(1) Other Income, which is residence-only: "taxable only in that State" — so it stays outside India's taxing right regardless.

Capital Gains Treatment

Article 13 allocates taxing rights rather than capping a rate.

Article 13(5) is the provision to flag for any Nepalese shareholder of an Indian company: India retains an unconditional right to tax the gain, with no minimum-holding test and no grandfathering date, regardless of how small the stake.

How to Apply Reduced Rates

Tax Residency Certificate and Form 41

The Nepalese recipient must hold a valid Tax Residency Certificate and electronically file Form 41 (formerly Form 10F), covering status, tax identification, and period of residence, per section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Forms 145 and 146

The Indian payer files Form 145 before remitting. A Chartered Accountant's certificate on Form 146 (formerly Form 15CB), confirming the applicable rate and DTAA eligibility, is needed only for Part C of Form 145 — a taxable remittance above INR 5 lakh made without a section 395 certificate.

Lower-Deduction Certificate

Where the rate is uncertain — commonly, whether a 90-day services PE has arisen — the Nepalese payee applies to the Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a lower- or nil-deduction certificate. The Indian payer's own route is section 395(2) (section 195(2) of the Income-tax Act, 1961), an application to determine the proportion of the payment that is chargeable to tax.

Domestic Rates vs Treaty Rates Comparison

Domestic rates under section 207(1) and 207(2) of the Income-tax Act, 2025 can attract surcharge and health-and-education cess on top; the DTAA-capped rates on dividends, interest and royalties are final rates with no further surcharge or cess.

Common Mistakes and Compliance Tips

Applying a 10% FTS rate

There is no FTS article in this treaty. A payer defaulting to the familiar 10% FTS rate used for other Indian treaties is applying a rate this Agreement does not provide.

Missing the 90-day services PE

Because there is no FTS gross-rate shortcut, the PE test in Article 5(3)(b) does the real work. Track cumulative days for the same or a connected project across any 12-month period, not calendar years.

Citing Article 12(5) for the royalty PE carve-out

The correct paragraph is 12(4) — 12(5) is the source rule, not the PE carve-out.

Assuming the MFN clause has already lowered the royalty rate

No notification implementing Protocol paragraph 2 has been traced. Apply 15% unless a specific notification is identified.

Treating Article 11(3)(c) as covering a specific bank

It is an open mechanism for future agreement by exchange of letters, not a ready-made exemption list.

Frequently Asked Questions

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

Article 10(2)(a) of the India-Nepal DTAA caps dividends at 5% of the gross amount where the beneficial owner is a company holding at least 10% of the payer's shares (not capital). Article 10(2)(b) caps every other dividend at 10%. Both are well below India's 20% domestic rate under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025.

Is there a reduced interest rate for Nepalese banks?

No separate bank tier exists — Article 11(2) caps all interest at a flat 10%, against a domestic rate of 20%. Article 11(3) fully exempts interest arising in India where the beneficial owner is the Nepal Rashtra Bank, or the Government, a political sub-division or a local authority of Nepal — the exemption runs to the other Contracting State's central bank and government. A further exemption reaches only institutions the two competent authorities agree on by exchange of letters.

What is the FTS withholding rate under the India-Nepal DTAA?

There isn't one. The Agreement has no fees-for-technical-services article, so no gross withholding rate applies to Nepalese technical or consultancy fees. They are business profits under Article 7, taxable in India only if the Nepalese enterprise has a permanent establishment here, most commonly via the 90-day services-PE test in Article 5(3)(b).

What is the royalty withholding rate from India to Nepal?

Article 12(2) caps royalties at 15% of the gross amount, covering patents, know-how, and the use of industrial, commercial or scientific equipment. This is higher than the 10% cap in most modern Indian treaties, though still below India's 20% domestic rate under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025.

Does the royalty MFN clause in the Protocol lower the 15% rate?

Protocol paragraph 2 lets a lower rate Nepal grants a third State on royalties flow through to this treaty, but the trigger is Nepal's own treaty network, not India's, and covers royalties only. Whether any Nepal-third-State treaty has activated it is not publicly confirmed, and post-Nestlé SA (SC, 2023) an MFN benefit needs a formal notification to be enforceable in India — so 15% remains the rate to apply absent one.

What forms are needed to apply the DTAA rate on a payment to Nepal?

The Nepalese recipient needs a Tax Residency Certificate and an electronically filed Form 41 (formerly Form 10F). The Indian payer must withhold at the correct treaty rate under section 393(2) of the Income-tax Act, 2025 and file Form 145 (formerly Form 15CA) before remitting; the CA certificate on Form 146 (formerly Form 15CB) is required only for Part C of Form 145, a taxable remittance above INR 5 lakh made without a section 395 certificate.

For the full treaty overview, see our India-Nepal DTAA guide and our DTAA master guide.