Withholding Tax Rates: India to Sri Lanka Under DTAA

India to Sri Lanka Withholding Tax Rates Under DTAA

When an Indian entity pays a Sri Lankan resident — dividends, interest, royalties or fees for technical services — Tax Deducted at Source (TDS) is required under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). The India-Sri Lanka DTAA, signed 22 January 2013 and in force since 22 October 2013, generally reduces that withholding well below India's domestic rates. Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), the taxpayer may apply whichever of the domestic rate or the treaty rate is more beneficial — for every income head covered here, that is the treaty rate.

For the treaty's history, permanent establishment rules and anti-abuse provisions, see our complete India-Sri Lanka DTAA guide.

Dividend Withholding Rate

Article 10 of the India-Sri Lanka DTAA caps Indian withholding tax on dividends paid to a Sri Lankan beneficial owner at 7.5% of the gross amount — one of the lowest dividend rates in any Indian tax treaty.

A common misreading is to assume a large or controlling Sri Lankan shareholding earns a lower or nil rate. It does not: Article 10(2) applies the same 7.5% whatever the shareholding percentage. A Protocol clause made the rate reviewable after three years, but no review has ever been notified — the clause is self-executing, so 7.5% remains the operative rate. There is no most-favoured-nation clause in this treaty (the phrase does not appear anywhere in the Agreement or the Protocol), so a lower rate agreed in some other Indian treaty cannot be imported here.

Interest Withholding Rate

Article 11 caps interest paid to a Sri Lankan beneficial owner at 10% of the gross amount (Article 11(2)) — again with no separate lower tier for banks or financial institutions.

Article 11(3)'s exemption is recipient-specific: it exempts India-source interest paid to the Government of Sri Lanka or the Central Bank of Sri Lanka, and, mirroring the other way, exempts Sri Lanka-source interest paid to the Government of India, the RBI, the Export-Import Bank of India or the National Housing Bank. A dormant third limb lets the competent authorities add further wholly government-owned institutions by exchange of letters, but none has been added — do not assume any other Indian development-finance institution is covered.

The 20% domestic comparison is narrower than it looks: section 207(1) (Table, Sl. No. 3) of the Income-tax Act, 2025 applies that rate only to interest on money borrowed or debt incurred in foreign currency. Interest on a rupee-denominated debt falls instead to the rates in force for the payee — currently 35% for a foreign company — so the treaty saving on a rupee loan is larger than the table suggests. Article 11(4) defines interest broadly but excludes late-payment penalty charges from the definition. Interest on investments directly connected with operating ships or aircraft in international traffic is instead Article 8 shipping/aircraft profit under Article 8(5), where Article 11 does not apply at all.

Royalty and FTS Withholding Rate

Article 12 covers both royalties and fees for technical services in a single combined article, both capped at 10%.

The royalty definition in Article 12(3)(a) is OECD-style, reaching cinematograph films, broadcast tapes and discs, and equipment royalties. The FTS definition in Article 12(3)(b) covers managerial, technical or consultancy services, including secondment of personnel, and — unlike the India-USA, India-UK or India-Singapore treaties — has no "make available" requirement, so a service does not need to leave the Indian payer able to perform it independently to count as FTS. The only exclusions are payments already covered by Article 14 (independent personal services) or Article 15 (dependent personal services).

Article 12(5)(a) sources the income to wherever the payer is resident; Article 12(5)(b) deems the payment to arise wherever the underlying right is used or the services performed, even where neither payer is resident in India or Sri Lanka. The treaty has no services-PE carve-out for Article 12 income, so an Indian payer should also check whether the recipient's personnel have created a services PE — if activities for the same or a connected project exceed 90 days in any 12-month period, the fee moves out of Article 12 and into Article 7 as PE business profits.

Permanent Establishment Carve-Out

All three passive-income articles route effectively-connected income away from their capped rates and into net-basis business taxation: dividends under Article 10(4), interest under Article 11(5), and royalties/FTS under Article 12(4). In each case the income is instead taxed under Article 7 (business profits, where the recipient has a permanent establishment) or Article 14 (independent personal services, where the recipient is an individual with a fixed base), at India's ordinary rates rather than the treaty's capped withholding rate — currently 35% for a foreign company, plus surcharge and cess. The trigger is a PE under Article 5: a fixed place of business, a construction or drilling project lasting more than 183 days, a services engagement continuing more than 90 days in any 12-month period, a dependent agent habitually concluding contracts or securing orders, or an insurance enterprise collecting premiums or covering risks other than through an independent agent. See the complete DTAA guide for the full PE analysis.

Capital Gains Treatment

Article 13 does not set a withholding rate on capital gains — it allocates the taxing right, and any Indian tax due is collected through India's ordinary assessment and TDS machinery for capital gains rather than a flat treaty percentage.

• Immovable property (13(1)) — taxable where the property is situated.
• PE/fixed-base movables (13(2)) — taxable where the PE or fixed base is, including on alienation of the PE itself.
• Ships and aircraft (13(3)) — taxable only in the alienator's State of residence, not the place of effective management.
• Land-rich company shares (13(4)) — taxable where the immovable property is situated, if the company's property consists directly or indirectly principally of that property — no percentage threshold.
• All other shares (13(5)) — may be taxed in the company's State of residence, unconditionally, with no minimum shareholding and no grandfathering.
• Residual gains (13(6)) — taxable only in the alienator's State of residence.

Article 13(5) matters most for Sri Lanka-linked M&A and portfolio exits: India can tax a Sri Lankan resident's gain on Indian company shares under its own capital-gains provisions — section 198 (section 112A of the 1961 Act) at 12.5% without indexation above the exemption threshold for long-term listed-equity gains, section 196 (section 111A) at 20% for short-term listed-equity gains, or section 197 (section 112) at 12.5% without indexation for other long-term gains — regardless of the shareholder's stake size.

How to Apply the Reduced Rates

Tax Residency Certificate

The Sri Lankan recipient obtains a Tax Residency Certificate from the Inland Revenue Department of Sri Lanka, handled by its Secretariat division at the Colombo head office.

Form 41 (formerly Form 10F)

The recipient electronically files Form 41 (formerly Form 10F) on the Indian income-tax portal, confirming status, tax identification number and residence period — treaty relief at source requires this filing, not the TRC alone.

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

The Indian payer files Form 145 before the remittance. A chartered accountant's Form 146 certificate is not required on every outward remittance — only where Part C of Form 145 applies, that is a taxable remittance above INR 5 lakh made without a section 395 certificate.

Lower or nil withholding certificate

If there is doubt about the rate, the recipient can apply under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) to the Assessing Officer for a certificate specifying the correct rate in advance.

Beneficial ownership and PE declaration

The recipient should also confirm, in writing to the payer, beneficial ownership of the income and the absence of a permanent establishment connected with it, since either failure moves the payment out of the treaty rate.

Worked Examples

An Indian company pays its Sri Lankan parent a dividend of INR 80,00,000 and interest of INR 30,00,000 on a foreign-currency shareholder loan, and separately pays the Central Bank of Sri Lanka INR 15,00,000 in interest on a currency-swap facility. The parent and the Central Bank have each furnished valid TRCs and Form 41; none of the three payments is connected with a PE in India.

Total TDS is INR 9,00,000 against INR 1,25,00,000 in aggregate payments — against INR 25,00,000 (20% flat) had the payer defaulted to domestic rates on all three, and a further INR 1,50,000 wrongly withheld had the payer mistakenly applied the general 10% interest rate instead of the Article 11(3) exemption on the Central Bank payment. Over-withholding on an exempt payment is recoverable only by the Central Bank filing an Indian return and claiming a refund — it is not automatically corrected.

Domestic Rates vs Treaty Rates Comparison

Domestic rates under section 207(1) and section 207(2) of the Income-tax Act, 2025 carry applicable surcharge and health-and-education cess (4%) on top, and the 20% interest entry covers foreign-currency debt only; the treaty rates are final, all-inclusive figures with no surcharge or cess added.

Common Mistakes and Compliance Tips

Mistake 1: Applying a shareholding-based dividend tier

There is none. Article 10(2) is a flat 7.5% regardless of the size of the Sri Lankan shareholder's stake.

Mistake 2: Withholding on exempt government/central-bank interest

Interest paid to the Government of Sri Lanka or the Central Bank of Sri Lanka is fully exempt under Article 11(3) — deducting even 10% is an over-withholding error the recipient must separately claim back.

Mistake 3: Requiring a "make available" test for FTS

Article 12(3)(b) has no such requirement. A pure training or consultancy fee is FTS here even if no technical knowledge transfers to the Indian payer's staff.

Mistake 4: Missing a services PE

Personnel on the same or a connected project for more than 90 days in any 12-month period create a services PE under Article 5(3)(b), shifting the payment from 10% under Article 12 to net-basis Article 7 taxation at 35%.

Mistake 5: Skipping Forms 145 and 146

Form 145 is due before every remittance. Form 146 is narrower: a chartered accountant's certificate is needed only for Part C of Form 145, a taxable remittance above INR 5 lakh made without a section 395 certificate. Skipping the filing that does apply can hold up the remittance and expose the payer to interest and penalties under section 398 of the Income-tax Act, 2025 (section 201 of the Income-tax Act, 1961).

Mistake 6: Assuming an MLI-driven PPT applies from 2019

Sri Lanka has never signed the MLI, so no MLI-based PPT ever applied here. The only PPT in this treaty is the bilateral one the 2024 Protocol inserted into Article 28(6); that Protocol entered into force on 19 June 2026, and on its own effect clause the new test reaches income from fiscal years beginning on or after 1 April 2027.

For the treaty's residence rules, PE definitions and anti-abuse framework in full, see our complete India-Sri Lanka DTAA guide.

Frequently Asked Questions

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

Article 10(2) of the India-Sri Lanka DTAA caps withholding on dividends paid to a Sri Lankan beneficial owner at a flat 7.5% of the gross amount, with no shareholding-based tiers, against a domestic rate of 20% under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025. The rate is the same whether the Sri Lankan shareholder holds 1% or 100% of the Indian company.

Is there an exemption for interest paid to government or central bank entities?

Yes. Article 11(3) exempts India-source interest paid to the Government of Sri Lanka or the Central Bank of Sri Lanka, and exempts Sri Lanka-source interest paid to the Government of India, the Reserve Bank of India, the Export-Import Bank of India or the National Housing Bank. All other interest is capped at 10% under Article 11(2), with no separate rate for banks generally.

What is the FTS rate under the India-Sri Lanka DTAA, and is there a make-available test?

Fees for technical services share Article 12 with royalties and are capped at 10% under Article 12(2). The treaty has no make-available requirement, so managerial, technical and consultancy fees — including payments for seconded personnel — qualify as FTS even where no technical knowledge is transferred to the Indian payer.

Does a permanent establishment change the withholding rate?

Yes. Dividends, interest, and royalties or FTS effectively connected with a permanent establishment or fixed base in India fall outside Articles 10, 11 and 12 and are instead taxed as ordinary business profits under Article 7 or Article 14, at India's standard foreign-company rate of 35% plus surcharge and cess, rather than at the treaty's capped rates.

What forms are needed to apply the treaty rate instead of the domestic rate?

A Tax Residency Certificate from Sri Lanka's Inland Revenue Department, an electronically filed Form 41 (formerly Form 10F), and a self-declaration of beneficial ownership and no Indian permanent establishment. The Indian payer separately files Form 145 (formerly Form 15CA) before remitting; a chartered accountant's 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.

Is there a most-favoured-nation clause for Sri Lanka like some other Indian treaties?

No. The India-Sri Lanka DTAA and its 2024 Protocol contain no most-favoured-nation clause at all — the phrase does not appear anywhere in either text. Rates and definitions agreed in India's other tax treaties, such as lower dividend tiers or make-available tests, cannot be imported into this treaty by reference to another agreement.