1 How are foreign investors taxed in India?
A foreign investor is taxed only on India-source income under the Income-tax Act, 2025 (ITA), largely depending on whether it has a permanent establishment (PE) in India.
Foreign investors with a PE – income attributable to the PE is taxed in India on a net basis at the 35% rate applicable to foreign companies, resulting in an effective corporate income tax rate of approximately 36.4% to 38.22% after surcharge and cess.
Foreign investors without a PE – the investor’s business profits are generally not taxable in India, and the exposure is typically limited to withholding tax (WHT) on India-source passive income, such as dividends, interest, royalties, and fees for technical services (FTS), often at a reduced rate under an applicable double taxation avoidance agreement (DTAA).
2 When does a foreign investor create a PE?
A PE is a taxable business presence, as per India’s DTAAs and the ITA. It can arise from:
A fixed place of business;
A dependent agent who habitually concludes contracts in the investor’s name;
Services furnished beyond applicable DTAA day-count; or
Construction projects lasting beyond applicable DTAA periods.
Lastly, a significant economic presence – broadly, substantial digital dealings with Indian customers – can create a PE without any physical presence.
3 What WHT applies to a foreign investor’s income?
Payments made to a foreign investor, whether or not it has a PE in India, are generally subject to WHT, subject to any reduced rate available under an applicable DTAA. Examples include the following.
Income type | Indicative domestic rate* | Indicative DTAA rate** (treaty-dependent) |
Dividends | 20% | 5%–15% |
Interest | 20% | 7.5%–15% |
Royalties and FTS | 20% | 10%–15% |
Capital gains | 12.5%–20% | Nil–12.5% |
* Plus surcharge and cess. ** Subject to the applicable DTAA conditions.
Without a PE, WHT is generally the final Indian tax. With a PE, the income is included in the PE’s taxable profits, and any WHT is credited against the PE’s final tax liability.
4 How are treaty benefits claimed and protected against abuse?
DTAA benefits are generally claimed by furnishing a Tax Residency Certificate, Form 41, proof of beneficial ownership, and, where relevant, a no-PE declaration.
Foreign investors with a PE – a DTAA generally allocates profits to the PE and provides relief from double taxation; and
Foreign investors without a PE – a DTAA may reduce WHT rates and confirm that business profits are not taxable in India in the absence of a PE.
India polices DTAA abuse through the General Anti-Avoidance Rules and the principal purpose test, which may deny treaty benefits where arrangements lack commercial substance or are primarily designed to obtain a tax advantage, thereby rendering treaty shopping ineffective.
5 How can foreign investors structure to manage PE risk?
As PE converts limited WHT exposure into full net-basis taxation, investors may consider:
Keeping any Indian office limited to support activities and avoiding branch or project offices, to avoid creating a PE;
Ensuring Indian agents do not habitually conclude contracts, with key negotiations and execution occurring offshore;
Monitoring employee presence and project duration against treaty PE thresholds; and
Avoiding management and control being exercised from India.
Where PE is unavoidable, investors may limit profit attribution through arm’s-length pricing; clear allocation of functions, assets, and risks; and robust documentation.
6 How are exits and indirect transfers taxed?
For foreign investors, an exit is generally taxed as a capital gain, although gains attributable to a PE may instead be taxed as part of the PE’s business profits. Long-term gains on unlisted shares held for more than 24 months are taxed at 12.5% without indexation, while certain short-term gains are taxed at 20%. India also taxes indirect transfers, meaning gains from the sale of a foreign company deriving more than 50% of its value from Indian assets may be taxable in India, subject to any applicable treaty relief.
