India Mauritius DTAA Amendment 2026: Protocol, PPT and Capital Gains Rules Explained

The Central Government notified the amended India Mauritius DTAA on 13 October 2026, bringing into force the protocol signed at Port Louis on 7 March 2024. The 2024 Protocol, which took effect on 10 August 2026, inserts the Principal Purpose Test (PPT) to deny treaty benefits in abusive cases. Mauritius based funds and companies claiming lower tax under the treaty will now face closer checks on commercial substance and purpose.

What Is DTAA in Income Tax?

The Double Taxation Avoidance Agreement (DTAA), where DTAA is the full form for a bilateral tax treaty, is a pact between two countries that decides which country can tax a specific income and how relief is given to avoid taxing the same income twice. The agreement allocates taxing rights between the residence country, where the taxpayer lives, and the source country, where the income arises, and then requires one country to give credit or exemption for tax paid in the other.

A DTAA becomes applicable when a person or company earns income that is taxable in both India and its treaty partner. A simple example helps. If a Mauritius resident company earns dividends from shares of an Indian company, both India and Mauritius may claim tax under their domestic laws. The India Mauritius DTAA steps in to set a capped withholding tax rate in India and requires Mauritius to relieve double taxation. Taxpayers usually prove residence with a Tax Residency Certificate and file Form 10F in India, while resident Indians claiming foreign tax credit use Form 67.

India has built one of the largest treaty networks in the world, with comprehensive agreements in force with more than 90 jurisdictions, including the USA, UK, Singapore, UAE, France, Japan, Germany, Australia and Canada. The core mandate of these treaties remains the same. They remove double taxation to promote trade and investment, ensure certainty on tax rates for interest, dividends, royalties and capital gains, and provide tools for exchange of information and assistance in tax collection.

India Mauritius Treaty History: From 1982 to the 2024 Protocol

The India Mauritius tax treaty is one of India’s oldest bilateral tax pacts. The original Convention was signed at Port Louis on 24 August 1982 and came into force on 6 December 1983. For more than three decades it followed residence based taxation of capital gains. This meant gains from sale of shares of an Indian company by a Mauritius resident were taxable only in Mauritius. Since Mauritius did not levy capital gains tax domestically, such gains largely escaped tax in both countries. This feature made Mauritius the preferred route for investment into India, but it also raised concerns about treaty shopping, round tripping of funds and revenue loss.

The first major correction came with the Protocol signed on 10 May 2016, which entered into force on 19 July 2016. The 2016 Protocol gave India the right to tax capital gains from shares acquired on or after 1 April 2017. Shares bought before that date were grandfathered, which means they kept the old exemption in India irrespective of when they are later sold. For shares bought on or after 1 April 2017 but sold during the transition window from 1 April 2017 to 31 March 2019, India applied only half its domestic tax rate, subject to the Limitation of Benefits (LOB) test under Article 27A. From 1 April 2019 onward, India taxes such gains at full domestic rates. The 2016 changes also brought source based taxation of bank interest at 7.5 percent, tightened the permanent establishment and information exchange rules, and denied the concessional transition rate to shell or conduit companies with annual Mauritius operational spending below ₹2.7 million.

The 2024 Protocol does not change those capital gains rates. It adds a treaty wide anti abuse layer that was missing because the India Mauritius DTAA was kept outside the multilateral route for updating treaties.

What Changes Under the 2026 Notification?

The Indian notification was issued as S.O. 5611(E) on 13 October 2026 under Section 159(1) of the Income-tax Act, 2025 and publishes the full text of the 2024 Protocol. Mauritius completed its side through the Double Taxation Avoidance Agreement (India) (Amendment) Regulations 2026, approved by its Cabinet on 17 July 2026 and gazetted on 8 August 2026. The Protocol entered into force on 10 August 2026, the date of the later completion notice. Its provisions apply from that date irrespective of the taxable year or the date on which the tax is levied.

Two legal changes matter most. First, the preamble now states that India and Mauritius intend to eliminate double taxation without creating opportunities for non taxation or reduced taxation through tax evasion or avoidance, including treaty shopping where residents of a third country route investments through Mauritius to claim relief indirectly. Tax officers can use this language to interpret the treaty in a purposive way when a structure looks artificial.

Second, the Convention gains a new Article 27B on Entitlement to Benefits. This article carries the Principal Purpose Test. The existing Article 27A Limitation of Benefits, which applied mainly to the 2017 to 2019 capital gains transition, continues to operate. Taxpayers must now satisfy both tests where each applies. The benefit at stake is wider than capital gains alone and can cover dividends, interest, royalties, fees for technical services and other income.

What Is the Principal Purpose Test?

The Principal Purpose Test (PPT) is an anti abuse rule developed under Action 6 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project to stop treaty shopping. The India Mauritius DTAA now provides that a treaty benefit will be denied if it is reasonable to conclude, after looking at all facts and circumstances, that obtaining that benefit was one of the principal purposes of an arrangement or transaction, unless granting it fits the object and purpose of the relevant treaty provision.

In practice, the test has two steps. The tax officer first asks whether securing the treaty advantage was one of the main drivers of the structure, not necessarily the sole driver. A holding company set up in Mauritius just before a large Indian investment, with no staff, board meetings or spending in Mauritius, would attract questions. The taxpayer can still keep the benefit by showing that granting it aligns with the purpose of the treaty clause, for instance where there is genuine commercial rationale, active decision making in Mauritius and clear non tax reasons for the location choice.

The PPT is broader than India’s domestic General Anti Avoidance Rules (GAAR). The GAAR treats an arrangement as impermissible when its main purpose is to obtain a tax benefit. The PPT can trigger when obtaining the treaty benefit was only one of the principal purposes. The PPT also sits beside the Multilateral Instrument (MLI), the 2016 OECD pact in force from 1 July 2018 that updated more than 1,000 treaties in one stroke. India ratified the MLI in June 2019 with effect from 1 October 2019, but Mauritius had excluded the India treaty from its MLI coverage. The 2024 bilateral Protocol fills that gap and brings the India Mauritius treaty in line with the BEPS minimum standard on treaty abuse.

Why Mauritius Matters for Investment Into India

Mauritius has been the largest source of foreign direct investment into India for most of the last two decades. Data from the Department for Promotion of Industry and Internal Trade (DPIIT) show cumulative FDI equity inflow from Mauritius of about $179 billion between January 2000 and December 2024, around 24.85 percent of total inflows, keeping Mauritius at rank one for that long period. In 2024-25, India received $81.04 billion in gross FDI, with Singapore at about 30 percent, Mauritius at about 17 percent and the United States at about 11 percent. The capital has flowed mainly into services, telecommunications, computer software and hardware, construction development and power, with Maharashtra, Gujarat, Karnataka and Delhi as leading destinations.

Several features explain this lead. Mauritius, an island nation in the western Indian Ocean with Port Louis as capital, offers a stable legal system, a low 15 percent corporate tax with exemptions that can lower effective rates, no domestic capital gains tax, an extensive treaty network and investment promotion structures such as Global Business Companies. For Indian policy, the Mauritius route brought welcome capital and jobs, but also persistent debate about whether some flows lacked substance and deserved the label of tax haven routing. The 2016 and 2024 protocols reflect a balance. India wants to keep Mauritius as a legitimate investment corridor while ensuring profits are taxed where real economic activity occurs.

How the Protocol Affects Investors and Funds

Foreign portfolio investors, private equity funds and holding companies using Mauritius entities will need stronger documentation of commercial substance. Tax authorities in both countries can now examine the full picture, including the reason for choosing Mauritius, the level of operational spending and staff, the place where key investment decisions are taken, board minutes, and whether the entity has active business links beyond holding Indian assets. Favourable treaty rates, such as the 5 percent withholding on dividends where a Mauritius shareholder holds more than 10 percent of capital, or the concessional interest and royalty rates, will be tested against this substance standard in addition to the beneficial ownership test.

The Central Board of Direct Taxes (CBDT), the apex direct tax administration under the Department of Revenue in the Ministry of Finance, issued Circular No. 01/2025 on 21 January 2025 to reduce uncertainty. The Circular states that the PPT will apply prospectively from the entry into force of the amending protocol, and that grandfathered shares acquired before 1 April 2017 will stay outside the PPT and remain governed by the specific grandfathering clause. A later clarification on 15 March 2025 added that this protection applies only to the PPT and does not dilute other anti abuse tools such as the GAAR, specific anti avoidance rules or other treaty entitlement conditions. In April 2026 the CBDT also reaffirmed that GAAR itself does not apply to income from transfer of investments made before 1 April 2017.

Some uncertainty remains because the Protocol text does not itself write in an express grandfathering exception for the PPT. Market experts therefore advise funds to ring fence pre April 2017 holdings with clear purchase records, while ensuring post August 2026 income, including dividends on old shares and gains on newer holdings or debentures, can pass the PPT on its own merits. The Supreme Court rulings in the Mauritius treaty cases, including the Azadi Bachao Andolan (2003) judgment upholding treaty benefits with a valid residency certificate and the Tiger Global (January 2026) ruling on indirect transfers and grandfathering claims, show that courts look closely at facts, timing and treaty purpose rather than paperwork alone.

The Way Forward

The immediate task is predictable administration of the new test. Clear CBDT guidance on evidence, timelines and safe practices for genuine funds would lower litigation and protect steady inflows. Mauritius entities are likely to raise their on ground substance, with real directors, decision making and expenditure in Mauritius, and to keep detailed commercial files for each Indian investment.

Over time, the Protocol should push investment toward direct and transparent routes rather than purely tax driven layering. India has already extended similar source based capital gains rules to Singapore and Cyprus and has widened information exchange and collection assistance. If administered fairly, the PPT can curb avoidance without hurting legitimate capital, and preserve Mauritius as a clean and compliant bridge for trade and investment between the two countries.

Key Takeaways

• The India Mauritius DTAA 2024 Protocol was signed on 7 March 2024, notified by India on 13 October 2026 and entered into force on 10 August 2026.
• The Protocol inserts new Article 27B with the Principal Purpose Test, which allows denial of treaty benefits if obtaining the benefit was one of the principal purposes of the arrangement.
• The original treaty of 24 August 1982 allowed residence only taxation of share gains, while the 2016 Protocol gave India taxing rights on shares acquired on or after 1 April 2017.
• Shares acquired before 1 April 2017 remain grandfathered from Indian capital gains tax, and the CBDT Circular of 21 January 2025 keeps such holdings outside the PPT.
• Mauritius was the top source of cumulative FDI equity of about $179 billion from 2000 to 2024, with about 17 percent share in 2024-25 inflows.