India tightens tax rules for investments through Mauritius

New Delhi: Foreign investors routing money into India through Mauritius will face greater scrutiny under new tax treaty rules that allow India to deny tax benefits if one of the main reasons for an investment structure was to obtain those benefits.

A notification issued on 13 October gives effect in India to a protocol amending the India-Mauritius tax treaty, signed in March 2024. The protocol came into force on 10 August 2026, while the notification formally implements its provisions in India.

The amendment introduces a Principal Purpose Test (PPT), which allows tax authorities to deny treaty benefits if obtaining them was one of the main purposes of a transaction or arrangement. Benefits can still be granted if doing so is consistent with the purpose of the relevant treaty provisions.

The change matters for foreign portfolio investors (FPIs), private equity (PE) and venture capital (VC) funds, holding companies and special-purpose vehicles that use Mauritius-based entities to invest in India. They may need to provide clearer evidence of the business reasons behind their investment structures when claiming tax benefits under the treaty.

Scrutiny shift

The amendment adds Article 27B, titled Entitlement to Benefits, to the existing Double Taxation Avoidance Agreement (DTAA). Under the PPT, authorities can examine whether securing a tax benefit was one of the main reasons for a transaction or arrangement.

For instance, if a company establishes an entity in Mauritius primarily to claim tax benefits on investments in India, authorities can deny those benefits unless granting them is consistent with the purpose of the relevant treaty provisions.

This does not mean that all investments routed through Mauritius will automatically lose tax benefits. Authorities will examine the purpose of each arrangement and the facts of the case before deciding whether the benefits should be allowed.

Richa Sawhney, partner, tax, at Grant Thornton Bharat, said the India-Mauritius treaty had been at the centre of tax litigation in India for decades, with many disputes focusing on treaty shopping and the availability of benefits under structures perceived as tax driven.

“The amended preamble moves away from the earlier emphasis on promoting mutual trade and investment and instead expressly states that the treaty should not create opportunities for non-taxation or reduced taxation through tax avoidance, including treaty-shopping arrangements,” Sawhney said.

The treaty was not a Covered Tax Agreement under the Multilateral Instrument (MLI), meaning it did not automatically incorporate the MLI’s anti-abuse provisions. The revised preamble and the PPT bring the treaty in line with minimum standards set by the Organisation for Economic Co-operation and Development (OECD) under its Base Erosion and Profit Shifting (BEPS) framework, according to experts.

Kunal Shah, partner at Price Waterhouse & Co LLP, said the notification formally gives effect to the protocol, including the PPT, signed in March 2024. “This provided much-needed clarity on the scope and application of the new PPT framework,” he said.

A new safeguard

Signed in 1982, the India-Mauritius tax treaty has played an important role in cross-border investment. In 2016, the two countries amended the agreement to give India the right to tax capital gains from the sale of shares acquired in Indian companies on or after 1 April 2017. Investments made before that date retained their earlier tax treatment under the revised treaty. The 2016 protocol also introduced conditions limiting access to certain transitional tax concessions.

The latest amendment does not introduce a new capital gains tax rate. It adds a safeguard against the misuse of treaty benefits, and applies from 10 August 2026, irrespective of when taxes are levied or the taxable years to which they relate.

Maneesh Bawa, partner at Nangia Global, said the protocol had been in force since 10 August 2026, and the 13 October notification gave it formal effect in India.

“It adds a revised preamble and a Principal Purpose Test (PPT), aligning the India-Mauritius tax treaty with the BEPS minimum standard. For genuine investors this is about substance, not disruption. Capital gains on shares acquired before April 2017 remain grandfathered, as CBDT clarified in January 2025,” Bawa said.

“The pressure points are dividends, interest and other income arising now, and structures without real commercial rationale in Mauritius. Funds and holding companies should document governance, decision-making and purpose. Clear CBDT guidance on applying the PPT would help,” he added.

About the Author

Dhirendra Kumar is a seasoned policy reporter with about 20 years of experience in deep, on-ground reporting across key economic and governance sectors. His work spans finance, public expenditure, disinvestment, public sector enterprises, textiles, trade, consumer affairs, and agriculture, with a strong focus on uncovering structural policy shifts and their real-world impact.<br><br>Kumar has been awarded the Chaudhary Charan Singh Award for Excellence in Journalism in Agricultural Research and Development, recognising his contribution to reporting on critical issues in the farm sector. He has also been a recipient of a fellowship in international trade from the National Press Foundation, which has further strengthened his coverage of global trade dynamics and their implications for India.<br><br>Kumar is known for breaking complex policy developments into clear, accessible stories. His reporting focuses on uncovering under-reported trends, explaining policy shifts, and helping readers stay informed about developments that shape India’s economic landscape.