Article 13(4): Taxation of Capital Gains on Shares in Indian Companies: An Analysis of the Grandfathering Clause and Its Implications 

Posted On - 6 April, 2026 • By - Rajesh Sivaswamy

Introduction

The Double Taxation Avoidance Agreement (“DTAA”) between the Republic of India and the Republic of Singapore (officially, the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income) has long been a cornerstone of cross-border investment structuring between the two nations. Entered into force in 1994 and subsequently amended through multiple protocols most notably the Third Protocol of 2016, this treaty governs the allocation of taxing rights over income arising in one jurisdiction to residents of the other.  

Among the treaty’s most consequential provisions is Article 13, which addresses capital gains. Specifically, Article 13(4) deals with gains derived from the alienation of shares in an Indian company held by a Singapore resident. The provision has been the subject of extensive commentary, litigation, and legislative attention, particularly following the amendment of the treaty and the introduction of the so-called “grandfathering” regime.  

This article, provides a comprehensive analysis of Article 13(4) of the India-Singapore DTAA, examining its legislative history, scope, conditions for applicability, the grandfathering regime introduced by the 2016 Protocol, practical implications for investors and fund structures, interaction with domestic Indian tax law, and recent developments in its interpretation. 

Background: The India–Singapore DTAA and the 2016 Protocol

A. The Original Treaty Framework

The original India-Singapore DTAA, modelled largely on the OECD Model Convention, allocated taxing rights over capital gains from the disposal of shares in Indian companies exclusively to Singapore. This exemption from Indian capital gains tax mirroring the India-Mauritius treaty structure made Singapore a preferred domicile for holding companies and private equity structures investing into India. The treaty’s capital gains exemption was premised on a tax residency certificate (“TRC”) mechanism, whereby a Singapore-resident entity holding a valid TRC from the Inland Revenue Authority of Singapore (IRAS) could avail itself of treaty protection.  

The limitation of benefits (LOB) provisions in the treaty and the concept of beneficial ownership were subject to significant judicial scrutiny, particularly in the aftermath of the Vodafone and related judgments that reshaped the landscape of indirect transfer taxation in India. 

B. The Third Protocol (2016): A Paradigm Shift

In May 2016, India and Singapore signed the Third Protocol amending the DTAA, effective from 1 April 2017. The Protocol fundamentally altered the capital gains allocation, aligning the India-Singapore treaty with the simultaneously renegotiated India–Mauritius DTAA. The Protocol introduced a source-based taxation regime for capital gains on shares of Indian companies acquired on or after 1 April 2017, while preserving treaty protection for investments made prior to that date through an express grandfathering clause. 

Key Change Introduced by the 2016 Protocol

Prior to the Protocol: Capital gains on shares of Indian companies were taxable exclusively in Singapore (residence state). 

Post Protocol (from 1 April 2017): India (source state) has the primary right to tax capital gains on shares of Indian companies acquired by Singapore residents on or after 1 April 2017. 

Transition: A two-year concessional tax rate (50% of applicable rate) applies to gains on shares acquired between 1 April 2017 and 31 March 2019, subject to satisfaction of the LOB clause. 

Article 13(4): Text and Scope

A. Statutory Text

Article 13(4) of the India–Singapore DTAA (as amended by the Third Protocol) provides, in essence: 

Article 13(4) – Relevant Extracts

(a) Gains from alienation of shares of a company resident in India may be taxed in India, if the alienation takes place on or after 1 April 2017 and the shares were acquired on or after 1 April 2017. 

(b) Gains from shares acquired before 1 April 2017 shall be taxed only in the Contracting State of which the alienor is a resident (i.e., Singapore) – the grandfathering protection. 

(c) Gains from shares acquired on or after 1 April 2017 but before 1 April 2019 shall be taxed in India at a rate not exceeding 50% of the rate applicable under Indian domestic law, subject to the LOB clause. 

(d) Gains from shares acquired on or after 1 April 2019 shall be taxed in India at the full applicable domestic rate. 

B. Scope and Definitional Issues

The provision applies to gains from the “alienation” of “shares” of a company resident in India. Several definitional questions arise: 

  • Meaning of “alienation”: The DTAA does not define “alienation” expressly. In the context of Indian domestic law, this includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion of a capital asset into stock-in-trade, and deemed transfers under Section 2(47) of the Income-tax Act, 1961 (“ITA”). The broad interpretation of alienation is consistent with the OECD Commentary and the Vienna Convention on the Law of Treaties. 
  • Indian company: A company “resident” in India for purposes of the DTAA means an entity incorporated in India or having its place of effective management (POEM) in India under the domestic law test. Post the introduction of POEM-based residency rules in India (effective 2017), the characterisation of a foreign-incorporated entity as an Indian company resident has become a significant consideration. 
  • Shares vs. other instruments: Article 13(4) expressly refers to “shares.” Questions arise as to whether compulsorily convertible debentures (CCDs), preference shares, warrants, or other equity-linked instruments fall within the provision. The safer view, consistent with the intent of the provision and domestic law, is that shares refer to equity shares and preference shares, but the position on hybrid instruments remains unsettled. 
  • Indirect transfers: The provision does not expressly address indirect transfers (i.e., transfer of shares of a Singapore holding company whose value is substantially derived from Indian assets). Indian domestic law, through Sections 9(1)(i) and 9A of the ITA and the Explanation substituted by the Finance Act 2012, asserts a right to tax such indirect transfers. The interaction between the treaty and the indirect transfer provisions continues to be litigated. 

The Grandfathering Clause: Analysis and Conditions

The grandfathering clause under Article 13(4) is of cardinal importance for Singapore-based investors and holding structures that made investments into India before 1 April 2017. The clause provides that capital gains on shares acquired prior to that date shall continue to be taxable only in Singapore, thereby preserving the erstwhile exemption from Indian capital gains tax. 

A. Conditions for Applicability

For the grandfathering protection to apply, the following conditions must be satisfied: 

1. The alienor (seller) must be a resident of Singapore for purposes of the DTAA at the time of alienation. 
2. The shares must have been acquired before 1 April 2017. The date of acquisition is typically the date on which beneficial ownership of the shares is transferred, not the date of registration or settlement. 
3. The alienor must satisfy the Limitation of Benefits (LOB) clause in Article 24A of the DTAA (for entities other than individuals), demonstrating that the Singapore entity is not a “shell” or conduit company set up for treaty shopping. 
4. The gains must arise from the “alienation” of shares (as discussed above) and not from deemed or notional transfers unless expressly covered. 
5. The alienor must be the beneficial owner of the shares, and not merely a nominee or conduit entity. 

B. The Limitation of Benefits (LOB) Clause

Article 24A of the DTAA (as inserted by the 2005 Protocol and amended in 2016) contains the LOB provisions applicable to entities other than individuals. An entity will be denied treaty benefits (including the grandfathering exemption) if: 

  • It is a shell or conduit company: i.e., a company with negligible or nil business operations and with negligible or nil assets in Singapore. 
  • It does not satisfy the “bona fide” business test: A company is not a shell if its total annual expenditure on operations in Singapore is at least SGD 200,000 in the immediately preceding period of 24 months from the date of the claim of treaty benefits. 
  • The “principal purpose test” may also be invoked by the Indian tax authorities (post the OECD BEPS Action Plan 6 recommendations, and under the Multilateral Instrument to which India is a signatory), potentially overriding the LOB exemption in cases of treaty abuse. 

In practical terms, Singapore holding companies must demonstrate substantive economic presence in Singapore including board meetings, decision-making, and operational expenditure to avail of the grandfathering protection. The reliance on mere TRC issuance by IRAS, which was adequate under the pre-2016 regime, may no longer be sufficient to withstand scrutiny by the Indian Income Tax Department. 

The Transitional Regime: Shares Acquired Between 1 April 2017 and 31 March 2019

The 2016 Protocol introduced a two-year transitional (or “concessional”) regime for shares acquired between 1 April 2017 and 31 March 2019 (both dates inclusive). During this period, capital gains on the alienation of such shares are taxable in India, but at a concessional rate: 50% of the rate of tax that would otherwise be chargeable under Indian domestic law. 

The concessional rate is available only if the Singapore entity satisfies the LOB conditions in Article 24A. If the LOB conditions are not met, the entity is denied even the concessional rate and is taxed at the full domestic rate applicable to non-residents. 

As of 1 April 2019, the transitional regime ended and all shares of Indian companies acquired on or after that date by Singapore residents are subject to Indian capital gains tax at the full applicable rate under the ITA (subject to any other applicable treaty or exemption). 

Interaction with Indian Domestic Tax Law

A. Capital Gains Taxation Under the Income-tax Act, 1961

Under the ITA, capital gains on shares of Indian companies are categorised as: 

  • Short-term capital gains (STCG): Gains on shares held for 12 months or less. If the shares are listed and sold on a recognised stock exchange (STT paid), STCG is taxed at 15% under Section 111A. For unlisted shares or listed shares transferred off-market, STCG is taxed at applicable slab rates (for individuals) or 30% (for companies). 
  • Long-term capital gains (LTCG): Gains on shares held for more than 12 months. If listed shares (STT paid), LTCG exceeding INR 1 lakh is taxed at 10% under Section 112A (as amended by the Finance Act 2018). For unlisted shares, LTCG is taxed at 20% with indexation under Section 112. 

Where a Singapore resident is the alienor and Article 13(4) applies without grandfathering protection (i.e., for post-1 April 2017 acquisitions), India’s right to tax is unrestricted by the treaty, and the full domestic rates apply (subject to any withholding tax procedure under Section 195 of the ITA). 

B. Withholding Tax Obligations

Where an Indian company is the purchaser (transferee) of shares from a non-resident Singapore entity, the Indian acquirer is required to withhold tax at source under Section 195 of the ITA on the capital gains component of the purchase price. Failure to deduct and deposit withholding tax exposes the acquirer to interest (Section 201), penalty (Section 271C), and potential disallowance of the acquisition cost. 

In practice, non-resident sellers and Indian buyers often seek a “nil withholding” or “lower withholding” certificate from the Indian tax authorities under Section 197 of the ITA, particularly where the grandfathering clause is being invoked. The tax authorities may scrutinise the LOB conditions before granting such certificates. 

C. Indirect Transfers and Section 9(1)(i)

One of the most vexed intersections of Article 13(4) with domestic law concerns indirect transfers. Section 9(1)(i) of the ITA (post the Vodafone amendment in 2012) provides that gains from the transfer of a foreign entity deriving substantial value from Indian assets are deemed to arise in India and are taxable as Indian-sourced income. The provision applies where: 

  • The share or interest in the foreign entity derives, directly or indirectly, substantially from assets located in India (i.e., the fair market value of Indian assets constitutes at least 50% of the total assets of the foreign entity as on the specified date). 
  • The fair market value of the share or interest transferred exceeds INR 10 crore. 

The interaction of this provision with Article 13(4) is contentious. The treaty’s grandfathering clause applies to gains from the “alienation of shares” in an Indian company – not to the alienation of shares of a foreign holding company. The OECD Commentary and the Indian Supreme Court’s Vodafone judgment (albeit pre-amendment) suggested that the treaty should prevail over domestic law in cases of indirect transfer. However, the amendments to the ITA and the position of the Indian tax authorities has increasingly been to assert taxability of indirect transfers notwithstanding treaty protection. 

Implications for Fund Structures and Investment Vehicles

The amendment to Article 13(4) has had significant structural implications for private equity, venture capital, and other investment vehicles using Singapore as a holding jurisdiction for Indian investments: 

  • Pre-April 2017 investments: Funds with Singapore-based holding structures that made investments before 1 April 2017 continue to benefit from the grandfathering exemption. However, such funds must ensure that the Singapore entity maintains adequate substance, satisfies the LOB test, and that there are no subsequent events (such as restructuring, conversion, or fresh issuance) that could be construed as a new acquisition of shares post the cut-off date. 
  • Post-April 2019 investments: All new investments through Singapore-based structures are subject to Indian capital gains tax. This has prompted a re-evaluation of jurisdiction selection, with some fund managers considering alternative structures or investing directly. 
  • Fund-level vs. SPV-level: Some fund managers have restructured from a Singapore SPV model to a direct investment model (through a Category I/II FPI registered in Singapore) to avail of any applicable treaty exemptions at the fund level. The applicability of Article 13 to FPI structures depends on the legal character of the FPI (trust, company, or LLP) and its residence for treaty purposes. 
  • Compulsory convertible instruments: Where investments were made through CCDs or warrants pre-April 2017, and converted to equity post that date, there is a material risk that the Indian tax authorities may characterise the equity shares (post-conversion) as having been “acquired” on the date of conversion (post 1 April 2017) rather than on the date of the original CCD subscription. This remains a live area of controversy. 

Recent Developments and Emerging Issues

A. Principal Purpose Test (PPT) under the MLI

India has ratified the Multilateral Instrument (MLI) developed under the OECD/G20 BEPS Project, and the India–Singapore DTAA has been modified by the MLI. The MLI introduces the PPT as a minimum standard, under which treaty benefits (including the grandfathering protection) can be denied if it is established that one of the principal purposes of an arrangement or transaction was to obtain treaty benefits. This introduces a significant uncertainty for Singapore holding structures, even those with genuine commercial substance, where tax benefit is clearly a motivating factor. 

B. POEM and Indian Residency of Singapore Entities

India’s POEM-based residency rules (effective from assessment year 2017-18) create a risk that a Singapore-incorporated entity whose effective management is exercised from India may be treated as an Indian resident for tax purposes, thereby potentially losing its right to treaty benefits as a Singapore resident. 

C. CBDT Circulars and Instructions

The Central Board of Direct Taxes (CBDT) has issued various circulars and instructions over the years providing guidance on the applicability of the India–Singapore and India–Mauritius treaties, substance requirements, and the treatment of TRCs. These administrative positions have not always been consistent with judicial precedents, creating an uncertain compliance environment for taxpayers. 

D. Judicial Developments

Indian tribunals and High Courts have increasingly scrutinised the beneficial ownership, substance, and LOB conditions in the context of the India–Singapore treaty. The Authority for Advance Rulings (now the Board for Advance Rulings) has issued rulings both affirming and denying grandfathering benefits, often turning on the specific facts of each case. Taxpayers seeking certainty on the applicability of Article 13(4) are advised to seek advance rulings or private letter rulings from the competent authorities. 

Practical Guidance for Taxpayers

The taxpayers and investors with Singapore-based structures need to consider the following: 

  • Maintain a contemporaneous record of investment dates, subscription agreements, and evidence of acquisition of beneficial ownership pre-1 April 2017 to substantiate grandfathering claims. 
  • Conduct a periodic LOB review to ensure that the Singapore entity satisfies the annual expenditure threshold and other substance requirements under Article 24A. 
  • Obtain a Tax Residency Certificate from IRAS for each relevant financial year, though note that this alone may not be sufficient to satisfy LOB conditions under enhanced scrutiny. 
  • Consider seeking an advance ruling from the Board for Advance Rulings where the quantum of gains is significant and the facts are complex, particularly in cases involving indirect transfers or hybrid instruments. 
  • Evaluate the impact of the MLI PPT on existing and proposed structures, and document the bona fide commercial rationale for the Singapore holding structure beyond treaty benefit. 
  • Engage with Indian withholding tax and compliance obligations proactively, including obtaining nil or lower withholding certificates where applicable, to avoid interest and penalty exposure. 
  • Assess whether structural alternatives – such as direct investment through a regulated FPI structure or co-investment arrangements – may be more efficient for new investments, given the loss of the capital gains exemption for post-2017 acquisitions. 

Conclusion

Article 13(4) of the India–Singapore DTAA, as amended by the 2016 Third Protocol, represents one of the most significant shifts in the treaty framework governing cross-border investments into India. The move from a residence-based to a source-based taxation model for capital gains on shares of Indian companies has materially altered the tax calculus for Singapore-based investors, while the grandfathering clause preserves historic treaty benefits for pre-2017 investments, subject to satisfaction of substance and LOB requirements. 

The interaction of Article 13(4) with India’s domestic indirect transfer provisions, POEM rules, and the MLI’s principal purpose test creates a complex and evolving compliance landscape. Investors and fund managers with exposure to the India–Singapore treaty corridor must take a proactive, well-documented, and substance-driven approach to their Singapore structures to protect treaty claims and manage litigation risk. 

Co- Authored By – Aditya Bhattacharya