Selling Shares of a Foreign Company Can Still Trigger Indian Tax
ObjectiveBy the end of this screen you can run the two-threshold test (FMV > ₹10 cr AND ≥50% of assets), apply both exemptions, and identify the Indian entity's separate reporting duty.
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Core Concept
Both parties foreign, transaction offshore - yet India can still tax the gain.
Non-resident sells shares/interest in a foreign company that derives substantial value from Indian assets
Section 9(10) deems those shares a capital asset situated in India
The gains fall into the Indian tax net
The structure this catches
Historical context: this deeming rule was introduced by the Finance Act, 2012, with retrospective effect.
Addresses offshore share transfers deriving substantial value from Indian assets
Current test sits in section 9(10) - still called 'indirect transfer' transactions in practice
Foreign investor (non-resident)
↓ sells shares of
Offshore holding company (incorporated outside India)
↓ substantially derives value from
Indian company / asset
Run the two-threshold test
Both thresholds must be met, tested on the 'specified date'.
Specified date = the date on which the accounting period of the foreign company or entity ends, preceding the date of transfer
Override: the date of transfer itself, where the book value of assets on that date exceeds the book value as on the year-end date by 15% (anti-abuse rule for last-minute asset stuffing or draining before a sale)
Do not assume the accounting period ends on 31 March - a foreign entity that regularly adopts a different twelve-month year-end for its home tax law or for reporting to its own shareholders is tested on that date
How is FMV determined?
Neither threshold can be run until the fair market values have been determined under Rule 11 - the ₹10 crore test and the 50% test are both FMV tests, not book-value tests.
Asset being valued
Rule 11 basis of fair market value
Listed Indian shares
Rule 11 uses the observable price on the recognised stock exchange - but where the shareholding confers a right of management or control, a specific formula (market capitalisation plus book value of liabilities, divided by outstanding shares) applies instead.
Unlisted Indian shares
FMV is determined by a merchant banker or an accountant under any internationally accepted arm's-length valuation methodology, increased by any liability considered in that determination.
Other assets / the offshore entity
Rule 11 separately prescribes the approach for other Indian assets, and for valuing all the assets of the foreign company or entity - the denominator in the 50% test.
Drag both sliders to model a fact pattern, then read the verdict below.
₹12 crore
55%
–Threshold 1: FMV of Indian assets exceeds ₹10 crore
–Threshold 2: Indian assets ≥ 50% of total assets
Exemptions
Even where both thresholds are met, check both limbs below before concluding the provisions apply - click each source badge to read the exact clause.
①SMALL SHAREHOLDER
Holding not exceeding 5%, no management/control
All conditions must be met together:
Voting power, share capital or interest not exceeding 5%
No right of management or control in the foreign company or entity
Holding aggregated with that of the transferor's associated enterprises
Tested at any time in the twelve months preceding the date of transfer
Conditions differ for direct vs indirect holding of the Indian assets - read the clause before relying on it
②FPI SHARE TRANSFER
SEBI-registered FPI shares
Provisions do not apply where the holding is, directly or indirectly, in:
Category I FPI under the SEBI (FPI) Regulations, 2019
Category I or Category II FPI under the 2014 Regulations, prior to their repeal
Independent of stake size or control - a wholly separate route from the small-shareholder limb
Verify the exact registration category, not merely 'FPI status'
Small-shareholder switchboard - which facts actually decide it?
Two switches are gold-tagged - they're the only ones that move the verdict. Flip the other two into every combination you like.
Decides itHolding %
Decides itManagement/control rights
IrrelevantIndian asset type
IrrelevantOffshore entity's jurisdiction
EXEMPTHolding not exceeding 5% and no management/control - the small-shareholder exemption applies. Asset type and jurisdiction never enter this test.
If the provision applies, how much of the gain is taxable in India?
Where only part of the offshore entity's value is attributable to Indian assets, India does not tax the whole gain. Rule 12 apportions it.
Rule 12 formula
India-attributable income = A × B / C
Term
What it is under Rule 12
A
Income from the transfer of the offshore share or interest, computed under the Act as if that share or interest were located in India.
B
FMV of the assets located in India on the specified date, computed under Rule 11.
C
FMV of all the assets of the foreign company or entity on the specified date, computed under Rule 11.
Drag the three sliders to model your own A, B and C, then read the apportionment the formula produces.
₹100 crore
₹600 crore
₹1,000 crore
–B does not exceed C (a valid Rule 11 numerator and denominator)
–B is at least 50% of C - the section 9(10)(b)(ii) proportion test
Form No. 4 - what the transferor must do
Obtain and furnish the report along with the return of income
Signed and verified by an accountant
Must give the basis of the apportionment under the formula
Must certify the India-attributable income is correctly computed
If information is not provided: the Assessing Officer determines the income in such manner as he deems suitable
Reporting duty on the Indian entity
Read this as a separate, standalone compliance duty on the Indian concern - it does not depend on whether the transferor itself is taxable.
Question
Threshold / test
Implication if met
Do Indian assets represent substantial value?
FMV of Indian assets > ₹10 crore AND ≥ 50% of total assets
Indirect transfer provisions potentially apply
Is the transferor a small shareholder?
Holding not exceeding 5%, no management/control rights, tested with associated enterprises at any time in the preceding 12 months
Exempt - provisions do not apply
Are the shares being transferred shares of an FPI?
Transferor is a SEBI-registered FPI
Exempt - specific FPI carve-out applies
Has the Indian entity filed its report?
Form No. 163 under Rule 235, within 90 days of FY-end (or 90 days of the transaction if management/control transferred)
Non-compliance attracts a section 458 penalty
Two different forms, two different persons - do not conflate them on the file.
Obligation
Person responsible
Rule 12 / Form No. 4
The transferor, supporting the attribution computation, filed with its return of income
Section 506 / Rule 235 / Form No. 163
The Indian concern, for indirect-transfer reporting, within the Rule 235 deadline
◇Deadline & penalty calculations
Click each fact pattern and work out the filing trigger and penalty yourself before opening the answer.
▶Worked example - same numbers, three different outcomes
A Cayman Islands holding company owns an Indian subsidiary worth ₹18 crore, representing 60% of the holding company's total assets. Three different transferors sell their stake:
Transferor
Outcome
Strategic investor, 40% stake, board seat
Both thresholds met (₹18cr > ₹10cr; 60% > 50%) and no exemption applies - indirect transfer provisions apply; gains taxable to the extent attributable to Indian assets.
FPI holding 3%, no control rights
Small-shareholder exemption applies (holding not exceeding 5%, no management/control, on the 12-month test) - exempt.
Non-resident transferring its investment held in a SEBI Category I FPI
The FPI carve-out under section 9(10)(g)(i) applies independently - exempt regardless of stake size.
Same underlying company, same thresholds met - but the transferor's own status determines the outcome. Check both exemptions before concluding the provisions apply.
A three-jurisdiction chain - the harder case
When the entity actually sold sits between the investor and the Indian asset, re-run both tests at the correct level of the chain:
Trace the chain top to bottom before reading the worked example - note which entity's shares are actually being sold.
Singapore HoldCo (Singapore tax resident - the alienator)
↓ holds 100% of
Mauritius entity (the company whose shares are actually sold)
↓ holds 70% of
Indian company (the underlying Indian asset)
◇Do not stop at section 9(10)
Section 9(10) establishes only the domestic exposure. Then, in order:
Determine the property actually alienated, at the correct level of the chain
Test the applicable Article 13 of the relevant DTAA
Apply any operative Protocol or MLI modification
Only then conclude India's final taxing right - worked through in the Capital Gains module
◇Diagnose the structure
For each fact pattern, click the outcome you would actually file. Where the facts given are enough to reach a position, decide on them; where they are not, say so - 'insufficient valuation facts' is itself a professionally defensible position.
✓
Key takeaways
Indirect transfers catch offshore transactions - run the two-threshold test (FMV > ₹10 crore AND ≥ 50% of total assets) when a foreign company above an Indian asset is sold, before concluding no Indian tax applies.
Two independent exemptions exist - small shareholder (holding not exceeding 5%, no management/control, tested over the preceding 12 months, with different conditions for direct and indirect holding structures) and the SEBI Category I FPI carve-out - check both before concluding the provisions apply.
FMV must be determined under Rule 11 before either threshold can be run; where the provisions apply, Rule 12 attributes only part of the gain to India and Form No. 4 must support that computation.
The Indian entity's own reporting duty (Form 163/Rule 235, 90 days) is separate from the transferor's tax position and carries its own section 458 penalty for non-compliance.
Exact law · Income-tax Act, 2025, Section 9(10)
Section 9(10) - Income deemed to accrue or arise in India
"(10) In sub-section (2), - (a) an asset or a capital asset, being any share of, or interest in, a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets (whether tangible or intangible) located in India;
(b) the share or interest, referred to in clause (a), shall be deemed to derive its value substantially from the assets located in India, if on the specified date, the value of such assets - (i) exceeds the amount of ten crore rupees; and (ii) represents at least 50% of the value of all the assets owned by the company or entity, as the case may be;
(c) the value of an asset shall be the fair market value on the specified date of such asset without reduction of liabilities, if any, in respect of the asset, determined in the manner, as may be prescribed."
IT Act, 1961 — Explanation 5 to s.9(1)(i) (predecessor provision)
Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
IT Act, 1961 — Explanation 5, provisos (predecessor provision)
Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:
Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 prior to their repeal, made under the Securities and Exchange Board of India Act, 1992:
Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992.
IT Act, 1961 — Explanation 7 to s.9(1)(i) (predecessor provision, small-shareholder exemption)
Explanation 7(a).—No income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or entity registered or incorporated outside India, referred to in Explanation 5—
(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity.
Exact law · Income-tax Act, 2025, Section 9(10)(d) and (e)
Section 9(10)(d) and (e) - 'specified date' and "accounting period"
"(d) the expression 'specified date' in clause (c) means - (i) the date on which the accounting period of the company or, as the case may be, the entity ends preceding the date of transfer of a share or an interest; or (ii) the date of transfer, if the book value of the assets of the company or, as the case may be, the entity on the date of transfer exceeds the book value of the assets as on the date referred to in sub-clause (i), by 15%;
(e) the expression 'accounting period' in clause (d) means - (i) each period of twelve months ending with the 31st March; (ii) each period of twelve months ending with a date other than the 31st March, in a case where a company or an entity, referred to in clause (a), regularly adopts a period of twelve months ending on a day other than the 31st March for - (A) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or (B) reporting to persons holding the share or interest; (iii) the period beginning with the date of registration or incorporation of a company or entity and ending with the 31st March or such other day referred to in sub-clause (ii), in a case where a company or entity comes into existence and the later accounting period shall be the successive periods of twelve months; or (iv) the period beginning with the 1st April or such other day as applicable in sub-clause (ii) and ending with the date immediately preceding the date on which the company or entity ceases to exist, in a case where the company or the entity ceases to exist before the end of the accounting period;"
Exact law · Income-tax Rules, 2026, Rule 11
Rule 11 - Fair market value of assets
"11. (1) The fair market value of asset, tangible or intangible, as on the specified date, held directly or indirectly by a foreign company or entity, for the purposes of section 9(10) shall be computed as per this rule with reference to the specified date.
(2) Where the asset is a share of an Indian company listed on a recognised stock exchange on the specified date, the fair market value of the share shall be the observable price of such share on the stock exchange so, however, that - (a) if the share is held as part of the shareholding which confers, directly or indirectly, any right of management or control in the said company, the fair market value of the share shall be determined using the following formula: Fair market value = (A+B)/C, Where, A = the market capitalisation of the company on the basis of observable price of its shares quoted on the recognised stock exchange; B = the book value of liabilities of the company; and C = the total number of outstanding shares; or (b) if, on the specified date, the share is listed on more than one recognised stock exchange, the observable price of the share shall be computed with reference to the recognised stock exchange which records the highest volume of trading in the share during the tax year.
(3) Where the asset is a share of an Indian company not listed on a recognised stock exchange on the specified date, the fair market value of the share shall be - (a) the fair market value as determined by a merchant banker or an accountant as per any internationally accepted valuation methodology for valuation of shares on arm's length basis; and (b) increased by the liability, if any, considered in such determination as per clause (a).
(5) The fair market value of the asset other than those referred to in sub-rules (2), (3) and (4) shall be the price it would fetch, if sold in the open market as determined by a merchant banker or an accountant and increased by the liability, if any, considered in such determination.
(6) The fair market value of all the assets of a foreign company or an entity on the specified date, if conditions specified in column B of the following Table are fulfilled, shall be determined as per column C thereof: 1. Where the transfer of share of, or interest in, the foreign company or entity is between the persons who are not connected persons, for the purpose of such transfer - Fair market value of all assets = A+B, where A = Market capitalisation of the foreign company or entity computed on the basis of the full value of consideration for transfer of the share or interest; and B = book value of the liabilities of the company or the entity as on the specified date as certified by a merchant banker or an accountant. 2. Where the share of the foreign company or entity is listed on a stock exchange on the specified date - Fair market value of all the assets = A+B, where A = Market capitalisation of the foreign company or entity computed on the basis of the observable price of the share on the stock exchange where the share of the foreign company or the entity is listed; and B = book value of the liabilities of the company or the entity as on the specified date. 4. Where the share in the foreign company or entity is not listed on a stock exchange on the specified date - Fair market value of all the assets = A+B, where A = fair market value of the foreign company or the entity as on the specified date as determined by a merchant banker or an accountant as per the internationally accepted valuation methodology; and B = value of liabilities of the company of the entity if any, considered for the determination of fair market value in A.
(8) For determining the fair market value of any asset located in India, being a share of an Indian company or interest in a partnership firm or association of persons, all the assets and business operations of the said company or partnership firm or association of persons shall be taken into account whether such assets or business operation are located in India or outside.
(9) The rate of exchange for calculation in foreign currency, of the value of assets located in India and expressed in rupees shall be the telegraphic transfer buying rate of such currency as on the specified date."
Exact law · Income-tax Rules, 2026, Rule 12; Form No. 4
Rule 12 - Determination of income attributable to assets in India
"12. (1) The income from transfer outside India of a share of, or interest in, a company or an entity referred to in section 9(10)(a) attributable to assets located in India, shall be determined with reference to the specified date, by the following formula: A × B / C, Where, A = Income from the transfer of the share of, or interest in, the company or the entity computed as per the provisions of the Act, as if, such share or interest is located in India; B = fair market value of assets located in India as on the specified date from which the share or interest referred to in A derives its value substantially, computed as per rule 11; and C = fair market value of all the assets of the company or the entity as on the specified date, computed as per rule 11.
(2) If the transferor of the share of, or interest in, the company or the entity referred to in sub-rule (1) fails to provide the information required for the application of the formula in the said sub-rule, then the income from the transfer of such share or interest shall be determined in such manner as the Assessing Officer may deem suitable.
(3) The transferor of the share of, or interest in, a company or an entity referred to in sub-rule (1), shall obtain and furnish along with the return of income a report in Form No. 4 duly signed and verified by an accountant providing the basis of the apportionment as per the formula and certifying that the income attributable to assets located in India has been correctly computed."
Exact law · Income-tax Act, 2025, Section 9(10)(g)
Section 9(10)(g) - Income deemed to accrue or arise in India (exemptions from indirect transfer)
"(g) the income referred to in sub-section (2) shall not include income from transfer, outside India, of any share of, or interest in, a company or an entity registered or incorporated outside India, - (i) if such share of, or interest in, a company or an entity registered or incorporated outside India is held by a non-resident by way of investment, directly or indirectly, - (A) in Category I or Category II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, prior to their repeal…; (B) in Category I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019…;
(ii) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, - (A) does not hold the right of management or control in relation to such company or the entity; and (B) does not hold voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or (iii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer - (A) does not hold the right of management or control in relation to such company or the entity; (B) does not hold any right in, or in relation to, such company or entity which would entitle it to the right of management or control in the company or entity which directly owns the assets situated in India; and (C) does not hold such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the company or entity which directly owns the assets situated in India."
IT Act, 1961 - Explanation 5, provisos (predecessor provision)
"Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015: Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 prior to their repeal... Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019."
IT Act, 1961 - Explanation 7 to s.9(1)(i) (predecessor provision, small-shareholder exemption)
"Explanation 7.- For the purposes of this clause - (a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or entity, registered or incorporated outside India, referred to in the Explanation 5 - (i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or (ii) if such company or entity indirectly owns the assets situated in India and the transferor..."
Section 506 - Furnishing of Information by an Indian Concern; Rule 235 - Filing Deadlines; Section 458 - Penalty for Failure
Section 506: "Where - (a) any share of, or interest in, a company or an entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India, as referred to in section 9(10)(a); and (b) such company or entity, as the case may be, holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such Indian concern shall… furnish within prescribed period to the prescribed income-tax authority the information or documents in such manner, as may be prescribed."
Rule 235(2): "The information shall be furnished in Form No. 163, electronically under digital signature to the Assessing Officer… within a period of ninety days from the end of the financial year in which any transfer of the share of, or interest in, foreign company or entity… has taken place and where such transaction… has the effect of directly or indirectly transferring the rights of management or control in relation to the Indian concern, the information shall be furnished… within ninety days of that transaction."
Section 458: "If any Indian concern… fails to [furnish information under section 506], the prescribed income-tax authority… may direct that such Indian concern shall pay by way of penalty, a sum of - (a) 2% of the value of the transaction… if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; (b) ₹500000, in any other case."
IT Act, 1961 - Section 285A (predecessor provision)
"285A. Where any share of, or interest in, a company or an entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India, as referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, and such company or entity, holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such Indian concern shall... furnish within the prescribed period to the prescribed income-tax authority the information or documents."
"4A. Gains from the alienation of shares acquired before 1 April 2017 in a company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident.
4B. Gains from the alienation of shares acquired on or after 1 April 2017 in a company which is a resident of a Contracting State may be taxed in that State.
4C. However, the gains referred to in paragraph 4B of this Article which arise during the period beginning on 1 April 2017 and ending on 31 March 2019 may be taxed in the State of which the company whose shares are being alienated is a resident at a tax rate that shall not exceed 50% of the tax rate applicable on such gains in that State.
5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident."
"1. A resident of a Contracting State shall not be entitled to the benefits of paragraph 4A or paragraph 4C of Article 13 of this Agreement if its affairs were arranged with the primary purpose to take advantage of the benefits in the said paragraph 4A or paragraph 4C of Article 13 of this Agreement, as the case may be.
2. A shell or conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of paragraph 4A or paragraph 4C of Article 13 of this Agreement. A shell or conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State."
Exact law · Income-tax Rules, 2026, Rule 128
Rule 128 - Chapter XI (GAAR) not to apply in certain cases
"128. (1) The provisions of Chapter XI shall not apply to—
(a) an arrangement, where the aggregate tax benefit in the relevant tax year, to all the parties to the arrangement does not exceed a sum of three crore rupees;
(b) a Foreign Institutional Investor,—
(i) who is an assessee under the Act;
(ii) who has not taken benefit of an agreement referred to in section 159; and
(iii) who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), in relation to such investments;
(c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;
(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 1st April, 2017 by such person.
(2) Without prejudice to the provisions of sub-rule (1)(d), the provisions of Chapter XI shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017."