Money went into India as capital; now the business is profitable and the question flips: how does the foreign shareholder get value out – and what does each route cost in tax? The four levers are dividends, buyback, royalty/service fees, and capital exits. The rules moved sharply in the last two years: buyback proceeds became dividend income in the shareholder’s hands (October 2024), the Netherlands 5% treaty claim died in the Supreme Court, and from April 2026 the whole rulebook wears new section numbers under the Income-tax Act 2025. Here is the current map, route by route.
Route 1 – Dividends
- Domestic rate: 20% under section 115A (now section 207, ITA 2025), withheld under section 195 (now 393). With surcharge and cess: 20.8%–21.84% for foreign companies, up to 23.92% for NRI individuals at the top slab (dividend surcharge capped at 15%);
- Treaty relief: most Indian treaties cut this to 5–15% – USA 15% (corporate holder with 10%+ voting stock), UK/UAE/Netherlands/Germany/Japan 10%, Singapore 10% (25%+ holding), Mauritius 5% (10%+ holding);
- The paperwork that unlocks the treaty: Tax Residency Certificate + electronic Form 10F (Form 41 from FY 2026-27) + beneficial-ownership and no-PE declarations – and surviving the MLI principal-purpose test where it applies;
- No gross-up deductions; the company pays out of fully-taxed profits (~25% corporate tax first), so the combined leak on a dividend is real – model it before choosing this lever.
Route 2 – Buyback (rewritten in 2024 – and again in 2026)
| Before 1 Oct 2024 | 1 Oct 2024 – 31 Mar 2026 | |
|---|---|---|
| Who pays | Company – ~23.3% buyback tax; receipt exempt for shareholder | Shareholder – entire proceeds taxed as dividend (section 2(22)(f)) |
| Cost of shares | Irrelevant | No deduction against the dividend; cost becomes a capital loss (8-year carry-forward, set-off against capital gains only) |
| TDS on NR | None | 20% + surcharge/cess under s.195/393 – treaty dividend rates applied at source in practice (the Infosys November 2025 buyback did exactly this on TRC + Form 10F + declarations) |
Route 3 – Royalty and technical service fees
- Rate doubled to 20% (+ surcharge/cess) from April 2023 – treaties at 10–15% are now almost always worth claiming;
- Claiming the treaty rate triggers an Indian return-filing obligation for the foreign recipient (the filing exemption only covers full domestic-rate withholding);
- PAN is not mandatory for treaty rates – Rule 37BC particulars (name, address, TIN, TRC) neutralise the higher-rate override;
- Process: section 195/393 TDS + Form 15CA/15CB + Form A2 at the bank. Related-party royalties also sit inside transfer pricing (Form 3CEB);
- Do not forget the other direction: importing services from the parent attracts 18% IGST under reverse charge – a cash-flow cost even where ITC is available.
Route 4 – Capital exits
| Exit | Tax treatment | FEMA |
|---|---|---|
| Sale of shares | Buyer withholds on the gain: LTCG now 12.5% (+SC/cess; unlisted, 24-month holding; no indexation); lower/nil withholding orders (s.197) standard practice | Repatriable holdings: proceeds freely remittable post-tax, no cap; FC-TRS in 60 days. Non-repat holdings: to NRO, then the USD 1M route |
| Capital reduction | Deemed dividend to the extent of accumulated profits (s.2(22)(d)); excess = capital gains | NCLT process; remittance via AD bank with tax clearance |
| Liquidation | Accumulated-profits slice = deemed dividend; balance capital gains (s.46(2)) | Winding-up remittances through AD bank |
Choosing the lever – a working comparison
| Lever | Effective leak (typical treaty investor) | Best when |
|---|---|---|
| Dividend | ~25% corporate tax + 5–15% WHT on the distribution | Recurring profit extraction; clean and simple |
| Buyback | Same as dividend now, minus usable capital loss | Rarely optimal post-2024; cap-table cleanups |
| Royalty / service fees | 10–15% WHT, deductible for the Indian company | Genuine IP/services exist; transfer pricing must hold |
| ECB interest | 20% WHT or treaty; deductible (30% EBITDA cap, s.94B) | Parent funding structured as debt from day one |
| Share sale | 12.5% LTCG on the gain | Exit events; the only lever that returns capital tax-efficiently |
Planning a distribution or an exit?
We model the routes on your numbers – treaty rates, TRC/Form 10F paperwork, 15CA/CB and the FEMA leg – and execute the one that wins.
Talk to My Cloud AccountantFrequently asked questions
What is the withholding tax on dividends paid to a foreign parent?
20% base plus surcharge and cess (20.8–21.84% for foreign companies), reducible to the treaty rate – typically 10–15%, or 5% under the Mauritius treaty with a 10% holding – on TRC, Form 10F and beneficial-ownership documentation.
How is a share buyback taxed for foreign shareholders now?
For buybacks between 1 October 2024 and 31 March 2026, the entire proceeds were dividend income with no cost deduction and the cost stranded as a capital loss. The Finance Act 2026 reversed this: buybacks on or after 1 April 2026 are taxed as capital gains – 12.5% long-term for non-promoter shareholders, with promoters paying a higher special rate.
Can a foreign parent charge royalty to its Indian subsidiary?
Yes – it is deductible for the subsidiary and taxed at 20% (or the 10–15% treaty rate) in India. The charge must survive transfer-pricing scrutiny, and the treaty claim obliges the parent to file an Indian return.
Is repatriation of share-sale proceeds capped?
No cap for investment held on repatriation basis – net-of-tax proceeds remit freely with FC-TRS and 15CA/CB. Only non-repatriation holdings route through NRO with the USD 1 million per year scheme.
Based on the Income-tax Act 1961/2025 (ss. 115A/207, 195/393, 2(22)/2(40)), the Finance (No. 2) Act 2024 buyback amendments, Indian treaty texts and current FIRMS/AD-bank practice. Last reviewed: July 2026.