A group with Indian operations underneath a European holding company can arrive at a sale believing the transaction is outside India. The shares sold are shares in a Dutch or Luxembourg entity. The buyer is European. The agreement is governed by European law and the price is paid into a European account. Nothing about the mechanics touches India, and the closing checklist reflects that.
India does not accept the premise. Where the shares sold derive their value substantially from assets located in India, the statute treats them as an Indian asset and taxes the gain to the extent attributable to those assets. The rule survived the recodification of Indian income tax law and now sits in the Income-tax Act, 2025, in force since 1 April 2026. The section numbers changed. The exposure did not.
The deeming rule and where it now lives
Section 9(2) of the 2025 Act deems income accruing or arising, directly or indirectly, through or from any asset or source of income in India, any property in India, any business connection in India, or the transfer of a capital asset situated in India, to accrue or arise in India. Section 9(10)(a) then supplies the extension that matters here. A share of, or interest in, a company or entity registered or incorporated outside India is deemed to be situated in India if that share or interest derives, directly or indirectly, its value substantially from assets, tangible or intangible, located in India.
Two features of the drafting deserve attention. The first is the word indirectly: the analysis does not stop at the first tier. A sale of a European holding whose subsidiary holds another European entity which in turn holds the Indian business is inside the wording. The second is that the rule applies to an interest as well as a share, so partnership and fund interests are not outside it by virtue of their legal form.
The consequence is not that the whole gain becomes Indian. Section 9(10)(f) provides that where a non-resident transfers shares in a foreign company and not all of that company’s assets are located in India, only such part of the income as is reasonably attributable to the Indian assets is deemed to arise in India, determined in the prescribed manner. India taxes a slice, and sizing the slice is a computation the seller has to be able to perform.
Two thresholds, both of which must be met
Section 9(10)(b) defines what substantially means, and it does so with two conditions that operate cumulatively. On the specified date, the value of the Indian assets must exceed ten crore rupees, and it must represent at least 50 per cent of the value of all the assets owned by the company or entity.
The first threshold is absolute and the second relative, and a structure can pass one while failing the other. A holding whose only real asset is a small Indian subsidiary worth less than the monetary threshold falls outside the rule even though the Indian assets are all of its value. A large European group whose Indian operations are worth many times that threshold falls outside it if those operations are a minority of total value. Groups remember one test and forget the other.
Valuation is defined so as to remove the argument that would otherwise follow. Section 9(10)(c) provides that the value of an asset is its fair market value on the specified date, without reduction of liabilities in respect of the asset. Gross, not net. An Indian business carrying substantial debt is measured before the debt, which pushes structures into the rule that a net asset calculation would leave outside it.
The specified date, and the fifteen per cent trap
The specified date is normally the date on which the accounting period of the company or entity ends preceding the date of transfer of the share or interest. That is a helpful rule for a seller, because it fixes the measurement at a historic balance sheet date rather than at the moment of a negotiated price.
Section 9(10)(d)(ii) attaches a condition to it. Where the book value of the assets on the date of transfer exceeds the book value as at the preceding accounting period end by 15 per cent, the specified date becomes the date of transfer. A group that acquires assets, injects capital or completes a reorganization between the last balance sheet date and the closing can move its own measurement date without noticing, and a structure that was comfortably outside the 50 per cent test on the historic date may not be outside it on the closing date.
The accounting period is defined too, and the definition matters for groups that do not use a March year end. It means each period of twelve months ending with 31 March, or ending on another date where the foreign company regularly adopts that date to comply with the tax law of its state of residence or to report to the holders of the shares or interests.
Who is exempted, and how narrow the exemption is
Section 9(10)(g) carves out two categories, and the second is the one that European sellers reach for. It applies where the foreign company or entity directly owns the Indian assets and the transferor, individually or together 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 that company or entity, nor holds voting power, share capital or interest exceeding 5 per cent of the total.
Where the ownership of the Indian assets is indirect, a third condition is added. The transferor must also not hold any right in or in relation to the foreign company that would entitle it to the right of management or control in the company that directly owns the Indian assets, and the 5 per cent test is applied by reference to that lower company.
Two points follow. The exemption is designed for portfolio investors, not for a group selling a holding company it controls. And the twelve month look back means a shareholder who reduces a stake shortly before closing does not thereby acquire the exemption. Associated enterprises are aggregated for the purpose, with the meaning given in section 162.
The other carve out covers investments held by a non-resident in Category I or Category II foreign portfolio investors under the 2014 Securities and Exchange Board of India regulations before their repeal, and in Category I foreign portfolio investors under the 2019 regulations. Neither limb assists a trade seller.
The reporting obligation that sits on the Indian company
Section 506 places a duty not on the seller but on the Indian entity underneath. Where a share of or interest in a foreign company derives its value substantially from assets located in India as referred to in section 9(10)(a), and the foreign company holds those Indian assets directly or indirectly through or in an Indian concern, that Indian concern must furnish, within the prescribed period and to the prescribed income-tax authority, the information or documents prescribed, for the purpose of determining income accruing or arising in India.
This is easy to miss in a sale process. Information about an offshore transaction reaches the Indian authority through the Indian subsidiary, the party least involved in the negotiation and often the last to be told. It also survives the sale, because the obligation attaches to the Indian concern, and after closing that entity belongs to the buyer.
Sellers should assume the transaction will be visible in India regardless of where it is documented, and buyers that they are acquiring a company with a filing duty in respect of a transaction they were party to.
What the buyer will ask for, and why
An informed buyer treats the Indian exposure as an indemnity question and a withholding question at once. Indian tax on the attributable portion of the gain is a liability of the non-resident seller, but the practical route by which India collects from a non-resident is a deduction at source by the payer, and a buyer that has paid the full price without deduction can find itself pursued.
That produces the familiar sequence. The buyer asks for a valuation showing that the Indian assets do not exceed 50 per cent, or for a computation of the attributable income if they do. The seller resists on the ground that no Indian tax is due. The parties end with a holdback, an indemnity, or an application for a certificate of lower or nil deduction, which takes time nobody has allowed for.
The way to avoid this is to run the two threshold tests early, on the historic accounting period end and again on a projected closing date. A seller who can hand over that analysis unprompted controls the negotiation. A seller who is asked for it and does not have it concedes the holdback.
Treaty relief, and why it is not automatic
Where the seller is resident in a state with which India has a treaty, the capital gains article may allocate taxing rights away from India. Section 159(4) of the 2025 Act provides that where the Central Government has entered into such an agreement, its provisions apply to the extent they are more beneficial to the assessee.
Three qualifications follow in the same section. Under section 159(8), a non-resident may claim relief only where a certificate of residence has been obtained from the government of the other state and the other prescribed documents are provided. Under section 159(6), the general anti-avoidance provisions of Chapter XI apply even where they are not beneficial to the taxpayer. And section 159(3)(b) states the purpose of such agreements as the avoidance of double taxation without creating opportunities for non-taxation or reduced taxation, including through treaty-shopping arrangements aimed at obtaining relief for the indirect benefit of residents of another country.
A European holding company inserted above an Indian business shortly before a sale, with no function beyond holding, is exactly the fact pattern that language addresses. Treaty relief on an indirect transfer is available to a structure that has been in place, has substance and can evidence both. It is not available as a closing manoeuvre.
Where this leaves a group with Indian assets
The rule is stable and is now restated in a new statute, which means the citations in every existing memorandum are out of date even where the analysis is not. A group holding Indian assets under a European holding should keep a current calculation of the two thresholds, refreshed at each accounting period end, with fair market values determined gross of liabilities.
If the group is inside the rule, the questions are what portion is attributable to India, what the Indian concern will have to furnish, and whether the treaty position is defensible on the facts as they are. If it is outside, the analysis should be documented at the time and kept, because the buyer will ask and a historic valuation cannot be reconstructed later on the same evidence.