The revised India-Mauritius tax treaty preserves protection for qualifying gains on shares bought before 1 April 2017, while raising scrutiny of low-substance holding structures and other income.
India’s revised tax treaty with Mauritius has sharpened the focus on how foreign investors use the island jurisdiction for holdings in Indian companies, but the most important point is also the narrowest one: the new anti-abuse rule does not automatically strip away grandfathered protection for legacy share sales. According to the reporting and guidance cited by tax advisers, the Principal Purpose Test, or PPT, is designed to block treaty benefits where obtaining them was one of the main aims of an arrangement, unless granting the benefit fits the treaty’s purpose.
That distinction matters because the protocol amending the India–Mauritius double taxation avoidance agreement was notified in October 2026 and took effect from 10 August 2026. The Central Board of Direct Taxes has clarified, as described by practitioners, that capital gains on shares in Indian companies bought before 1 April 2017 remain outside the PPT’s reach. In practical terms, that means a qualifying gain on those grandfathered shares should not be refused treaty protection solely because the new anti-abuse standard now applies more broadly to Mauritius structures.
Even so, the protection is not a free pass for every type of income flowing through the same investment vehicle. Dividends, interest and other receipts may still be tested separately under the revised treaty framework, depending on the facts of the arrangement. As tax lawyers have noted, an investor could therefore have grandfathered capital gains on a sale while still facing scrutiny over other income generated by the same holding, particularly where the structure appears to have been set up mainly to secure tax advantages.
That is why the new rules are likely to draw closer examination of holding companies, special purpose vehicles and other low-substance structures in Mauritius. The authorities may look at whether the entity has employees, an office, genuine management activity and real decision-making in Mauritius, as well as where funds are controlled and who ultimately benefits. Investors are being advised to keep contemporaneous records showing the commercial reasons for using the structure, including board minutes, funding documents, ownership records and tax residency papers, because the PPT does not impose a fixed checklist but instead turns on the full facts of each case.
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