Indian residents increasingly use Paasa to hold China equities such as A-shares via Stock Connect, H-shares, or broad China ETFs. Dividend income from these holdings is paid in China and reported in India, which can create confusion about who taxes what and how to avoid paying twice.
The India–China Double Taxation Avoidance Agreement (DTAA) solves this by ensuring your cross-border equity income is taxed only once. This guide explains how the treaty works for dividends, interest, and capital gains, and how Paasa helps you apply the 10% treaty rate at source and file Form 67 so your post-tax returns reflect a single effective tax.
Table of Contents
- What is Double Taxation
- Understanding the India–China DTAA
- Residency Rules under DTAA
- Source vs Residence (Who gets to tax what)
- How DTAA Applies to Dividends, Interest & Capital Gains
- How to avoid double taxation?
- Example 1: Interest Income
- Example 2: Dividend Income
- Chinese Inheritance/Gift Tax (What the DTAA Does Not Cover)
- Common Mistakes Investors Make
- Conclusion
- FAQs
What Is Double Taxation?
When you earn income in one country but live in another, both countries may try to tax the same income. This overlap is called double taxation.
Example: You are an Indian resident investing in China stocks or China-focused ETFs through Paasa.
- China deducts 10% as withholding tax on dividends you receive.
- When you file your return in India, you must declare that same income again because India taxes global income.
- Without relief, you would pay both taxes in full – once in China and again in India.
The Double Taxation Avoidance Agreement (DTAA) prevents this by capping tax at source and letting you claim a credit in India for tax already paid abroad. For China, there is no refund step–the 10% withheld at source is the final China amount; India gives you credit for it.
Without DTAA | With DTAA | |
Investor | Indian resident holding a China stock via Paasa | Indian resident holding a China stock via Paasa |
Dividend received | $10,000 | $10,000 |
Tax withheld in China | $1,000 (10%) | $1,000 (10%) |
Tax payable in India (30% slab) | $3,000 | $3,000 |
Credit allowed for China tax paid | ❌ None | ✅ $1,000 (via FTC) |
Final tax payable in India | $3,000 | $2,000 (balance only) |
Total tax paid overall | $4,000 (double taxed) | $3,000 (single effective tax) |
What counts as China-sourced equity income:
- A-shares (Shanghai, Shenzhen) held directly or via Stock Connect are China-source because the issuer is a China tax resident.
- H-shares are listed in Hong Kong but the company is China tax resident, so dividends are China-source.
- ADRs of China issuers keep the same source at the underlying company level.
Note: Paasa guides investors on applying treaty benefits correctly and filing Form 67 so every dollar earned abroad is taxed only once.
What is the India-China DTAA Treaty?
The India–China Double Taxation Avoidance Agreement (DTAA) makes sure the same income isn’t taxed twice, once where it’s earned (the source country) and again where the investor lives (the residence country).
For Indian residents earning dividends from China stocks or equity ETFs via Paasa, this treaty is what keeps your total tax fair and compliant. (China deducts tax first; the treaty + India’s credit rules ensure you don’t pay twice.)
While the DTAA covers many income types, this guide focuses only on equities, specifically:
- Dividends from China shares and equity ETFs
- Capital gains on listed shares/ETFs
In simple terms, the DTAA works through two mechanisms:
- Allocating taxing rights: It defines which country has the primary right to tax each category of income (for example, dividends vs. capital gains).
- Granting relief: If both countries tax the same income, your country of residence (India) allows a tax credit for tax already paid abroad.
With China, there is usually no refund step. China withholds at the treaty rate at source (typically 10 percent), and then India gives credit for that amount so only your Indian rate ultimately remains.
You can read the official India–China DTAA text on the Government of India’s website here.
For a practical investing workflow for this market, read Invest in China from India.
Residency rules under DTAA
The treaty’s first step is to decide where you are a tax resident. If you are considered a resident in both India and China during a financial year, the DTAA uses a tie-breaker to pick one country for treaty purposes.
For example, if you live in India but spend significant time in China, the tie-breaker decides which country will treat you as its resident for tax purposes. It follows a clear sequence:
- Permanent home: Where you have a fixed home available.
- Centre of vital interests: Where your personal and economic relations are stronger.
- Habitual abode: Where you stay more frequently.
- Nationality: If still unresolved, the country of citizenship applies.
- Mutual agreement: In rare cases, both tax authorities mutually decide.
Understanding residency is crucial because DTAA benefits apply only to residents of one of the treaty countries. For most Indian investors earning China equity income such as dividends or capital gains, India is the country of residence and China is the source country.
Source vs Residence (Who gets to tax what)
The treaty divides taxing rights between the country of source (where the income arises) and the country of residence (where you live and file taxes).
Here’s how it works for income types relevant to China equities:
Type of Income | Taxed in Source Country (China) | Taxed in Residence Country (India) |
Dividends | Yes. Withheld at 10% when paid. No refund step. | Yes, with credit for China tax that remains. |
Interest | Yes. 10% at source on China-source interest for beneficial owners. If an onshore bond exemption applies or the payout comes from a non-China-domiciled bond fund, the rate is 0% at source. | Yes, taxed in India with foreign tax credit for the China tax actually withheld. If 0% at source, no credit. |
Capital gains from sale of shares or securities | China is entitled to tax China-source gains under the treaty. Stock Connect A-share gains for overseas investors are currently exempt from PRC income tax. | Yes. |
Employment income | Taxed where the work is performed. Taxed only in the residence country if all three hold: stay ≤ 183 days in the other country, employer not resident there, and pay not borne by a PE there. | Yes, if you are tax-resident in India. Foreign tax credit may apply if also taxed in China. |
How DTAA Applies to Dividends, Interest & Capital Gains
When Indian investors earn income from China assets such as stocks or equity ETFs, China deducts tax at source before paying out. This is called withholding tax, and by default it is 10% on dividends and often 10% on interest when distributions are classified as interest.
However, under the India–China Double Taxation Avoidance Agreement (DTAA), this burden reduces. China’s rate is capped at 10% for India-resident beneficial owners on dividends and interest, and then you claim a foreign tax credit in India for the tax already paid abroad. There is no refund step. Let’s see how it works for the most relevant income types:
Dividends
- China withholds 10% on dividends paid by China-resident companies. This includes A-shares and H-shares.
- Buying A-shares through Stock Connect in Hong Kong does not change the payer’s residence. The dividend is still China-source.
- India taxes the dividend and allows a foreign tax credit for the 10% actually withheld in China.
China Dividend Withholding | |
At payment (statutory) | 10% |
Treaty rate for India resident beneficial owner | 10% |
Note: For most Paasa investors, the final China rate is 10% at payment. The same 10% can be claimed as a foreign tax credit in India via Form 67.
Interest
Interest income from ETF distributions classified as interest or from bond coupons faces 10% China withholding at source. Certain domestic exemptions can reduce this to 0% in some cases.
If a bond ETF or fund pays you from outside China, the payer is not China-resident at your level, so withholding at source can be 0% and there is no credit in India.
Example: You receive CNY 30,000 in China-source interest this year.
- China withholds CNY 3,000 (10%).
- In India, at a 30% slab, tax on this interest is CNY 9,000.
- You claim foreign tax credit of CNY 3,000 for the China tax actually withheld.
- You pay the balance CNY 6,000 in India.
- Total tax = CNY 9,000 (your Indian rate), not CNY 12,000.
China Interest Withholding Tax Rate | |
Default statutory rate at payment | 10% |
Domestic exemption applies (if eligible) | 0% |
Note: For most Paasa investors who are individuals, expect 10% at payment when classified as interest, or 0% where a domestic exemption applies, and a matching foreign tax credit in India only for the tax actually withheld.
Capital Gains
Under the India–China DTAA and China domestic rules, capital gains from the sale of listed China securities by an India-resident individual are often taxed only in India when China provides a domestic exemption on non-resident gains through common routes such as Stock Connect.
- China frequently does not levy capital gains tax on non-resident investors selling listed shares via Stock Connect, subject to current policy.
- Indian residents must report and pay capital gains tax in India as part of global income.
- The applicable Indian rate depends on the holding period: Long-term capital gains on foreign shares (held for more than 24 months): 12.5% without indexation. Short-term capital gains (held for 24 months or less): taxed at the investor’s income-tax slab rate.
How to avoid double taxation?
Once both countries have exercised their taxing rights, the DTAA gives you relief through India’s Foreign Tax Credit (FTC) system under Sections 90 and 91, read with Rule 128.
Here’s how it works:
- If China keeps 10% on your dividend at payment and your Indian slab rate is 30%, India allows a credit for the 10% already paid abroad.
- You pay only the remaining 20% in India so that your total equals your Indian rate, not both countries added together.
Note: Paasa helps streamline this flow with clear income summaries and ready to file Form 67 figures so every rupee earned abroad is taxed only once.
Example 1: Interest income
Imagine an Indian investor holding units of a China bond ETF or a China bond fund. The fund pays interest-type distributions periodically.
- When those distributions are paid while the person is living in India, China withholds 10% at source if the payout is classified as interest.
- Under the India–China DTAA, the treaty rate for individuals is 10%. There is no refund step.
- Since the person is an Indian tax resident, India also taxes that same income as part of global earnings.
- Under the DTAA, the individual can claim a Foreign Tax Credit in India for the 10% China tax actually withheld.
- Effectively, they pay only the difference in India if India’s rate is higher, not the full amount twice.
Example: Suppose an Indian investor receives CNY 25,000 of distribution income from the China bond ETF this year while living in India.
Paasa’s role:
- Paasa helps investors ensure payouts are correctly classified as interest, the at-source 10% rate is applied, and ready figures for Form 67 are prepared so the credit is claimed correctly in India.
- We keep distribution breakdowns and any China tax vouchers organized, reducing source-tax errors and protecting long-term returns.
Example 2: Dividend Income from China Stocks and ETFs
An Indian investor using Paasa may hold individual China A-shares via Stock Connect, H-shares, or equity ETFs with China exposure.
- China companies pay regular dividends, and China withholds 10% at payment by default.
- Under the India–China DTAA, you receive the 10% treaty rate at source if you are an India-resident beneficial owner. There is no refund step.
- In India, you must still declare the dividend and claim a Foreign Tax Credit (FTC) for the 10% kept in China.
How DTAA helps
- The 10% China tax that remains can be claimed as FTC in India through Form 67.
- If your Indian slab rate is 30%, you pay only the remaining 20% in India, so your total stays 30%, not 10% + 30%.
- Compliance stays straightforward with Paasa’s documentation guidance and ready FTC figures.
Example: Let’s say an Indian investor using Paasa holds a China A-share via Stock Connect and receives $20,000 in annual dividends.
Note: Buying A-shares in Hong Kong through Stock Connect does not change the source. The issuer is China-resident, so the dividend is subject to 10% China withholding.
Paasa’s role: Paasa helps investors ensure the 10% at source is applied correctly, keeps beneficial-owner details and broker statements organised, and prepares ready figures for Form 67 so the FTC is claimed accurately in India.
China Wealth and Other Taxes (What the DTAA does not cover)
Many Indian investors holding China equities are unaware that several China charges sit outside the India–China DTAA. The treaty covers taxes on income only.
- China does not levy wealth tax, inheritance tax, or estate tax. These are not part of the DTAA because they currently do not exist.
- A-share trades attract China stamp duty at 0.05% on the seller. ETFs are often waived. This is a transaction levy, not an income tax, so it is not creditable in India.
- Stock Connect trades also include exchange and clearing fees such as handling or transfer fees. These are not income taxes and do not qualify for credit in India.
- VAT may apply in parts of the bond market or on financial services. VAT is an indirect tax and is not eligible for foreign tax credit in India.
Paasa’s role: Paasa helps investors keep dividend and transaction statements organised, classify distributions correctly, and prepare ready figures for Form 67 so income taxes are credited in India. We also track stamp duty and other trading costs separately so you know what reduces returns but does not create a foreign tax credit.
Common Mistakes Investors Make
Even seasoned investors slip up when managing China equity income across two tax systems. These aren’t about intent, just clarity. Here are the most common ones to avoid:
Assuming China withholding is automatically adjusted in India
The 10% China tax deducted on dividends or interest does not sync with Indian filings. There is no refund step. You must claim relief through Form 67 so India gives credit for the 10% already paid abroad.
Skipping Form 67 submission
Missing Form 67 can forfeit your Foreign Tax Credit, even when China tax was correctly withheld at 10%.
Not reporting foreign assets in Schedule FA
Every overseas brokerage account and security must be disclosed in your Indian return. Non-disclosure can trigger scrutiny later.
Confusing stamp duty or VAT with double taxation
The India–China DTAA covers income taxes only. China stamp duty on A-share sales, exchange or clearing fees, and any VAT elements are outside the treaty and are not creditable as FTC.
Forgetting the treaty mechanics on dividends and interest
China withholds 10% at payment for beneficial owners. If a domestic exemption makes the rate 0% on certain interest, India still taxes the full amount and no FTC is available. Filing correctly preserves your post-tax return.
Claiming credit for the wrong amount
You cannot claim FTC for amounts over 10% taken by mistake or for any China tax suffered inside foreign funds. Foreign tax credit is only available on the tax actually withheld on your payout, capped by Indian tax on that income.
Relying on U.S. forms for China
W-8BEN is a U.S. form. It does nothing for China withholding. Provide TRC and Form 10F details, and keep broker statements and tax vouchers to support your FTC.
Conclusion
The India–China DTAA ensures that Indian residents earning from China equities pay tax only once on their global income. Applying the 10% treaty rate at source and claiming credit in India through Form 67 helps you stay compliant and protect post-tax returns.
About Paasa
Paasa is an Indian investor’s gateway to compliant global investing, trusted by HNIs, family offices, and professionals with overseas income. It helps you diversify into markets across the U.S., Europe, China, and more.
What sets Paasa apart is its India-first compliance layer for cross-border investors:
- FEMA, LRS, and DTAA alignment built into every transaction and cash flow.
- Integrated tax analytics and reporting for India residents investing abroad, covering LTCG, STCG, dividend tax, FTC, and TCS tracking.
- End-to-end support for remittances, reconciliation, and tax-credit documentation such as Form 67, with clean statements for Schedule FSI, Schedule TR, and Schedule FA.
Whether you invest directly in China equities, use Stock Connect, or build exposure through UCITS ETFs, Paasa offers one transparent platform to keep your portfolio aligned with India’s tax and regulatory framework.
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Disclaimer
This article is for information only and does not constitute investment, tax, or legal advice. The material is based on public sources and our interpretation of current regulations, which may change. Investing in global markets involves risk, including currency risk, political risk, and market volatility. Past performance does not predict future results. Please seek advice from qualified financial, tax, and legal professionals before acting.
