The Central Board of Direct Taxes (CBDT) has notified changes to India’s tax treaty with Mauritius. The new rules allow tax authorities to deny treaty benefits when securing a tax advantage is a principal purpose of a transaction. The amended agreement took effect on August 10, 2026, and aims to curb the misuse of tax benefits by investors.

The notification, issued on October 13, introduces a Principal Purpose Test (PPT) under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). However, the change does not automatically remove tax benefits for every Mauritius-based investor. Authorities must consider the facts and circumstances of each arrangement.

Key highlights

• The new Principal Purpose Test targets transactions designed mainly to secure tax benefits.
• Qualifying capital gains on shares acquired before April 1, 2017, retain grandfathering protection under the treaty.
• Investors may face greater scrutiny over their commercial activities, governance, and investment structures.

What Does the New Tax Treaty Rule Mean for Investors?

Under the amended tax treaty, benefits may be denied if obtaining them was one of the principal purposes of an arrangement or transaction. However, an exception applies when granting the benefit is consistent with the purpose of the relevant treaty provisions.

The change is intended to prevent investors from routing investments through Mauritius primarily to obtain tax advantages that might otherwise be unavailable. It also aligns the agreement with international efforts to prevent tax avoidance and treaty abuse.

According to Maneesh Bawa, Partner at Nangia Global, the protocol introduces a revised preamble and the Principal Purpose Test. These changes bring the agreement closer to international standards for preventing the misuse of tax treaties.

Bawa said genuine investors are unlikely to face disruption solely because of the amendment. The focus will be on whether an investment structure has a genuine commercial purpose and sufficient substance in Mauritius.

This means investors may need to demonstrate why they chose Mauritius for their business or investment activities. The use of a Mauritius-based entity alone does not establish that a transaction is intended to avoid taxes.

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Will Existing Investments and Future Income Be Affected?

Capital gains on shares acquired before April 1, 2017, retain grandfathering protection, as clarified by the CBDT in January 2025. The clarification means the new tax treaty provisions do not, by themselves, remove the existing protection for qualifying investments.

However, dividends, interest, and other income could face closer examination when the investment structure lacks genuine commercial activity or appears to exist mainly to secure tax benefits.

Funds and holding companies may therefore need to maintain detailed records of their governance, decision-making processes, and commercial objectives. Such documentation can help demonstrate the business reasons behind their investment structures.

Bawa also said clearer guidance from the CBDT on applying the Principal Purpose Test would help investors understand how the new provisions will work in practice.

The amendment does not mean all Mauritius-based investments will lose tax benefits. Instead, the authorities will have an additional mechanism to examine whether claims meet the treaty’s conditions. Investors with genuine business operations and well-documented commercial reasons may be better placed to establish their eligibility.

For investors, the key question is no longer simply where an investment entity is registered. Its commercial purpose, operations, and reasons for claiming treaty relief could also matter.