India–mauritius Tax Treaty Protocol Notified: Principal Purpose Test Effective from 10 August 2026

India has notified the 2024 protocol to the India–Mauritius Tax Treaty, adding a treaty anti-abuse test that took effect on August 10, 2026. The notification followed on October 13, 2026, after India and Mauritius completed the required procedures.

The gap between those dates sets the point from which the change applies. The protocol does not wait until its notification date to take effect.

It adds a new rule for claims to treaty benefits. Qualifying older share investments remain protected under existing grandfathering provisions.

The treaty now lets authorities test why an arrangement was made

The protocol inserts a Principal Purpose Test, or PPT, as Article 27B. It allows treaty benefits on an item of income to be denied when the facts reasonably indicate that securing the benefit was among the main aims of an arrangement or transaction.

That is not the end of the inquiry. A taxpayer can still qualify if granting the benefit accords with the object and purpose of the relevant treaty provisions.

The change also revises the preamble to the Double Taxation Avoidance Agreement. It describes the treaty’s aim as relieving double taxation without opening routes to non-taxation or reduced taxation through evasion, avoidance or treaty shopping.

The protocol was signed in Port Louis on March 7, 2024. It amends the convention first signed on August 24, 1982, which was subsequently amended in 2016.

Mauritius structures face scrutiny, not an automatic ban

The test does not bar investment through Mauritius by itself. Instead, tax authorities may assess the transaction and the surrounding commercial circumstances when a taxpayer claims treaty relief.

The rule is relevant to Mauritius-based foreign portfolio investors, private-equity funds, holding companies and investment vehicles seeking Indian treaty benefits. Structures with little commercial activity, weak independent decision-making or no business rationale beyond tax relief may draw closer examination.

Maneesh Bawa, a partner at Nangia Global, said funds and holding companies should retain records explaining their governance, investment decisions and commercial objectives.

The test therefore directs attention to how an entity operates, as well as where it is resident. A Mauritius company’s role in an investment may need to be supported by evidence of real decision-making and commercial purpose.

Pre-April 2017 share acquisitions retain their protection

Capital gains on shares in Indian companies acquired by Mauritius residents before April 1, 2017 remain covered by the existing grandfathering provisions.

PwC India tax partner Kunal Shah said the new test “will not interfere with grandfathering.” He added that the rule may apply to other income when taxpayers claim treaty benefits after the effective date.

The Central Board of Direct Taxes addressed the timing of treaty anti-abuse rules in CBDT Circular No. 1/2025, dated January 21, 2025. The circular says provisions negotiated into bilateral treaties apply prospectively from the effective date of the relevant treaty or protocol.

It also confirmed that qualifying share investments made before April 1, 2017 by residents of Mauritius, Singapore and Cyprus remain subject to the grandfathering provisions in their respective treaties.

Taxpayers will need records that explain the structure

Companies and funds claiming benefits should be ready to document the commercial case for using a Mauritius entity and the facts supporting its residence and tax substance. Relevant records include:

• Board meetings, governance arrangements and independent investment decisions.
• The investment’s source, business purpose and commercial objectives.
• Beneficial ownership, control, personnel and operating functions.
• The entity’s commercial activity and reasons for establishing the arrangement.
• How the claim fits the purpose of the particular treaty article.

The rule gives Indian tax authorities a treaty-based route to deny benefits if the purpose test is met and the claim conflicts with the treaty’s aims. It does not, on its own, void Mauritius-based arrangements or remove grandfathering protections.

The date to track for the new protocol is August 10, 2026, when the procedures required by both countries had been completed.