# Dividend Declaration by an Indian Subsidiary to Its Foreign Parent

> Source: https://krystal7.com/insights/dividend-from-indian-subsidiary-to-foreign-parent
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: Nihal Srivastava
> Published: 11 Aug 2026; updated 01 Oct 2026
> Summary: An Indian subsidiary can pay its foreign parent a dividend without RBI approval after withholding 20 percent plus surcharge, or the treaty rate.

*Written by Nihal Srivastava, Krystal7 Consultants. Last updated 27 September 2026.*

**An Indian subsidiary can pay a dividend to its foreign parent without RBI approval, because a dividend is a current account remittance under FEMA. The company declares it under section 123 of the Companies Act, 2013, funds a separate bank account within 5 days and pays within 30 days. It withholds 20 percent plus surcharge and cess under section 207 of the Income Tax Act, 2025, or the lower treaty rate. Forms 145 and 146 go in before the bank remits.**

This page takes a foreign owned subsidiary from the board meeting to the TDS certificate. It covers company law, FEMA, treaty rates for ten parent countries and deemed dividends. It also compares a dividend with a buy back, a royalty and a service fee.

## Can an Indian subsidiary pay a dividend to its foreign parent without RBI approval?

Yes. The Foreign Exchange Management Act, 1999 (FEMA) treats net income from investments as a current account transaction. Section 5 of FEMA lets any person draw foreign exchange for current account transactions unless the Current Account Transactions Rules, 2000 restrict them. Dividends are not restricted, so the authorised dealer (AD) bank remits them without RBI approval.

Schedule I to those Rules lists prohibited remittances. Its item 5 covers "remittance of dividend by any company to which the requirement of dividend balancing is applicable". Dividend balancing was a condition in some older foreign investment approvals for consumer goods. If your subsidiary's approval did not impose it, item 5 does not apply.

The RBI Master Direction on Foreign Investment in India (RBI/FED/2017-18/60) was updated as on 15 Jun 2026. It adds no approval step for dividends. Nothing is filed with RBI for the dividend itself. The dividend does appear in the annual return on Foreign Liabilities and Assets (FLA). RBI's FLA FAQ sets the due date as 15 July each year. Check the FLAIR portal for any extension, as our note on the [FLA return due date](/insights/fla-return-due-date-fy-2025-26) explains for FY 2025-26.

The AD bank still checks the file before it releases funds. We ask for the bank's checklist before the AGM. The usual set is:

1. Certified copies of the Board and shareholder resolutions.
2. Audited financial statements for the year the dividend comes from.
3. Form 145 acknowledgement and the chartered accountant's Form 146.
4. The tax computation, and the challan once paid.
5. Evidence that the parent's investment was reported, usually the FC-GPR acknowledgement on the FIRMS portal.

Some banks also want the statutory auditor to certify that the dividend meets section 123. If a FEMA filing for the original investment is missing, expect the bank to hold the remittance. We see this most when a share allotment never went into FC-GPR, which our [FEMA compliance service](/services/fema-compliances.html) fixes before the AGM.

## What profits can a company use to declare a dividend?

Section 123(1) of the Companies Act, 2013 allows a dividend only out of profit after depreciation. That can be the current year's profit, undistributed profit of earlier years, or both. The company must first set off carried forward losses and unprovided depreciation against current profit. Unrealised gains, revaluation and fair value changes do not count.

Depreciation follows Schedule II, under section 123(2). The fair value exclusion came in through the Companies (Amendment) Act, 2017. It matters for Ind AS subsidiaries, where fair value gains can inflate reported profit.

A transfer to reserves before the dividend is optional. When a company declares out of reserves, only free reserves qualify. Securities premium, capital redemption reserve and revaluation reserve do not. So share premium cannot go back to the parent as a dividend. It can return only through a reduction of capital or a buy back, each with its own tax result.

Section 123(5) says a dividend is payable only in cash, which includes bank transfer. Section 123(6) bars an equity dividend while the company is in default of the deposit rules in sections 73 and 74.

### Declaring a dividend out of reserves

When the year's profit is inadequate or absent, a proviso to section 123(1) allows a dividend out of accumulated profits in free reserves. Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 then sets four conditions.

| Condition under Rule 3 | Limit | What it means in practice |
|---|---|---|
| Rule 3(1): rate of dividend | Not above the average rate of the three preceding years | Does not apply if the company declared no dividend at all in those three years |
| Rule 3(2): amount drawn from reserves | Not above one tenth of paid up capital plus free reserves | Measured on the latest audited financial statements |
| Rule 3(3): use of the amount drawn | First used to set off the current year's loss | Only the balance can go to equity shareholders |
| Rule 3(4): reserves left behind | Not below 15% of paid up capital | Measured on the latest audited financial statements |

For a subsidiary's first dividend, Rule 3(1) does not bite. Rules 3(2) and 3(4) still cap the amount.

## Who approves an interim or final dividend, and by when?

The Board declares an interim dividend by resolution, during the financial year or after year end until the annual general meeting (AGM). A final dividend is recommended by the Board and declared by shareholders at the AGM. Section 96 requires the AGM within six months of the year end, so by 30 September for a March year end.

Section 123(3) was widened by the Companies (Amendment) Act, 2017. It lets the Board pay an interim dividend from the surplus in the profit and loss account. It may also use profit of the year, or profit up to the quarter before the declaration. A loss in the current year up to the preceding quarter adds a cap. The interim rate then cannot exceed the average of the three preceding years.

Most private companies follow Table F in Schedule I to the Act. Under Table F, shareholders cannot declare more than the Board recommended. Declaring a dividend is ordinary business at an AGM under section 102(2)(a), so an ordinary resolution is enough.

A wholly owned subsidiary still has two members, because section 3(1)(b) requires two for a private company. The second is usually a nominee holding one share for the parent under a section 89 declaration. The dividend on that share belongs to the parent. Section 123(5) allows payment to the registered holder "or to his order". So we take a written mandate from the nominee directing that amount to the parent. With both members consenting, the AGM can be held at short notice under section 101.

## What is the timeline from declaration to remittance?

Deposit the whole dividend in a separate scheduled bank account within 5 days of declaration. Pay the parent within 30 days. Move any unpaid amount to an Unpaid Dividend Account within the next 7 days. Deposit the tax withheld by the 7th of the following month, or by 30 April for tax withheld in March.

The last column uses a final dividend declared at an AGM on Tuesday 29 Sep 2026, the scenario in the worked example.

| Step | Legal basis | Deadline | Date if the AGM is on 29 Sep 2026 |
|---|---|---|---|
| Declare the final dividend | Companies Act s.96 and s.123 | AGM by 30 September | 29 Sep 2026 |
| Deduct tax at source | Income Tax Act, 2025 s.393(2) | Credit or payment, whichever is earlier | 29 Sep 2026, when the dividend payable is booked |
| Fund a separate dividend bank account | Companies Act s.123(4) | Within 5 days of declaration | By 4 Oct 2026 (we fund it on 29 Sep, as 2 Oct is a bank holiday) |
| Parent files Form 41; accountant issues Form 146; company files Form 145 | Income Tax Rules, 2026 rules 75 and 220 | Before the remittance | 1 Oct to 5 Oct 2026 |
| Remit the dividend through the AD bank | Companies Act s.127 | Within 30 days of declaration | 6 Oct 2026 (last date 29 Oct 2026) |
| Deposit the tax withheld | Income Tax Rules, 2026 rule 218 | 7th of the next month | 7 Oct 2026 |
| Transfer any unpaid amount | Companies Act s.124(1) | Within 7 days after the 30 days end | By 5 Nov 2026 |
| File the quarterly TDS statement, Form 144 | Income Tax Act, 2025 s.397(3)(b), rule 219 | 31 October for July to September | 31 Oct 2026 |
| Issue the TDS certificate, Form 131 | Income Tax Act, 2025 s.395(4) | 15 days after the Form 144 due date | 15 Nov 2026 |
| Report the dividend in the FLA return | RBI | 15 July | 15 Jul 2027 |

Tax is deducted on credit or payment, whichever comes first. We treat the book entry for the dividend payable as the credit. So the tax falls in the month of declaration, even if the cash leaves the next month. In the example, the tax belongs to the July to September quarter although the money moves in October.

An unpaid balance triggers section 124(2): a statement of unpaid amounts on the company's website within 90 days of the transfer. After seven years in the Unpaid Dividend Account, section 124(5) sends the money to the Investor Education and Protection Fund. With one real shareholder and a planned remittance, none of this should arise.

### Companies Act and FEMA steps with forms

| Step | Law | Form or record | Who does it |
|---|---|---|---|
| Approve audited accounts and recommend dividend | Companies Act s.123, s.134 | Board resolution | Board |
| Declare final dividend | Companies Act s.96, s.102 | Ordinary resolution at the AGM | Shareholders |
| Treaty claim | Income Tax Act, 2025 s.159(8) | TRC and Form 41 | Parent |
| Accountant certificate | Income Tax Rules, 2026 rule 220 | Form 146 | Chartered accountant |
| Remittance information | Income Tax Act, 2025 s.397(3)(d) | Form 145, Part C | Company |
| Remittance | FEMA s.5 | AD bank remittance application | Company and AD bank |
| Tax deposit and reporting | Income Tax Act, 2025 s.393, s.397 | Challan, Form 144, Form 131 | Company |
| Annual filing | Companies Act s.137 and s.92 | AOC-4 within 30 days of AGM, MGT-7 within 60 days | Company |
| Foreign liabilities reporting | FEMA, RBI | FLA return | Company |

A private company files no MCA form for the declaration itself. The dividend appears in the financial statements in AOC-4. See our note on [AOC-4 and MGT-7](/insights/aoc-4-mgt-7-annual-filing-foreign-owned-company).

## How much tax is withheld on a dividend to a foreign company?

Section 207(1) of the Income Tax Act, 2025 taxes dividends received by a foreign company at 20 percent. The Indian company withholds under section 393(2), Table serial 17. It deducts 20 percent plus surcharge and 4 percent cess, or the treaty rate if lower. We apply a treaty rate flat, without surcharge or cess.

Serial 17 covers "any other sum chargeable" paid to a foreign company, at "rates in force". Section 2(90) defines rates in force for these deductions as the Finance Act rate or the treaty rate, whichever is applicable. Section 159(4) applies the Act only where it is more beneficial. So the company may deduct at the treaty rate once it holds the treaty documents.

The Memorandum to the Finance Bill, 2026 kept the FY 2025-26 deduction and surcharge rates for FY 2026-27. For a foreign company, surcharge is 2 percent where the amount exceeds INR 1 crore but not INR 10 crore. It is 5 percent above INR 10 crore. Health and Education Cess stays at 4 percent of tax plus surcharge.

| Dividend paid or likely to be paid in the year | Base rate | Surcharge | Cess | Effective rate |
|---|---|---|---|---|
| Up to INR 1 crore | 20% | Nil | 4% | 20.8% |
| Above INR 1 crore, up to INR 10 crore | 20% | 2% | 4% | 21.216% |
| Above INR 10 crore | 20% | 5% | 4% | 21.84% |

The slab looks at the amount paid or likely to be paid in the year, not one payment. If the subsidiary also pays the parent royalty or fees, check the aggregate first.

On a treaty rate, we do not add surcharge and cess. The treaty caps "the tax so charged", and tribunal rulings treat surcharge and cess as part of that tax. No CBDT circular settles the point, so have Form 146 state the article and the rate. We apply 15 percent flat for a qualifying US parent.

Two more points shape the rate:

1. **No PAN.** Section 397(2) requires the payee's PAN. Without it, tax is deducted at the higher of the applicable rate and 20 percent. Section 397(2)(c) and rule 217 of the Income Tax Rules, 2026 (old rule 37BC) lift this for a non resident. The relief covers dividends, interest, royalty, fees for technical services and capital asset transfers. The parent must give its name, email, phone number, home address, TRC and tax identification number.
2. **Dividend distribution tax is gone.** Dividends declared from 1 Apr 2020 are taxed in the shareholder's hands. The department's navigator marks old section 115-O as redundant.

Our guide to [TDS on payments to non residents](/insights/tds-on-payments-to-non-residents) covers the same mechanics for other payments.

## What treaty rates apply for common parent countries?

India's treaties with ten common parent countries cap dividend withholding between 5 and 15 percent. Mauritius is lowest at 5 percent for a company holding at least 10 percent of capital. The US and Canada allow 15 percent with a 10 percent voting threshold. The UK, UAE, Netherlands, Germany, Japan and France cap it at 10 percent.

We read each rate from the treaty text on incometaxindia.gov.in, as notified and amended.

| Parent country | Article | Rate for a qualifying parent company | Holding threshold | Rate in other cases | Notification |
|---|---|---|---|---|---|
| United States | 10(2) | 15% | At least 10% of the voting stock | 25% | GSR 992(E), 20 Dec 1990 |
| United Kingdom | 11(2) | 10% | None | 15% if paid by a property investment vehicle from exempt property income | Protocol, S.O. 372(E), 10 Feb 2014 |
| Singapore | 10(2) | 10% | At least 25% of the shares | 15% | GSR 610(E), 8 Aug 1994 |
| United Arab Emirates | 10(2) | 10% | None | 10% | Substituted by S.O. 2001(E), 28 Nov 2007 |
| Netherlands | 10(2) | 10% | None | 10% | GSR 382(E), 27 Mar 1989 |
| Germany | 10(2) | 10% | None | 10% | S.O. 836(E), 29 Nov 1996 |
| Japan | 10(2) | 10% | None | 10% | Amended by S.O. 1136(E), 19 Jul 2006 |
| Mauritius | 10(2) | 5% | At least 10% of the capital | 15% | GSR 920(E), 26 Dec 1983; protocol of 2016 |
| France | 11(2) | 10% | None | 10% | Amended by S.O. 650(E), 10 Jul 2000 |
| Canada | 10(2) | 15% | At least 10% of the voting power | 25% | S.O. 28(E), 15 Jan 1998 |

Every rate needs the parent to be the beneficial owner. A parent that passes the dividend straight on to another group company risks losing the rate. Several of these treaties also carry a principal purpose test through the Multilateral Instrument. The UAE treaty has a limitation of benefits clause in Article 29. Section 159(6) applies the General Anti Avoidance Rule in Chapter XI even where a treaty is more beneficial.

Three country points come up often:

1. **Netherlands and France, most favoured nation clauses.** Both protocols import a lower rate India later gives an OECD member. In Assessing Officer v. Nestle SA (19 Oct 2023), the Supreme Court held that this needs a separate notification. None exists for dividends, so we apply 10 percent.
2. **France, new protocol.** India and France signed an amending protocol on 23 Feb 2026, as the Ministry of Finance announced that day. It sets 5 percent where the parent holds at least 10 percent of the capital, and 15 percent otherwise. It also deletes the most favoured nation clause. It takes effect only after both countries complete their internal procedures. The France treaty page on incometaxindia.gov.in lists no notification for it as at 27 Sep 2026, so 10 percent still applies.
3. **Mauritius, principal purpose test.** A protocol signed in March 2024 adds one. It leaves the 5 percent rate alone but makes holding structures harder to defend. The Mauritius treaty page on incometaxindia.gov.in lists no notification for it as at 27 Sep 2026. Check that page before you rely on either position.

A Singapore parent needs a 25 percent holding for 10 percent. Our note on the [India Singapore DTAA for companies](/insights/india-singapore-dtaa-for-companies) covers its other articles.

## Which documents does the parent give to claim the treaty rate?

Section 159(8) of the Income Tax Act, 2025 requires a tax residency certificate (TRC) from the parent's home tax authority and the prescribed information. That information is Form 41 (old Form 10F), filed online under Rule 75 of the Income Tax Rules, 2026. The accountant signing Form 146 will also want beneficial ownership and permanent establishment declarations.

| Document | Issued or filed by | What it shows | Timing |
|---|---|---|---|
| Tax residency certificate (TRC) | Home tax authority (US: IRS Form 6166; UK: HMRC certificate of residence) | Parent is resident of the treaty country | Must cover the date of credit or payment |
| Form 41 | Parent, online on the income tax portal, verified by EVC or DSC | Status, nationality, tax ID, address, period of residence | Once per tax year, before the first remittance |
| PAN, or the prescribed substitute details | Parent | Avoids the higher rate under section 397(2) | Before tax is deducted |
| Beneficial ownership declaration | Parent, on letterhead | Parent keeps the dividend and is not a conduit | For each dividend |
| No permanent establishment declaration | Parent | The shares are not connected with an Indian PE | For each dividend |
| Shareholding evidence | Indian company's register of members | Holding threshold is met | On the declaration date |
| Form 146 | Chartered accountant | Rate, article, TRC and Form 41 were examined | Before Form 145, Part C |

A permanent establishment (PE) matters because each dividend article has a carve out. If the shares are effectively connected with a PE of the parent in India, the business profits article applies instead.

US TRCs (Form 6166) cover a calendar year, while India's tax year runs April to March. A 2026 certificate covers an October 2026 dividend but not a February 2027 one. We ask US parents to apply for the next year early.

If the TRC is not ready by the payment date, deduct at the domestic rate. The parent claims the excess back through its Indian return. The alternative is a lower deduction certificate in Form 128 under section 395(1). See our note on [lower or nil TDS certificates](/insights/lower-tds-certificate-non-residents-form-128). With that certificate, the company files Part B of Form 145 and needs no Form 146.

## Are Forms 145 and 146 needed for a dividend remittance?

Yes, in almost every case. Section 397(3)(d) and Rule 220 of the Income Tax Rules, 2026 require Form 145 (old 15CA) before a payment to a foreign company. Dividends are not on the Rule 220 list of exempt payments. Above INR 5 lakh in a tax year, the company files Part C with a chartered accountant's Form 146 (old 15CB).

Rule 220 lists 33 payment types that need no Form 145, such as imports, travel and investments abroad. Dividends are not among them. The other exemptions, for individuals and IFSC units, do not help a subsidiary.

| Part of Form 145 | When it applies | Form 146 needed? |
|---|---|---|
| Part A | Chargeable payment, and the aggregate in the tax year is INR 5 lakh or less | No |
| Part B | Payment above INR 5 lakh, with an Assessing Officer certificate or order under section 395(1) or 395(2) | No |
| Part C | Payment above INR 5 lakh, with an accountant's certificate | Yes |
| Part D | Payment not chargeable to tax | No |

Part D is not for dividends. A dividend is chargeable even when a treaty lowers the rate. We see companies pick Part D because "tax is already deducted", which gives the bank an inconsistent file.

Form 145 can be withdrawn within 7 days of submission, and withdrawing Part C also withdraws the linked Form 146. The AD bank reports the remittance in its own quarterly Form 147. A missing or wrong Form 145 attracts a penalty of INR 1,00,000 under section 462. Our guide to [Form 15CA and 15CB requirements](/insights/form-15ca-and-15cb-requirements-guide-2026) covers who must file. The same logic applies to Forms 145 and 146.

## Does the foreign parent have to file an Indian tax return?

Yes, if it uses a treaty rate below 20 percent. Section 207(8) excuses a foreign company from filing only on two conditions. Its Indian income must be only dividends and similar items. Tax must also be deducted at a rate not less than the section 207 rate. A 15, 10 or 5 percent treaty rate fails the second condition.

Section 207(8) has two limbs. Limb (a) requires the income to consist only of items in the section 207 tables, such as dividends, royalty and fees for technical services. Limb (b) requires tax deducted at a rate "not less than the rate specified" in subsections (1) and (2). For dividends that rate is 20 percent.

So a US parent at 15 percent must file an Indian return of income for that tax year. It needs a PAN, and the due date is the one section 263 sets for companies. The same applies to a UK, UAE or Mauritius parent at 10 or 5 percent.

Many foreign groups assume the treaty rate ends their Indian obligations. It does not. The saving is still worth it: on an INR 10 crore dividend, the treaty rate saves INR 62,16,000. We file the parent's return on the same engagement as the Form 146, so the credit in Form 131 matches the return.

## When is a loan or advance to the parent treated as a dividend?

Section 2(40)(e) of the 2025 Act treats three payments by a closely held company as dividends, capped at accumulated profits. One is a loan or advance to a shareholder with at least 10 percent of the votes. Another is a loan to a concern where that shareholder has a substantial interest. The third is a payment for that shareholder's benefit.

An unlisted Private Limited subsidiary is a company "in which the public are not substantially interested". A 100 percent parent passes the 10 percent test. In a sister company, "substantial interest" means at least 20 percent of the voting power. In a firm or other concern, it means a beneficial right to at least 20 percent of its income. "Accumulated profits" run up to the date of payment.

A direct loan to the parent is rare, because FEMA stops it. The RBI's Overseas Investment Directions, 2022 allow lending to a foreign entity only in limited cases. The Indian entity must have made overseas direct investment there and hold control. A subsidiary does not own its parent, so an upstream loan is not permitted. The exposure comes from elsewhere.

| Situation | Deemed dividend risk | Why |
|---|---|---|
| Subsidiary lends to an Indian sister company owned by the same parent | High | Loan to a concern in which the shareholder has a substantial interest |
| Subsidiary pays the parent's bills, such as global software licences, and never recovers them | High | Payment on behalf of, or for the benefit of, the shareholder |
| Receivable from the parent for services, collected on normal credit terms | Low | CBDT Circular 19/2017 of 12 Jun 2017 says commercial trade advances are not deemed dividends; section 536 of the 2025 Act keeps such circulars in force where consistent |
| Loan between a group entity outside India and a Finance Company or Finance Unit set up in an IFSC as a global or regional corporate treasury centre, with the group parent listed abroad | Excluded | Specific exclusion in section 2(40) |
| Company whose substantial business is lending money | Excluded | Ordinary course of a lending business |

The deemed dividend is the parent's dividend income, and the company must withhold tax on it. Whether the treaty dividend article covers it depends on how that treaty defines dividends. An interest free balance with the parent is also an international transaction for Form 48 (old 3CEB) under section 172.

## Is a dividend better than a buy back, royalty or service fee?

A dividend is the simplest way to send profit home. A buy back suits returning invested capital, because a foreign parent that is a promoter now pays about 30 percent on the gain. Royalties and service fees are deductible in India and can cost less Indian tax, but only for real IP or services priced at arm's length.

The table compares the routes on INR 10 crore of Indian profit before tax. The parent is a US company holding 100 percent for more than 24 months. The subsidiary pays tax under the 22 percent regime in section 200 of the 2025 Act (old section 115BAA). With surcharge and cess, that is 25.168 percent. The buy back assumes the parent's cost for the shares is INR 1,48,32,000.

| Line (INR) | Dividend | Buy back | Royalty | Service fee |
|---|---|---|---|---|
| Profit before the payment | 10,00,00,000 | 10,00,00,000 | 10,00,00,000 | 10,00,00,000 |
| Deductible for the Indian company | No | No | Yes | Yes |
| Indian corporate tax at 25.168% | 2,51,68,000 | 2,51,68,000 | Nil | Nil |
| Gross amount paid to parent | 7,48,32,000 | 7,48,32,000 | 10,00,00,000 | 10,00,00,000 |
| Tax withheld on the payment | 1,12,24,800 (15% treaty) | 1,90,94,400 (30% of 6,00,00,000 gain, plus 2% surcharge and 4% cess) | 1,50,00,000 (15% treaty) | Nil if not a fee for included services; 1,50,00,000 if it is |
| Cash reaching the parent | 6,36,07,200 | 5,57,37,600 | 8,50,00,000 | 10,00,00,000 or 8,50,00,000 |
| Total Indian tax | 3,63,92,800 | 4,42,62,400 | 1,50,00,000 | Nil or 1,50,00,000 |
| GST | None | None | IGST under reverse charge, creditable | IGST under reverse charge, creditable |
| Main limit | Distributable profit under s.123 | Companies Act s.68 limits, fair value cap, FC-TRS | Real IP, arm's length price, Form 48 | Real services, arm's length price, Form 48 |

The buy back column rests on section 69 of the 2025 Act, as amended by the Finance Act, 2026 from 1 Apr 2026. Buy back consideration is a capital gain again, and a promoter pays an additional income tax on top. For a promoter other than a domestic company, it is 17.5 percent on long term gains. With the 12.5 percent base rate, the total is 30 percent.

For an unlisted company, section 69(3) treats anyone holding more than 10 percent, directly or indirectly, as a promoter. So a parent above that level qualifies. If the parent's cost equals the buy back price, the gain and the tax are nil. So a buy back suits returning capital put in at a premium, not distributing profit.

The table adds 2 percent surcharge and 4 percent cess to the whole 30 percent. Section 69(2) calls the extra levy additional income tax. Neither the Act nor the Budget 2026 FAQs say in terms how surcharge applies to it. Treat that line as a prudent estimate.

Section 68 of the Companies Act adds its own limits:

1. A special resolution is needed above the Board's limit of 10 percent of paid up capital and free reserves.
2. The buy back cannot exceed 25 percent of paid up capital and free reserves.
3. Debt after the buy back cannot exceed twice the capital and free reserves.

Under FEMA, the price paid to a non resident cannot exceed fair value, and the transfer is reported in FC-TRS. See our note on [share transfers between residents and non residents](/insights/share-transfer-resident-to-non-resident-fc-trs).

A royalty or service fee cuts Indian corporate tax, which is why it often looks cheapest. Four conditions limit it:

1. The parent must own the IP or render the service, under an agreement signed before the service starts.
2. The price must be at arm's length and documented in Form 48. See our note on [US parent transfer pricing](/insights/transfer-pricing-us-parent-indian-subsidiary).
3. The subsidiary must withhold tax and pay it on time, or the deduction is lost.
4. The subsidiary pays IGST under reverse charge on the imported service and claims it back as input tax credit.

The service fee column depends on the treaty. The US treaty taxes "fees for included services" only if they are ancillary to a royalty or "make available" technical knowledge or skill. Routine support services often fall outside, so no Indian tax is due unless the parent has a PE. Some treaties lack the make available test, so check the article.

The table covers Indian tax only. A royalty is usually taxable at the parent's home with a credit for Indian tax, while dividends may be exempt there. Ask the home adviser before you pick a route. For other options, see our [repatriation guide](/insights/repatriation-of-profits-from-india-to-a-foreign-parent-the-2026-strategic-guide).

## What are the penalties for paying late or missing TDS?

Missing the 30 day payment deadline is an offence under section 127 of the Companies Act, and the company owes 18 percent simple interest. On the tax side, section 398 charges 1 percent a month for late deduction and 1.5 percent a month for late deposit. Fees and penalties follow for late or wrong Forms 144 and 145.

| Default | Provision | Consequence |
|---|---|---|
| Dividend not paid within 30 days of declaration | Companies Act s.127 | Each director knowingly party to the default: imprisonment up to 2 years and a fine of at least INR 1,000 a day; company pays simple interest at 18% a year |
| Unpaid amount not moved to the Unpaid Dividend Account within 7 days | Companies Act s.124(3) | Interest at 12% a year on the amount not transferred |
| Other breach of section 124 | Companies Act s.124(7) | Company: INR 1,00,000 plus INR 500 a day, up to INR 10,00,000; each officer in default: INR 25,000 plus INR 100 a day, up to INR 2,00,000 |
| Tax not deducted on time | Income Tax Act, 2025 s.398(3)(a) | Interest at 1% a month or part of a month |
| Tax deducted but not deposited | Income Tax Act, 2025 s.398(3)(a) | Interest at 1.5% a month or part of a month |
| Failure to deduct | Income Tax Act, 2025 s.448 | Penalty equal to the tax not deducted |
| Late Form 144 | Income Tax Act, 2025 s.427 | Fee of INR 200 a day, capped at the tax deductible |
| Form 144 more than a month late, or wrong | Income Tax Act, 2025 s.461 | Penalty of INR 10,000 to INR 1,00,000 |
| Form 145 not filed, or wrong | Income Tax Act, 2025 s.462 | Penalty of INR 1,00,000 |
| Tax deducted but not paid to the government | Income Tax Act, 2025 s.476 (old s.276B), as amended by the Finance Act, 2026 | Simple imprisonment up to 2 years if the tax exceeds INR 50 lakh, up to 6 months if it is above INR 10 lakh and up to INR 50 lakh, fine only below that; no prosecution if paid by the Form 144 due date |

Section 127 has five exceptions, such as a dispute over entitlement or a legal bar on payment. A treasury delay is not one of them. Section 461 does not apply if the tax, fee and interest were paid and the statement filed within one month of the due date. Section 476(2) likewise bars prosecution where the tax was paid by the due date of the quarterly statement. The section 124(7) penalties came in through the Companies (Amendment) Act, 2020. They replaced a fine of INR 5 lakh to INR 25 lakh for the company.

## What changed in 2026

The Income Tax Act, 2025 replaced the 1961 Act from 1 Apr 2026. The dividend rate and surcharge did not change, but every section and form number did. The Finance Act, 2026 also took buy backs out of the dividend definition.

| Item | Until 31 Mar 2026 | From 1 Apr 2026 | Instrument |
|---|---|---|---|
| Rate on dividends of a foreign company | 20%, section 115A | 20%, section 207(1), Table serial 1 | Income Tax Act, 2025 (30 of 2025) |
| Withholding on payments to non residents | Section 195 | Section 393(2), Table serial 17 | Income Tax Act, 2025 |
| Treaty relief and TRC | Section 90(2) and 90(4) | Section 159(4) and 159(8) | Income Tax Act, 2025 |
| Return filing exemption | Section 115A(5) | Section 207(8) | Income Tax Act, 2025 |
| Deemed dividend on loans | Section 2(22)(e) | Section 2(40)(e) | Income Tax Act, 2025 |
| Remittance information and certificate | Forms 15CA and 15CB, rule 37BB | Forms 145 and 146, rule 220 | Income Tax Rules, 2026 |
| Treaty information | Form 10F | Form 41, rule 75 | Income Tax Rules, 2026 |
| Quarterly TDS statement and certificate | Forms 27Q and 16A | Forms 144 and 131 | Income Tax Rules, 2026 |
| Lower deduction certificate | Form 13, section 197 | Form 128, section 395(1) | Income Tax Rules, 2026 |
| Relief for a non resident without PAN | Section 206AA(7), rule 37BC | Section 397(2)(c), rule 217 | Income Tax Rules, 2026 |
| Prosecution for TDS not paid | Section 276B | Section 476, with prison terms graded by amount | Finance Act, 2026, section 111 |
| Buy back consideration | Deemed dividend, from 1 Oct 2024 | Capital gains, plus additional tax for promoters, section 69 | Finance Act, 2026, omitting section 2(40)(f) |
| India France treaty | 10% dividend rate, MFN clause | Protocol signed 23 Feb 2026 (5% or 15%, MFN clause deleted), not yet in force | Ministry of Finance press release, 23 Feb 2026 |

Two practical effects follow. First, board packs, Forms 146 and bank letters should now cite the 2025 Act. A Form 146 citing section 195 for a remittance after 1 Apr 2026 will draw questions. Second, the buy back change reverses the October 2024 rule. In 2025 the whole buy back price was taxed as a dividend. Now only the gain is taxed, but at up to 30 percent for a foreign promoter.

The other section moves are in [our note on the 2025 Act](/insights/income-tax-act-2025-changes-for-foreign-owned-companies).

## Worked example

### An INR 10 crore final dividend to a US parent

A Delaware corporation holds 100 percent of an Indian Private Limited subsidiary, with one share held by a nominee. At the AGM on Tuesday 29 Sep 2026, shareholders declare a final dividend of INR 10 crore for FY 2025-26, as the Board recommended.

The parent owns more than 10 percent of the voting stock. So Article 10(2)(a) of the India US treaty caps the tax at 15 percent. The dividend is exactly INR 10 crore, which is not above INR 10 crore. The domestic route therefore takes the 2 percent surcharge slab, not 5 percent.

| Line (INR) | Domestic rate route | Treaty route, Article 10(2)(a) |
|---|---|---|
| Dividend | 10,00,00,000 | 10,00,00,000 |
| Base tax at 20% or 15% | 2,00,00,000 | 1,50,00,000 |
| Surcharge at 2% of base tax | 4,00,000 | Nil |
| Tax plus surcharge | 2,04,00,000 | 1,50,00,000 |
| Health and Education Cess at 4% | 8,16,000 | Nil |
| Total tax withheld | 2,12,16,000 | 1,50,00,000 |
| Effective rate | 21.216% | 15% |
| Net amount remitted | 7,87,84,000 | 8,50,00,000 |
| Parent must file an Indian return? | No, section 207(8) | Yes |

The treaty route puts INR 62,16,000 more in the parent's hands. The cost is an Indian return for tax year 2026-27, which needs a PAN. The dates run like this:

1. On 29 Sep 2026 the company books the dividend payable, deducts INR 1,50,00,000 and funds the dividend account.
2. The parent has already filed Form 41 for tax year 2026-27 and sent its 2026 Form 6166 and declarations.
3. The accountant issues Form 146 citing section 207(1), section 159 and Article 10(2)(a). The company files Form 145, Part C.
4. On 6 Oct 2026 the AD bank remits INR 8,50,00,000, inside the 29 Oct 2026 limit.
5. On 7 Oct 2026 the company deposits INR 1,50,00,000 of tax.
6. By 31 Oct 2026 it files Form 144 for July to September, because the credit was in September.
7. By 15 Nov 2026 it issues Form 131, which the parent uses for its Indian return and home tax credit.

At INR 10.5 crore, the domestic route moves to the 5 percent slab. Base tax is INR 2,10,00,000, surcharge INR 10,50,000 and cess INR 8,82,000. The total is INR 2,29,32,000, or 21.84 percent. The treaty route stays at 15 percent, or INR 1,57,50,000.

### An INR 40 lakh interim dividend to a UK parent

A UK company holds 100 percent of an Indian subsidiary. On 15 Jan 2027 the Board declares an interim dividend of INR 40 lakh out of profit up to 31 Dec 2026. Article 11(2)(b) of the India UK treaty caps the tax at 10 percent.

| Line (INR) | Domestic rate route | Treaty route, Article 11(2)(b) |
|---|---|---|
| Dividend | 40,00,000 | 40,00,000 |
| Base tax at 20% or 10% | 8,00,000 | 4,00,000 |
| Surcharge (dividend below INR 1 crore) | Nil | Nil |
| Health and Education Cess at 4% | 32,000 | Nil |
| Total tax withheld | 8,32,000 | 4,00,000 |
| Net amount remitted | 31,68,000 | 36,00,000 |

The amount is above INR 5 lakh, so Form 145 Part C with Form 146 applies. Tax is due by 7 Feb 2027, Form 144 by 31 May 2027 and Form 131 by 15 Jun 2027. The UK parent used 10 percent, so it too must file an Indian return.

## Common mistakes

1. **Adding surcharge and cess to the treaty rate.** A US parent then suffers 15.912 percent instead of 15 percent. Fix: apply the treaty rate flat, as tribunal rulings support, and have Form 146 state the article.
2. **Paying before the treaty papers arrive.** Fix: collect the TRC and Form 41 before the AGM. Otherwise deduct at the domestic rate and let the parent claim a refund.
3. **Skipping the separate bank account.** Fix: open the dividend account before the meeting and fund it within 5 days, as section 123(4) requires.
4. **Putting the TDS in the wrong quarter.** Fix: deduct when the dividend payable is booked, and report it in that quarter's Form 144.
5. **Using the wrong surcharge slab.** An INR 5 crore dividend taxed at 20.8 percent instead of 21.216 percent is short deducted. Fix: check the aggregate paid to the parent in the year, royalty and fees included.
6. **Choosing Part D of Form 145.** Fix: use Part C with Form 146 for any dividend above INR 5 lakh.
7. **Telling the parent it has no Indian filing.** Fix: plan a PAN and an Indian return whenever the rate is below 20 percent.
8. **Declaring from securities premium or fair value gains.** Fix: compute distributable profit under section 123 and Rule 3 before the Board recommends an amount.
9. **Lending to a sister company.** Fix: test the loan against section 2(40)(e) first. Equity or a parent loan is often cleaner.
10. **Claiming 5 percent for a Dutch or French parent.** Fix: apply 10 percent unless a notification issues or the France protocol comes into force.

## Checklist for paying a dividend to a foreign parent

1. Compute distributable profit under section 123, after setting off carried forward losses and unprovided depreciation.
2. Check the treaty article, rate and holding threshold for the parent's country.
3. Collect the TRC, Form 41, PAN and the beneficial ownership and no PE declarations.
4. Ask the AD bank for its dividend remittance checklist.
5. Hold the Board meeting to approve the accounts and recommend the final dividend, or to declare an interim one.
6. Declare the final dividend at the AGM by ordinary resolution, by 30 September.
7. Deposit the full dividend in a separate scheduled bank account within 5 days.
8. Book the dividend payable and compute the tax at the treaty or domestic rate.
9. Obtain Form 146 from a chartered accountant and file Form 145, Part C.
10. Remit the dividend through the AD bank within 30 days of declaration.
11. Deposit the tax by the 7th of the next month, or by 30 April for March.
12. Transfer any unpaid amount to the Unpaid Dividend Account within 7 days after the 30 days end.
13. File Form 144 for the quarter and issue Form 131 within 15 days of its due date.
14. Report the dividend in AOC-4 and the FLA return.
15. Remind the parent to file its Indian return where a treaty rate below 20 percent was used.

To have us check a dividend before the AGM, send the draft accounts through our [contact page](/contact).

## Frequently Asked Questions

### Does the Indian subsidiary still pay dividend distribution tax?

No. Dividend distribution tax applied to dividends declared up to 31 Mar 2020. From 1 Apr 2020, dividends are taxed in the shareholder's hands and the company withholds tax instead. The department's section navigator treats old section 115-O as redundant under the Income Tax Act, 2025. A foreign parent now bears 20 percent under section 207(1), plus surcharge and cess, or the lower treaty rate.

### Can a subsidiary with carried forward losses declare a dividend?

Only after the losses are covered. A proviso to section 123(1) of the Companies Act, 2013 sets the order. Carried over losses and unprovided depreciation come off current year profit first. If current profit does not cover them, there is nothing to declare from. Declaring out of reserves under Rule 3 also requires the amount drawn to absorb the current year's loss first.

### Can the parent receive securities premium as a dividend?

No. Securities premium is not a free reserve, and section 123 allows dividends only from profit or free reserves. A parent that wants premium back needs a buy back under section 68 or a reduction of capital under section 66. A capital reduction payout is a deemed dividend under section 2(40) of the Income Tax Act, 2025, to the extent of accumulated profits.

### Do surcharge and cess apply when the treaty rate is used?

We do not add them. The treaty caps the total tax charged on the dividend, and tribunal rulings treat surcharge and cess as part of that tax. No CBDT circular settles the point. So a US parent holding at least 10 percent of voting stock bears 15 percent flat under Article 10(2)(a). Surcharge and 4 percent cess apply when the company deducts at the domestic 20 percent under section 207(1).

### What if the parent's tax residency certificate arrives after the dividend is paid?

Deduct at the domestic rate of 20 percent plus surcharge and cess, because section 159(8) makes the TRC a condition for treaty relief. The parent then files an Indian return with the TRC and Form 41 and claims the excess as a refund. Waiting for the certificate is rarely possible, because section 127 of the Companies Act requires payment within 30 days.

### Can the parent claim the treaty rate without an Indian PAN?

Yes, if it meets section 397(2)(c) of the Income Tax Act, 2025 and rule 217 of the Income Tax Rules, 2026. Rule 217 asks for name, email, phone number, home address, TRC and tax identification number. Without a PAN or those details, the company must deduct at the higher of the applicable rate and 20 percent. A parent taking the treaty rate needs a PAN anyway to file its Indian return.

### Is Form 41 filed for every dividend?

No. The guidance note on Form 41 says the non resident files it once per tax year, online on the income tax portal. It replaced Form 10F under Rule 75 of the Income Tax Rules, 2026. A parent receiving an interim and a final dividend in one tax year files one Form 41. Its TRC must still cover both payment dates.

### Can a filed Form 145 be corrected?

Yes, but only for 7 days. The Form 145 FAQs allow withdrawal within 7 days of submission. Withdrawing Part C also marks the linked Form 146 as withdrawn, so the accountant must issue a fresh certificate. Check the rate, treaty article and amount against the bank's remittance request before you submit, because the window is short.

### How does the parent get credit for the Indian tax at home?

The company issues Form 131 (old 16A) within 15 days after the due date of the quarterly Form 144. The certificate shows the dividend, the tax deducted and the deposit details. The parent uses it for its Indian return and as evidence for a foreign tax credit at home. Whether home credit is available depends on that country's rules for foreign dividends.

### Does a dividend need a transfer pricing report?

A dividend is a distribution to a shareholder, not a price paid for a supply or a loan. So there is no arm's length price to test on the dividend itself. The subsidiary still files Form 48 (old 3CEB) under section 172 for its other international transactions with the parent. Royalties, service fees and intercompany balances all belong in that report.

### How is the dividend on the nominee shareholder's share handled?

The nominee holds one share for the parent under a section 89 declaration, so the parent owns that dividend. Section 123(5) allows payment to the registered holder or to that holder's order. We take a written mandate from the nominee directing the dividend on that share to the parent. That keeps the bank records, the TDS and the parent's income on the same footing.

### Can the Board declare more than one interim dividend in a year?

Yes. Section 123(3) of the Companies Act, 2013 does not limit the number of interim dividends. Each must come from the surplus in the profit and loss account, or from profit up to the quarter before it. Each needs its own bank deposit within 5 days and payment within 30 days. Forms 145 and 146 apply to each once the year's total crosses INR 5 lakh.

### Does GST apply to a dividend paid to a foreign parent?

No. A dividend is a distribution of profit to a shareholder, not consideration for a supply of goods or services. A buy back is a transfer of securities, which GST excludes. GST does apply when the subsidiary pays the parent a royalty or service fee. The subsidiary then pays IGST under reverse charge and usually claims it back as input tax credit.

### Can a Mauritius or Singapore holding company always use the lower rate?

No. Mauritius offers 5 percent for a company holding at least 10 percent of capital, and Singapore 10 percent at a 25 percent holding. Both require the holding company to be the beneficial owner. Section 159(6) lets the General Anti Avoidance Rule override the treaty. The Multilateral Instrument adds a principal purpose test to many Indian treaties, and a 2024 protocol adds one for Mauritius once in force.

### What happens to a dividend the parent never claims?

Section 124(1) of the Companies Act moves it to an Unpaid Dividend Account within 7 days after the 30 day payment period. The company must post a statement of unpaid amounts on its website within 90 days. If it stays unpaid for seven years, section 124(5) sends it to the Investor Education and Protection Fund. The parent can then claim it only from that Fund.

### Will the AD bank remit if an FC-GPR or FLA filing is pending?

Often it will not. The bank checks that the parent's investment is FEMA compliant before it sends money out on that investment. A missing FC-GPR usually has to be filed with a late submission fee, or compounded, before the dividend moves. Our guide to [FEMA compounding applications](/insights/fema-compounding-application-a-complete-guide-to-resolving-fema-contraventions-in-2026) covers the process.

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