India Mauritius DTAA Protocol in Force: Principal Purpose Test
October 16, 2026 · International Tax and Transfer Pricing
India Mauritius DTAA protocol, notified on October 13, 2026, adds a principal purpose test from August 10, 2026. What changes for investors and payers.
The India Mauritius DTAA has been amended. Through Notification No. 135/2026 dated October 13, 2026 (S.O. 5611(E)), the Central Government has given effect in India to the Protocol signed at Port Louis on March 7, 2024. The Protocol entered into force on August 10, 2026 and adds a Principal Purpose Test (PPT) to the treaty.
The change affects Mauritius residents claiming treaty relief on Indian income, and Indian deductors paying them at a treaty rate. The Protocol has no carve-out for grandfathered investments, but CBDT Circular No. 1/2025 states that they remain outside the PPT.
What has changed in the India Mauritius DTAA
The Protocol makes two anti-abuse amendments to the Convention of August 24, 1982, as amended by the Protocol of May 10, 2016. Neither changes tax rates or taxing rights.
New preamble against treaty shopping
Article 1 of the Protocol replaces the preamble. The governments now intend to eliminate double taxation "without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third jurisdictions)".
A preamble does not itself deny a benefit, but it guides how every other article is read.
Article 27B: principal purpose test India Mauritius
Article 2 of the Protocol inserts Article 27B, "Entitlement to Benefits". A treaty benefit "shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit".
The benefit can still be allowed if "it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention".
The earlier Article 27A applied only to the Article 13(3B) reduced rate and is now spent. Its "primary purpose" test differs from the PPT's "one of the principal purposes". Para 4(C) of CBDT Circular No. 1/2025 points to the BEPS Action 6 report and the UN Model commentary on Articles 1 and 29 for guidance.
Effective date of the India Mauritius DTAA protocol 2026
Under Article 3(1), the Protocol entered into force on August 10, 2026, the date of the later notification of completion of domestic procedures. Under Article 3(2), the provisions "shall have effect from the date of entry into force of the Protocol, without regard to the date on which the taxes are levied or the taxable years to which the taxes relate".
The PPT therefore applies prospectively. Withholding on payments made between August 10 and October 13, 2026, before the notification was issued, may need review.
Category
Earlier position
Revised position
Effective from
Preamble
Avoidance of double taxation, prevention of fiscal evasion and encouragement of mutual trade and investment
Elimination of double taxation without creating opportunities for non-taxation or reduced taxation, including through treaty shopping
August 10, 2026
Treaty anti-abuse rule
No PPT article; Article 27A limited to the Article 13(3B) reduced rate
Article 27B (Entitlement to Benefits) denies benefits where obtaining them was one of the principal purposes
August 10, 2026
Domestic notification
Not applicable
Notification No. 135/2026 under section 159(1) of the Income-tax Act, 2025 (corresponding to section 90(1) of the 1961 Act)
Issued October 13, 2026
Timing rule
Not applicable
Effect from entry into force, regardless of the date taxes are levied or the taxable year
August 10, 2026
Grandfathered investments and the PPT
The Protocol itself contains no carve-out. However, CBDT Circular No. 1/2025 dated January 21, 2025 states that the grandfathering provisions of the India-Mauritius DTAA "shall remain outside the purview of the PPT provision", and that a PPT added through a bilateral protocol applies prospectively from the date the protocol enters into force. CBDT's press release of March 15, 2025 adds that the circular does not affect GAAR, SAAR or judicial anti-avoidance rules.
As of October 16, 2026, CBDT has issued no clarification specific to Notification No. 135/2026. Secondary reports indicate that some commentators read the carve-out as applying while others treat it as open. It is also reported that the carve-out covers capital gains only, so dividends, interest, royalties and fees for technical services face the PPT.
Practical impact of the principal purpose test
A Tax Residency Certificate is a condition for claiming treaty relief under section 159(8) of the Income-tax Act, 2025, but it is not conclusive. The Supreme Court in Tiger Global (2026) described it as an eligibility condition rather than sufficient evidence, and Article 27B can deny a benefit regardless of residence. Section 159(3)(b) of the 2025 Act already carries anti-treaty-shopping wording.
For Mauritius-based investors, funds and family offices
Entities claiming relief on capital gains, dividends, interest or fees should review why each Mauritius structure exists. Relevant factors include where decisions are taken, staff, premises, source of funds and business rationale.
For Indian companies and deductors
Payers applying treaty rates should revisit their documentation, including the Tax Residency Certificate, Form 41 under Rule 75(1) of the Income-tax Rules, 2026 (section 159(8)(b)), and a declaration on beneficial ownership and substance.
Tax on payments to non-residents is withheld under section 393(2) [Table: Sl. No. 17] of the Income-tax Act, 2025 (formerly section 195 of the 1961 Act). Under section 2(90)(c), "rates in force" include the treaty rate. A deductor who applies a treaty rate that is later denied can be treated as an assessee in default under section 398(1); a payer's application to determine the portion of the sum chargeable to tax, formerly under section 195(2), now lies under section 395(2).
Interaction with GAAR and transition rules
GAAR now sits in Chapter XI (sections 178 to 184) of the Income-tax Act, 2025, with rules 127 to 132 of the Income-tax Rules, 2026. Section 159(6), formerly section 90(2A), applies it even where it is not beneficial to the assessee. Notifications No. 54/2026 and 55/2026 dated March 31, 2026 amended Rule 10U of the Income-tax Rules, 1962 and Rule 128 of the Income-tax Rules, 2026, so gains on investments made before April 1, 2017 are now outside GAAR.
Under section 536(2)(c), the 1961 Act still governs tax years beginning before April 1, 2026, and Circular No. 1/2025 survives under section 536(2)(j). Old and new sections can be compared with the Income-tax Act 1961 to 2025 section mapper .
Checklist for the India Mauritius tax treaty amendment
List Indian income streams where India Mauritius DTAA relief is claimed.
Record the commercial reasons for each Mauritius entity.
Update Tax Residency Certificates and Form 41 filings.
Review withholding applied on or after August 10, 2026.
Check positions on pre-April 1, 2017 investments against CBDT Circular No. 1/2025 (para 4(B)) and Rule 128 of the Income-tax Rules, 2026.
Keep board minutes, substance evidence and investment rationale on file.
Frequently asked questions
What is Notification No. 135/2026?
It is a notification dated October 13, 2026 (S.O. 5611(E)) under section 159(1) of the Income-tax Act, 2025. It gives effect to the Protocol amending the India Mauritius DTAA.
From when does the India Mauritius DTAA protocol apply?
It applies prospectively from August 10, 2026, its date of entry into force. Its effect does not depend on when taxes are levied or the taxable year.
What is the principal purpose test in the India Mauritius DTAA?
Under Article 27B, a benefit is denied if obtaining it was one of the principal purposes of an arrangement. It is still allowe