Income Tax Notifications & Order IT

India-Mauritius DTAA Principal Purpose Test 2026: What CBDT Notification 135/2026 and the New Article 27B Mean for Mauritius Investors

CA Adityavikram Banka

Quick Summary

  • What happened: CBDT Notification No. 135/2026 (S.O. 5611(E), dated 13 October 2026) gives effect in India to the Protocol amending the India-Mauritius Double Taxation Avoidance Agreement (DTAA), signed at Port Louis on 7 March 2024.
  • In force from 10 August 2026: the Protocol entered into force on 10 August 2026, the date of the later of the two countries’ notifications, and has effect from that date.
  • New Article 27B, “Entitlement to Benefits”: a treaty benefit is denied for an item of income if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted in it, unless granting it is in line with the object and purpose of the relevant provisions.
  • New Preamble: the treaty now states that it is meant to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping for the indirect benefit of residents of third jurisdictions.
  • No date carve-out: the Protocol applies “without regard to the date on which the taxes are levied or the taxable years to which the taxes relate”. Its text contains no exception for investments made before any date.

The India Mauritius DTAA principal purpose test is now part of Indian law. On 13 October 2026 the Central Government published CBDT Notification No. 135/2026 in the Gazette, giving effect to the 2024 Protocol that adds a new Article 27B to the India-Mauritius tax treaty. From 10 August 2026, a Mauritius resident claiming a treaty benefit on income from India must be able to show that obtaining that benefit was not one of the principal purposes of the arrangement that produced it. This note explains what the Protocol says, from when it applies, who should act, and what to review now.

What does CBDT Notification 135/2026 say?

The notification is short. It records three facts and makes one operative statement:

  1. A Protocol amending the Convention between India and Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains was signed at Port Louis on 7 March 2024.
  2. The Protocol entered into force on 10 August 2026, being the date of the later of the notifications of completion of the procedures required to give effect to it, in accordance with paragraph 1 of Article 3 of the Protocol.
  3. In exercise of the powers under section 159(1) of the Income-tax Act, 2025, the Central Government notifies that all the provisions of the Protocol, as annexed to the notification, shall be given effect to in the Union of India, in accordance with Article 3 of the Protocol.

The Protocol amends the Convention signed at Port Louis on 24 August 1982, as already amended by the Protocol signed on 10 May 2016. It has three articles.

Article of the Protocol What it does
Article 1 Replaces the Preamble of the Convention with new text on preventing non-taxation, reduced taxation and treaty-shopping.
Article 2 Inserts a new Article 27B, “Entitlement to Benefits”, after Article 27A of the Convention.
Article 3 Entry into force on the later of the two notifications; effect from that date regardless of when taxes are levied or the taxable year they relate to.

What is the principal purpose test in Article 27B?

The full text of the new Article 27B reads:

“Notwithstanding the other provisions of this Convention, a benefit under this Convention 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, unless 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.”

Read clause by clause, the test has these parts:

  • “Notwithstanding the other provisions of this Convention”: Article 27B overrides every other article of the treaty. A benefit that another article would otherwise give is still denied if the test is met.
  • “a benefit under this Convention”: the test applies to any benefit the treaty gives, not only to one type of income.
  • “in respect of an item of income”: the test is applied item by item. Each dividend, interest payment, gain or other receipt is looked at on its own.
  • “reasonable to conclude, having regard to all relevant facts and circumstances”: the standard is a reasonable conclusion drawn from the whole picture, not a single fact.
  • “one of the principal purposes”: obtaining the benefit need not be the only purpose, or the main purpose. It is enough that it was one of the principal purposes.
  • “any arrangement or transaction that resulted directly or indirectly in that benefit”: the test looks at the arrangement or transaction behind the income, including one that produces the benefit indirectly.
  • “unless it is established”: the benefit is still available if it is established that granting it in those circumstances is in accordance with the object and purpose of the relevant treaty provisions.

How does the new Preamble change the reading of the treaty?

Article 1 of the Protocol replaces the Preamble. The new Preamble says the two Governments intend “to eliminate double taxation with respect to the taxes covered by this Convention 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)”.

This matters for the exception in Article 27B. Whether granting a benefit is “in accordance with the object and purpose” of the treaty is now read against a Preamble that names treaty-shopping for the benefit of third-country residents as something the treaty is not meant to allow.

From when does the India-Mauritius Protocol apply?

Three dates matter:

Event Date
Protocol signed at Port Louis 7 March 2024
Protocol entered into force (later of the two notifications) 10 August 2026
CBDT Notification No. 135/2026 giving effect in India (S.O. 5611(E)) 13 October 2026

Article 3(2) of the Protocol provides that its 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 Protocol therefore has effect from 10 August 2026, not from the date of the Indian notification. Income items between 10 August 2026 and 13 October 2026 fall within that period.

For income tax purposes, an item of income arising on or after 10 August 2026 falls in tax year 2026-27, for which the Income-tax Act, 2025 applies. Section 159(1) of that Act is the power under which this notification was issued.

Are investments made before a certain date protected from Article 27B?

The Protocol text contains no exception for investments, shareholdings or arrangements made before any date. Article 3(2) says the Protocol has effect from 10 August 2026 without regard to the date on which taxes are levied or the taxable years to which they relate. Article 27B itself refers to “any arrangement or transaction”. A founder or fund should not assume that an older Mauritius holding is outside Article 27B because of when it was set up.

Separate relief under the domestic General Anti-Avoidance Rules is a different set of provisions with its own conditions; see our earlier post on CBDT Notifications 54 and 55 of 2026. The Protocol does not refer to those rules.

Who is affected by the principal purpose test?

  • Mauritius-resident companies and funds holding Indian investments that claim any benefit under the India-Mauritius treaty on dividends, interest, gains or other income from India received on or after 10 August 2026.
  • Foreign investors who invest into India through a Mauritius entity, since the new Preamble expressly refers to treaty-shopping arrangements for the indirect benefit of residents of third jurisdictions.
  • Indian companies and other payers that apply a treaty rate when deducting tax on payments to a Mauritius resident. Applying a treaty rate is applying a benefit under the Convention, so the payer’s position depends on the payee’s entitlement under Article 27B.
  • CAs and tax advisers who give certificates or opinions on the tax treatment of payments to Mauritius residents, or who prepare returns claiming treaty relief for them.

What should Mauritius investors and Indian payers do now?

  1. List every item of income from India received by a Mauritius entity on or after 10 August 2026 for which a treaty benefit was claimed or applied. This includes items between 10 August and 13 October 2026.
  2. For each item, identify the arrangement or transaction behind it, as Article 27B requires the test to be applied to the arrangement that resulted in the benefit.
  3. Record the commercial and non-tax reasons for using the Mauritius entity and for each arrangement, with contemporaneous documents. Article 27B looks at “all relevant facts and circumstances”.
  4. Payers should revisit treaty-rate withholding on payments to Mauritius residents from 10 August 2026, and ask the payee for the facts that support its entitlement to the benefit.
  5. Do not rely on the date of the original investment to exclude Article 27B; the Protocol contains no such carve-out.

Founders whose Mauritius holding company also has management in India should read this with our guide to place of effective management under Section 6 of the Income-tax Act 2025. Companies receiving fresh investment from a Mauritius entity should also keep the FC-GPR and FC-TRS reporting deadlines in view.

Frequently asked questions

Does Article 27B apply only to capital gains?

No. Article 27B applies to “a benefit under this Convention” in respect of “an item of income”. It is not limited to any one type of income.

Does the benefit have to be the main purpose of the arrangement?

No. Article 27B applies if obtaining the benefit was “one of the principal purposes” of the arrangement or transaction.

Is there any way to keep the benefit if the test is met?

Yes, Article 27B allows the benefit where “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”.

Sources

  • Source: Ministry of Finance (Department of Revenue), CBDT Notification No. 135/2026, S.O. 5611(E), F. No. 500/03/2012-FTD-II, 13 October 2026, with the Annexure (Protocol amending the India-Mauritius Convention signed at Port Louis on 7 March 2024), incometaxindia.gov.in.

Get expert guidance

Holding Indian investments through Mauritius, or paying dividends or interest to a Mauritius shareholder, and want to check your position under Article 27B? Tax Update India can help. Book a quick call.

Disclaimer: This article is for general information only and reflects the law as on the date of publication. It is not legal or tax advice. Please consult a qualified professional before acting on it.

CA Adityavikram Banka
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