Mauritius-domiciled foreign portfolio investors held a little over $37 billion in Indian assets at the end of June 2026, giving the island a significant role in foreign investment into India. The tighter tax treaty could alter the economics of that route, although a change in how funds hold their investments would not necessarily mean a withdrawal from Indian assets.

The concern for future inflows is whether investors can assess their tax treatment before committing more capital. Funds claiming treaty benefits face a broader inquiry into the purpose of their arrangements, and additional spending on governance, documentation and advice may not resolve uncertainty over whether they qualify.

Mauritius’s historical appeal rested heavily on the treaty’s treatment of capital gains, which allocated taxing rights over gains from Indian share sales to the investor’s country of residence. Since Mauritius generally did not tax those gains, qualifying investors could avoid capital gains tax in both jurisdictions.

The 2016 amendment gave India taxing rights over gains on Indian-company shares acquired from April 2017 while preserving grandfathered treatment for earlier acquisitions. The latest protocol therefore adds to changes already made to the route’s principal tax advantage.

Those legacy protections apply to specified gains rather than every receipt from an investment. CBDT’s January 2025 guidance preserves the treaty’s grandfathering provisions, while KPMG distinguishes eligible gains on shares acquired before April 2017 from dividends, interest and other income that can face scrutiny after the new test becomes effective 

The protocol, which entered into force on 10 August 2026, introduces a Principal Purpose Test under which relief can be denied where it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining the benefit was one of an arrangement’s principal purposes. Relief remains available where granting it accords with the object and purpose of the relevant treaty provisions. 

The revised preamble states that the treaty seeks to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty shopping for third-country residents. The dividend and interest provisions nevertheless remain unchanged, while certain gains on securities other than shares can retain favourable treatment, subject to the new test and other applicable conditions. 

Mauritius consequently retains tax advantages, but investors must establish that their claims fall within the benefits the treaty is intended to provide.

Purpose Matters
India has a reasonable interest in examining the commercial role of an entity claiming bilateral treaty relief, rather than accepting its registration and address as sufficient evidence of entitlement. That examination must also recognise that lower taxation is part of what a treaty offers and will naturally influence investment decisions.

The Principal Purpose Test accommodates both considerations. Its threshold is broad because obtaining relief need only be one of an arrangement’s principal purposes, but the object-and-purpose exception means that a tax-conscious structure is not automatically disqualified. 

Investors must be able to explain what their entities do, where decisions are made and why their role makes commercial sense. KPMG’s assessment highlights commercial rationale, governance, decision-making and economic substance in Mauritius, while calling for further guidance on applying the test. 

The difficulty lies in understanding how that evidence will be assessed. A fund might document its operations extensively without knowing which facts support its claim or how much weight the authorities will give them. For an investment committee, the resulting uncertainty concerns the expected tax outcome rather than the completeness of the compliance record.

Investment Arithmetic
A fund can incorporate a known tax liability into its expected return, whereas uncertain eligibility requires it to consider several outcomes, including denial of relief. An established Mauritius platform might need only to improve its supporting evidence, while another investor could reconsider whether maintaining the structure justifies the expense.

For a marginal allocation, a less favourable tax assumption could reduce the expected return enough to delay deployment. These remain possible responses rather than measured consequences of the protocol, and Mauritius-specific selling attributable to the change has not been established.

Changes in holdings or investment rankings would not, on their own, demonstrate that causal link. Nor would a shift to another jurisdiction necessarily represent lost investment for India if the fund retained its exposure to Indian assets.

The policy concern is therefore narrower than a general retreat of foreign capital. While discouraging artificial arrangements may be an intended consequence, uncertainty that delays an investment with a credible commercial basis would impose a different economic cost.

Guidance could help investors assess their position by showing how the test applies to representative arrangements, including an established investment platform and a vehicle created around a particular transaction. The examples should explain which facts support or weaken eligibility and how the claimed benefit relates to the treaty’s purpose, without promising approval based on a vehicle’s description.

They should also distinguish protected share gains from other income so that funds can assess individual benefits rather than treat an entire structure as either protected or threatened. Investors, meanwhile, should examine whether their next allocation remains attractive if the claimed concession is unavailable, making clear how much of the return depends on treaty relief.

India cannot guarantee every fund its preferred tax outcome, but clearer assessment standards would give commercially grounded investors a more reliable basis for committing capital. The value of that predictability lies in allowing funds to price their exposure before investing, rather than incur higher compliance costs while leaving the central tax question unresolved.