26-05-2025
Can an OCI holder lend to their Indian company?
I'm a German citizen and an OCI (Overseas Citizen of India) cardholder. I co-promoted an Indian private limited company in 2010 with an Indian business family in a 50:50 shareholding ratio, and all FDI compliance was completed at the time. The company manufactures automobile spare parts and is currently in expansion mode. We plan to lend funds to the company in the same 50:50 ratio. Am I allowed to do this under Indian law, and what would the implications be?
—Name withheld on request
Yes, under Indian regulations, you may lend to the company, but there are specific conditions you must comply with as a non-resident shareholder.
Indian company law permits loans from shareholders, directors, or their relatives, subject to certain conditions. In your case, as a shareholder, you can lend to the company, provided the loan amount does not exceed 100% of the company's net worth.
Since you are a non-resident, any loan you extend will be treated as an External Commercial Borrowing (ECB) under India's foreign exchange laws. As you own more than 25% equity in the company, you qualify as an eligible lender. However, ECBs must adhere to specific conditions such as: Minimum average maturity period
Caps on interest rates
End-use restrictions
Reporting and compliance with the Reserve Bank of India (RBI)
You'll need to ensure the loan terms align with these RBI regulations before proceeding.
If the loan is interest-bearing, the interest you earn is taxable in India at 20% plus applicable surcharge and cess under domestic law.
However, as a German tax resident, you can opt to be taxed under the India-Germany Double Taxation Avoidance Agreement (DTAA). Under Article 11 of the DTAA, interest income is taxed in India at a reduced rate of 10%. This is likely more favourable than the standard Indian tax rate.
To claim DTAA benefits, the Indian company must obtain from you:
A valid Tax Residency Certificate (TRC) from Germany
A self-declaration and other relevant documentation
If interest income is your only source of income from India and tax has been correctly deducted at source, you are not required to file a tax return in India.
However, if you choose to avail the DTAA benefit and your interest income exceeds the basic exemption limit, filing a return becomes mandatory, even if TDS has been deducted.
Since the loan is between a resident and a non-resident related party, transfer pricing regulations under Indian tax law may apply. This means the interest rate must be benchmarked against arm's length pricing, and documentation must be maintained to substantiate this.
Harshal Bhuta, Partner, P. R. Bhuta & Co. CAs
