Withholding tax on GDR dividends and capital gains treatment hinges on holding period, residency, and rupee versus foreign exchange sale.

Shares issued under the GDR mechanism are subject to withholding tax on dividends, remitted net to the Overseas Depositary Bank with potential foreign tax credit for holders; GDR trading outside India among non-residents is exempt from Indian capital gains tax. Transfers of underlying shares in India to non-residents are taxable, with long term or short term classification determined by holding period post redemption. Redeemed shares paid for in foreign exchange retain concessional dividend and long term capital gains treatment unless subsequently sold on Indian exchanges for rupee consideration, which removes concessional treatment. Tax deduction at source applies to capital gains on transfer.

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