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of <h1>Interest Taxed Up to 10% in Source State; Exempt for Specified Entities Like Reserve Bank of India</h1> Interest arising in one Contracting State and paid to a resident of the other may be taxed in both States, with a maximum tax of 10% in the source State if the recipient is the beneficial owner. Interest is exempt from tax in the source State if derived by specified entities like the Reserve Bank of India or Nepal Rashtra Bank. The term 'interest' includes income from debt claims but excludes penalty charges. Provisions do not apply if the interest is connected to a permanent establishment or fixed base. Interest is deemed to arise where the payer is a resident or has a permanent establishment. Excessive interest due to special relationships is taxable under each State's laws.
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