Section 115H of Income Tax

Section 115H of the Income Tax Act deals with individuals who were NRIs in the previous year but are now residents in the current year under Chapter XII-A. The NRIs must file a declaration in writing along with their income tax return under Section 139 for the assessment year in which they become a resident.

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What is Section 115H of the Income Tax Act?

Under the Income Tax Act, non-residents are eligible for certain tax privileges outlined in Chapter XII-A. This provision grants them a special tax concession on income generated from investments in foreign exchange assets. It's important to note that this special tax rate is not applicable to resident Indians.

In the event that a Non-Resident Indian (NRI) becomes a resident Indian in any given year, they have the option to avail themselves of the benefits offered by Chapter XII-A. To exercise this choice, the NRI must provide a written statement to the assessing officer explicitly stating their desire for the provisions of Chapter XII-A to continue applying to them.

What are the Benefits of Section 115H of the Income Tax Act?

If a non-resident provides a written statement to the assessing officer along with their Income Tax Return in the year they are assessed as a resident, they can enjoy the following advantages:

  • Non-residents can benefit from a tax concession of 20% on income generated from investments in foreign exchange assets. This special tax rate is applicable to the income from such investments.

  • NRIs can also avail of a 10% tax concession on long-term capital gains. This concession is specifically applicable to dividend income and specified assets.

  • Non-residents can continue to enjoy the concessional tax rate until they convert their foreign exchange assets into money. This provides them with a sustained tax advantage during the holding period of the foreign exchange asset.

  • If the assessee owns specified assets, they can benefit from discounted tax rates. These rates remain applicable even if they decide to transfer their convertible foreign exchange from one bank to another.

What are the Provisions Under Section 115H of the Income Tax Act?

Section 115H of the Income Tax Act includes many provisions that grant concessional tax rate benefits to individuals of Indian origin who are non-residents. Here are the key provisions under Section 115H:

  1. Residential Status Criteria:

    • A person is considered a resident if they stayed in India for 182 days or more in the relevant previous year.

    • Alternatively, if a person stays in India for 365 days or more in the four immediately preceding years and at least 60 days or more in the relevant previous year, they are also considered a resident.

  2. Resident but Not Ordinarily Resident (RNOR) Criteria:

    A person is considered an RNOR if they are a resident in India for 2 years out of the preceding ten years or if they have stayed in India for 730 days or more in the preceding seven years.

  3. Non-Resident Status for PIO:

    A Person of Indian Origin (PIO) is considered a non-resident if they do not fall under the resident or RNOR category.

  4. Eligibility for Concessional Tax Rate:

    • Any person of Indian origin can avail themselves of the concessional tax rate benefits under Section 115H.

    • If an individual of Indian origin is not a resident of India, they are considered a non-resident for the purposes of this section.

  5. Definition of Foreign Exchange Asset:

    A foreign exchange asset is defined as any asset acquired by the taxpayer in convertible foreign exchange.

  6. Specified Assets:

    • Specified assets include securities issued by the Central Government as defined by the Public Debt Act of 1944.

    • It also covers shares of an Indian company, debentures issued by an Indian public company, deposits with an Indian public company, and any other asset specified by the Central Government of a similar nature.

  7. Exclusion of Benefits Upon Becoming a Resident Indian:

    Once an NRI becomes a resident Indian, they are no longer eligible to avail benefits from income derived from shareholdings in an Indian company.

  8. Return Filing and Concessional Rates:

    Non-residents can benefit from concessional rates of tax on the specified assets if they furnish their return under Section 139 and express their willingness in writing to be covered under Section 115H.

  9. Inclusion of Dividend Income:

    Dividend income has been included in the specification of assets since April 1, 2021.

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What are the Conditions for Availing the Benefits Under Section 115H?

Section 115H of the Income Tax Act provides certain provisions for Non-Resident Indians (NRIs) to avail of specific benefits. To qualify for these benefits, NRIs must meet the following conditions:

    • Residency in a DTAA Signatory Nation: NRIs should be residents of a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA).
    • Furnishing Tax Residency Certificate (TRC): NRIs are required to provide a Tax Residency Certificate (TRC) issued by the tax authority of the nation in which they are considered residents. This certificate serves as proof of their tax residency status.
    • Possession of Indian PAN Number: NRIs seeking benefits under Section 115H must possess an Indian Permanent Account Number (PAN).
    • Income from Specified Assets:

The benefits under this section are applicable to income earned by NRIs from specified assets, including:

    • Foreign currency deposits in Indian banks

    • Debt securities issued by Indian companies

    • Units of equity-oriented mutual funds

    • Shares of Indian companies listed on a stock exchange

Conclusion

Section 115H of the Income Tax Act serves as a significant provision benefiting Non-Resident Indians (NRIs) by offering specific advantages on income earned from specified assets. To avail of these benefits, NRIs must fulfill the above-mentioned conditions This section aims to facilitate a more favorable tax treatment for NRIs, promoting financial inclusivity and cross-border investments.

FAQ's

  • What is a Non-Resident Indian (NRI) as per the Income Tax Act?

    An NRI is an individual of Indian origin who does not reside in India. If an individual's grandparents or parents were born in India, they are regarded as a person of Indian origin.
  • What is the relevant section for the NRE exemption?

    Any interest earned on the NRE account is completely exempt from taxation under Section 10(4)(ii) of the Income Tax Act, and there is no specified limit.
  • What does Section 115H in the Income Tax Return (ITR) refer to?

    Section 115H enables non-resident taxpayers to retain the benefits of a reduced tax rate even if they transition into the status of a resident Indian in any subsequent year.

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