Section 115H Of Income Tax Act

Section 115H of the Income Tax Act provides a unique benefit for non-resident Indians under Chapter XII-A. This provision allows NRIs to enjoy a special tax concession on income earned from investments in foreign exchange assets, which is a privilege that is not extended to resident Indians.

If a non-resident Indian transitions to resident status in any financial year, they can continue to avail themselves of the benefits under Chapter XII-A by submitting a written statement to the assessing officer. This statement must explicitly declare their intention to maintain the application of Chapter XII-A provisions to their income from foreign exchange assets.

The key advantage of Section 115H lies in its ability to offer a special tax rate on investment income, which is typically around 20%. This is lower than the standard rates applicable to resident Indians. This concession aims to encourage and reward foreign exchange investments made by non-resident Indians (NRIs). This is to promote a greater participation of non-resident Indians (NRIs) in the Indian economy.

Criteria for Residential Status

• An individual is deemed a resident under two conditions :

• They have been in India for 182 days or more during the relevant fiscal year.

• They have been in India for at least 365 days in the four years immediately preceding the relevant year and for a minimum of 60 days in the relevant fiscal year.

Criteria for Resident but Not Ordinarily Resident (RNOR)

An individual is deemed as a resident but not ordinarily resident under two conditions :

They have been a resident of India for at least 2 years out of the last 10 years.

They have stayed in India for a minimum of 730 days in the preceding 7 years.

Classification of Non-Resident Status for Persons of Indian origin (PIO)

Persons of Indian origin who do not meet the criteria for being a Resident or Resident But Not Ordinarily Resident are classified as non-residents for income tax purposes.

Concessional Tax Rate Eligibility

Persons of Indian origin who are non-residents can avail themselves of concessional tax rates under Section 115H.

Definition of Foreign Exchange Assets

Foreign Exchange Assets are defined as those acquired by the taxpayer using convertible foreign exchange.

Specified Assets

These include :

• Securities issued by the Central Government as per the Public Debt Act of 1944.

• Shares in an Indian Company.

• Debentures issued by an Indian public company.

• Deposits with an Indian public company.

• Any other asset specified by the Central Government.

Exclusion of Benefits Upon Becoming a Resident

Once a Non-resident Indian attains the status of a resident Indian, they can no longer enjoy tax benefits on income from shareholdings in an Indian company.

Return Filing and Concessional Rates

Non-resident Indians can continue to benefit from concessional tax rates on specified assets if they file their returns under Section 139 and state their preference in writing.

Inclusion of Dividend Income

As of April 1, 2021, dividend income is included in the category of specified assets, allowing it to qualify for concessional tax rates under Section 115H.

Section 115H of the Income Tax Act offers several benefits to non-resident Indians (NRIs) who become residents in any given year. To avail of these benefits, non-resident Indians (NRIs) must submit a written statement to the assessing officer along with their income tax return for the relevant year.

Here are the detailed benefits :

The concessional tax rate on investment income- Non-resident Indians can benefit from a 20% tax rate on income generated from investments in foreign exchange assets. This is a significant concession compared to the standard tax rates that apply to resident Indians.

Tax benefits on long-term capital gains- Non-resident Indians (NRIs) can avail of a 10% tax concession on long-term capital gains. This concession is specifically applicable to dividend income and specified assets.

Sustained concessional tax rate- The concessional tax rates under section 115H continue to apply until the foreign exchange asset is converted into money, this allows NRIs to enjoy favourable tax treatment over the entire holding period of their investments.

Residency in a Double Taxation Avoidance Agreement (DTAA) Signatory Nation

The Non-resident Indian should be a resident of a country with which India has a Double Taxation Avoidance Agreement (DTAA). This agreement helps in avoiding the double taxation of income.

Furnishing Tax Residency Certificate (TRC)

Non-resident Indians must provide a Tax Residency Certificate (TRC) issued by the tax authority of their resident country. This certificate is essential as it serves as proof of their tax residency status which ensures that they are eligible for the benefits under Section 115H.

Possession of Indian Permanent Account Number

Non-resident Indians must possess an Indian Permanent Account Number (PAN). This identification is crucial for availing of tax benefits and for filing income tax returns in India.

Income from Specified Assets

The benefits under Section 115H apply to income earned by NRIs from specific assets, which include:

• Deposits in Indian banks made in foreign currency.

• Debt securities issued by Indian companies.

• Units of mutual funds that are equity-oriented.

• Shares of Indian companies listed on the stock exchange.

• Non-resident Indians enjoy a concessional tax rate of around 20% on income from foreign exchange assets.

• Non-resident Indians who are becoming residents can still benefit from Chapter XII-A by submitting a written statement.

• Concessional rates apply to income from specified assets.

• Non-resident Indians can get a 10% tax concession on long-term capital gains from specified assets.

• Concessional tax rates continue until the foreign exchange assets are converted into money.

• Non-resident Indians must be residents of a country with India that has a Double Taxation Avoidance Agreement (DTAA).

• Non-resident Indians must provide a Tax residency Certificate issued by their resident country’s tax authority.

• Non-resident Indians must have an Indian Permanent Account Number (PAN).

Submit a Written Statement- To continue enjoying the benefits under Chapter XII-A, ensure you submit a written statement to the assessing officer when you transition from a Non-resident Indian status to resident status.

Maintain your Foreign Exchange Assets- Keep your investments in foreign exchange assets, as the concessional tax rates apply to specified assets.

File your returns under Section 139- Always file your returns under Section 139 and clearly state your preference for continuing Chapter XII-A benefits.

Research Criteria for your Residential Status- Be aware of the criteria for residential status and ensure you meet the conditions to maximise the benefits under Section 115H.

Invest in Specified Assets- Invest in specified assets such as securities by the Central Government, shares in Indian companies and deposits with Indian public companies to qualify for concessional tax rates.

Obtain a Tax Residency Certificate (TRC)- Ensure you have a Tax Residency Certificate from the tax authorities of your resident country to prove your eligibility for the benefits.

Keep your Indian Permanent Account Number (PAN) updated- Obtaining and maintaining an Indian Permanent Account Number (PAN) is essential to avail tax benefits and smooth filing of income tax returns.

Use Double Taxation Avoidance Agreement (DTAA)- If you reside in a country that has a Double Taxation Avoidance Agreement (DTAA) with India, use it to avoid double taxation and optimise your tax benefits.

Stay Updated With Changes In Tax Laws- Stay updated with changes in taxation laws and regulations to ensure you are making the right decisions and optimising the available benefits.

Consider consulting- Consider consulting with a tax professional to understand how to maximise the benefits under Section 115H and effectively manage your investments and tax obligations.

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Understanding and utilising the 115H section of the Income Tax Act can significantly benefit Non-resident Indians returning to India.

By staying informed about the provisions and maintaining foreign investments, non-resident Indians can maximise their tax benefits as it helps them file accurate returns. This helps ensure a smoother financial transition to resident status.