Section 115H of Income Tax Act - Benefits & Provisions for NRIs

Residential status is one of the key factors that determines income tax liabilities in India since tax laws apply differently to resident and non-resident Indians. There are three types of residential statuses permissible under the provisions of the Income Tax Act. A person can be a resident, non-resident, or resident but not ordinarily resident status depending on the number of days. Income tax laws apply differently to individuals depending on their corresponding residential status. One of the key provisions of the IT Act, Section 115H deals with the taxation of income on specified assets accruing to NRIs who have attained resident status in the current year. In this article, we explore the provisions, benefits, and conditions of Section 115H of the Income Tax Act.

Section 115H of the Income Tax Act applies to NRIs who had a non-resident status in the previous year, but now have a resident Indian status in the current financial year. Under Chapter XII-A of the Income Tax Act of 1961, non-residents can avail of certain tax benefits. The provisions outlined in this section offer non-residents a special concession of 20% on the income generated from foreign exchange asset investments.This concessional rate, however, does not apply to resident Indians. NRIs becoming resident Indians in any given year can continue to avail of these tax benefits by furnishing a statement in writing to the assessing officer. The submitted statement should outline their desire to be covered under the provisions of Chapter XII-A of the Income Tax Act .

Under Sec 115H of the Income Tax Act, NRIs can claim the following benefits when they become assessable as resident Indians:

• NRIs can continue to avail of a 20% concessional tax rate on investment income derived from foreign exchange assets.
• A concessional tax rate of 10% tax is applicable on long-term capital gains accruing due to the transfer of specified assets. The regular LTCG taxation rate is 20%.
• A flat tax rate of 20% is applicable on dividend income earned from Indian companies.
• A short-term capital gains tax of 15% is applicable on the transfer of specified assets.
• These concessional rates are applicable until NRIs convert the existing foreign exchange assets into money.
• Discounted tax rates and concessional tax benefits are available to NRIs even if they transfer the convertible foreign exchange asset from one bank to another.

However, it should be noted that benefits under Section 115H of the Income Tax Act are applicable only if the NRI furnishes a written document expressing a desire to continue enjoying concessional tax benefits. This written document, along with the income tax return of the year in which they become assessable as residents must be submitted to the assessing officer. Also Read: Tax Deductions Under Section 24 of Income Tax for Homeowners

Section 115H of the Income Tax Act includes several provisions that grant tax discounts to NRIs. The key provisions of Section 115H of the Income Tax Act are outlined below:

• A person is considered a resident if he/she has resided in India for 182 days or more in the relevant previous year.
• A person is considered a resident if he/she has resided in India for 365 days or more in the 4 preceding years or has stayed in India for 60 days or more in the relevant previous year.

• A person has been an India resident for at least two years out of the 10 preceding years.
• A person has stayed in India for a period of at least 730 days or more in the 7 preceding years.

• Securities issued by the Central Government as defined by the Public Debt Act of 1944.
• Debentures issued by an Indian company
• Deposits made with an Indian public company
• Shares of an Indian company
• Section 115H also covers any other asset of a similar nature that’s been specified by the Central Government

1. Residential Status Criteria To qualify for benefits under Section 115H, the residential status of individuals needs to be verified. This is done in accordance with the provisions outlined under Section 6 of the Income Tax Act which states:
2. Criteria for Resident but Not Ordinarily Resident (RNOR) Status Under Section 115H of the Income Tax Act, the RNOR status is applicable if:
3. Non-Resident Status for PIO If a PIO or Person of Indian Origin does not meet the criteria outlined to qualify as a resident or RNOR, they will be deemed as non-residents for income tax purposes.
4. Eligibility for Benefits under Section 115H of the Income Tax Act Any individual of Indian origin - whose parents or grandparents are Indian - qualifies for benefits under Section 115H of the Income Tax Act. However, if the person of Indian origin is not a resident of India, she/he qualifies for a non-resident status.
5. Foreign Exchange Asset Under Sec 115H of the Income Tax Act, foreign exchange asset is defined as any asset that the assessee has acquired in convertible foreign exchange.
6. Specified Assets Section 115H of the Income Tax Act also outlines the definition of Specified Assets. Specified Assets include the following:
7. It is important to note that privileges mentioned under Section 115H do not apply on income from shareholdings in an Indian company once NRIs attain a resident Indian status.
8. Income from Dividends Earlier, income from dividends was previously excluded from the list of specified assets. However, from 1st April 2021 onwards, dividend income is also covered under the benefits of Section 115H of the Income Tax Act.
9. Filing Returns To avail of benefits under Sec 115H of the Income Tax Act, qualifying NRIs must furnish their ITR under Section 139. They must also convey in writing that they wish to enjoy concessional tax rates on the assets specified under Section 115H.

Also Read: Section 80CCF - Eligibility & Deductions Under 80CCF

Benefits under Section 115H of the Income Tax Act can be availed by NRIs if they meet the following conditions:

• If the NRI is resident in a country that has a DTAA (Double Taxation Avoidance Agreement) with India.
• If the NRI can produce a TRC (Tax Residency Certificate) issued by the relevant tax authority of the nation where they are resident. This certificate is crucial because it serves as the NRI’s proof of compliance with the tax laws of the country where they reside.
• If the NRI possesses an Indian PAN (Permanent Account Number).
• If the income is earned from the list of specified assets mentioned in the Section 115H provisions.

Also Read: 5 Common Mistakes NRIs Make While Investing in India

Section 115H of the Income Tax Act offers several concessional tax benefits to non-resident Indians on income generated from specified assets. However, understanding the provisions and conditions outlined in Sec 115H is crucial for NRIs who wish to avail of these benefits even after becoming accessible as resident Indians.Ready to make the most of your money? Start your tax planning journey now!