Section 115F of the Income Tax Act, 1961, provides tax relief to non-resident Indians (NRIs) on the sale of their debentures or shares in India. Many NRIs still do not know about this section and pay tax on their long-term capital gain.
Are you also an NRI and seeking a way to avoid paying tax on your capital gains in India, or want some tax relief? Then you are on the right page. In this blog, we have broken down everything about Section 115F and how, as an NRI, you can claim tax benefits using this section. So read on and know about it.
What Is Section 115F of the Income Tax Act?
Section 115F of the Income Tax Act, 1961, is designed for non-resident Indians (NRIs). It helps the non-resident Indians in paying low or zero tax on their investments made in India after their sale. This section provides a tax exemption to NRIs on their long-term capital gains on:
Sale of a foreign asset (debentures or shares of Indian companies)
In eligible assets, reinvest the sale consideration within six months of asset transfer.
As stated above, section 115F of the Income Tax Act applies to NRIs. For cross-border investors, this section is an effective tool for tax planning in India. This section aims to increase foreign investment in India by offering an easy tax regime to NRIs.
This was all about section 115F of the Income Tax Act, 1961. Moving ahead, let's know the provisions under this section.
Provision of Section 115F
These are the following provisions under section 115F of the Income Tax Act:
Applicability: As stated above, this section only applies to NRIs who generate income from Indian investments.
Taxation Income: Under section 115F of the Income Tax Act, income earned by NRIs from specific Indian investments comes under this tax regime. On such income, the applicable tax rate is 20%. On a gross basis, this tax is payable without any expense or other deduction.
Specified Investments: These are the following investments covered under this section:
Conditions for Application: To get the tax benefits under section 115F of the Income Tax Act, 1961, NRIs need to fulfill the following application conditions:
Have a permanent home in India.
The investment income should not be connected to the business handled by an NRI.
It should not be the income earned from any other sources in India.
These are some of the provisions that come under section 115F of the Income Tax Act. Moving further, let's know the implications under this section.
Implications of Section 115F of the Income Tax Act
For non-resident Indians, section 115F of the Income Tax Act consists of several implications. To provide you with an idea of this, some of the implications are as follows:
Simplified Tax Regime: Through section 115F of the Income Tax Act, as stated above, NRIs can avail the tax benefits on income earned on their investments in India. This section eases the compliance requirements of tax for NRIs in India and provides them with attractive investment options.
Higher Tax Rate: Under section 115F of the Income Tax Act, 20% is the applicable tax rate on NRI. This tax rate is higher than the applicable tax rates that apply to resident Indians. However, due to this higher tax rate, some NRIs avoid investing in India.
Limited Applicability: Section 115F applies to only those NRIs who meet its specific conditions. As a result, it restricts the number of NRIs who can benefit from this section.
The government of India introduced this section to attract foreign investments in India. Lowering the compliance tax requirements of NRIs, this section provides a simple tax regime to them. However, due to its limited implications and higher tax rate, it somehow deters some NRIs from investing in India.
Moving further, let's know what a foreign exchange asset is for NRIs.
What Is a 'Foreign Exchange Asset' for NRIs?
According to the Indian tax law, a foreign asset is an asset with long-term capital gain that is obtained using convertible foreign exchange, such as funds from your foreign remittance channels, FCNR, or NRE account. To give you an example, here is the list of some foreign exchange assets:
Public sector debentures and bonds
Government securities
Listed equity shares of Indian companies
Fixed deposits with the company (only Indian public companies)
Under the income tax rules, the above-mentioned assets should be held for more than 12 or 24 months to be stated as long-term assets.
This was all about 'foreign exchange assets' for NRIs. Moving ahead, let's know the reinvestment options applicable under section 115F of the Income Tax Act.
Reinvestment Options Available Under Section 115F
To get tax benefits under section 115F of the Income Tax Act, 1961, in the following reinvestment options, NRIs should reinvest their total net sale consideration. These are as follows:
Securities of the Central Government
Equity shares of an Indian company
Public deposits with Indian firms
Debentures of Indian public companies
*Note: This section does not include reinvestment of NRIs in Indian real estate, mutual funds, private companies, gold, or ULIPs.
These are some of the reinvestment options available under section 115F of the Income Tax Act. Furthermore, let's know the lock-in period of these assets.
Lock-in Period for Reinvestment
The lock-in period for the reinvestment asset is three years. To maintain the tax exemption under section 115F of the Income Tax Act, the asset purchases from the capital gain should be held for at least three years. In case the newly purchased reinvested asset is transferred or sold before three years of its purchase, then the capital gain you earned becomes completely taxable in the year of which it is sale.
So, as an NRI, if you want to get the tax benefit under section 115F, you should reinvest your capital gains for at least three years. Moving ahead, let's know how tax is exempt under this section.
Calculation of Tax Exemption Under Section 115F
Under section 115F of the Income Tax Act, as per the reinvestment amount, the tax exemption is proportionately allowed on the long-term capital gain. The formula to calculate the exempted capital gain amount is as follows:
Exempt Long-term Capital Gain (LTCG) = (Reinvested Amount / Net Sale Value of Asset) * Total long-term capital gain
Let us better understand the calculation with an example.
Illustration
Suppose Mr. A is an NRI. Two years back, he purchased listed equity shares of an Indian company, and now he sells those shares. The sales value of listed equity shares is INR 6 crore, their original investment cost was INR 3 Crore, and the long-term capital gain earned from them is INR 3 Crore. Additionally, the amount reinvested in the equity shares of an Indian company is INR 4.5 crore. This is all the information. Now using section 115F, calculate the exempted tax amount.
The formula for exempt capital gain under section 115F = (Reinvested amount / Net sale value of assets) * Total long-term capital gain. Putting the values in the formula, i.e.,
Exempt capital gain = (INR 4.5 crore/ INR 6 crore) * INR 3 crore = INR 2.25 crore
Taxable long-term capital gain = Total long-term capital gain - exempt capital gain
Taxable long-term capital gain = INR 3 crore - INR 2.25 crore = INR 75,00,000
Tax saved by the NRI: Assuming the LTCG tax rate is 20% after indexation. So, as an NRI, Mr. A saves INR 45,00,000 tax (INR 2.25 crore * 20%).
This is how, using section 115F of the Income Tax Act, the exempted amount on long-term capital gain is calculated for NRIs. Moving further, let's know the key conditions stated for NRIs under this section.
Key Conditions for NRIs Under Section 115F
In order to get the tax benefits under section 115F of the Income Tax Act, NRIs should fulfill the following conditions:
Reinvest in Specific Assets within Six Months: After the sale of the investment, to get the tax exemption on the capital gain, NRIs should make a reinvestment within six months. Delaying is doing so disqualifies them from applying for tax exemption under section 115F of the Income Tax Act.
Invest in Specific Assets Only: Section 115F is only applicable to specific assets. So, to get the tax benefit as an NRI, make sure the following investment is stated under this section. Additionally, any investment in unlisted shares, property, international assets, or mutual funds is not mentioned under this section.
Lock-in Period of 3 Years: Under section 115F of the Income Tax Act, the reinvested asset should be held maximum of three years after its purchase. Selling the assets before 36 months disallows tax exemption under this section, and on the exempted capital gain amount, tax is imposed.
Maintain NRI Status and Use Foreign Currency Funds: Reinvestment of capital gain should be done using foreign currency, such as through FCNR/ NRE account or foreign remittance. Additionally, during the investment period, it is vital to maintain your NRI status. During the assessment to prove your compliance, you can also provide your FIRC certificate, bank records, and investment documents.
These are the four conditions that NRIs need to fulfill to get tax exemption under section 115F of the Income Tax Act. Moving ahead, let's know the benefits of this section for NRIs.
Key Benefits of Section 115F of the Income Tax Act for NRIs
These are the following key benefits NRIs get under section 115F of the Income Tax Act:
Does not require filing a tax refund
No taxation on long-term capital gains
Legal and permitted under the Income Tax Act, 1961
Perfect option for NRIs seeking to rotate capital from Indian deposits, government bonds, and shares
An efficient reinvestment option to invest in the Indian economy
These are some of the key perks that section 115F of the Income Tax Act offers to NRIs.
Final Thoughts
Although for NRIs, the Indian tax laws are quite complex, however, when strategically used, they can get tax benefits under sections like section 115F of the Income Tax Act, 1961. This section is specifically introduced for NRIs. It is not tax evasion but lawful optimization of tax. This was all about section 115F of the Income Tax Act. Furthermore, if you need more guidance on this section or want to increase your post-tax returns, contact Savetaxs. We have tax experts by our side who can help you in claiming maximum tax benefits and decrease your tax burden in India.
*Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult with either a Chartered Accountant (CA) or a professional Company Secretary (CS) from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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Section 115F of the Income Tax Act is only applicable to non-resident Indians who have a passive income from their Indian investment mentioned under this section. Other than them, this section does not apply to anyone.
Under section 115F of the Income Tax Act, the applicable tax rate is 20% on the long-term capital gain earned from investments in India.
Section 115F of the Income Tax Act is a special tax regime designed for non-resident indian who have income from certain investments made in India. This section was designed to reduce the tax burden of NRIs and increase foreign investment in the Indian market.
To avoid paying tax on selling property in India, under section 54 of the Income Tax Act, 1961, as an NRI, you should reinvest your money in buying another residential property in India, buy government bonds with specific factors, or other assets within the given timeframe, i.e., six months.
You can claim tax exemption on capital gains in India several times till you fulfill the conditions mentioned in different sections, like sections 54, 54F, and 54EC. These sections allow individuals to claim tax exemptions multiple times per transaction.
Section 115F of the Income Tax Act, 1961, is designed for NRIs and offers tax exemption on long-term capital gains when the sale of any investment stated under this section and reinvest the amount in the assets mentioned in this section. The key purpose of this section was to reduce the tax burden of NRIs and increase the foreign investment in India.
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