Section 115H Of Income Tax Act: Benefits & Provisions

Do you know that understanding specific tax provisions can offer several tax benefits, especially for those with unique circumstances? One such tax provision is Section 115H. It is for individuals who were non-resident Indians (NRIs) in the previous year but became residents in the current financial year.

In India, residential status is a key factor in determining an individual's tax liability. Under the Income Tax Act, 1961, there are three types of residential status: resident, non-resident, and resident but not ordinarily resident (RNOR), depending on the number of days a person stayed in India in a financial year.

A person’s residential status may change from year to year. Depending on this status, an individual must fulfill their tax obligations in India. Want to know what Section 115H is and how it benefits NRIs? You are at the right place. This blog covers all information related to Section 115H—from its meaning to benefits and provisions. Let’s dive in.

Key Highlights of Section 115H of the Income Tax Act

The following are the key highlights of Section 115H of the Income Tax Act:

• NRIs enjoy a 20% tax rate concession on income from foreign exchange assets.
• By submitting a written statement, NRIs can retain benefits after becoming Indian residents.
• Concessional rates apply only to specified assets acquired using foreign exchange.
• Up to 10% tax concession on long-term capital gains from specified assets.
• Benefits continue until foreign exchange assets are converted into money.
• DTAA benefits are optional but can be used alongside Section 115H.
• PAN is mandatory to enjoy tax perks and file ITR.

These are the key highlights of section 115H of the Income Tax Act. Moving further, being an NRI, do you also want to enjoy the benefits under this section? Well then, the next section is for you, as it contains tips to increase the tax benefits for NRIs under this section.

What Is Section 115H of Income Tax Act?

Section 115H of the Income Tax Act 1961 is for individuals who were NRIs in the previous year and have now become Indian residents in the current fiscal year.

Under Chapter XII-A, this section offers unique benefits to NRIs. It allows them to enjoy tax concessions on income generated from investments in foreign exchange assets—a privilege not available to regular Indian residents.

If your residential status changed from NRI to an Indian resident in an accounting year, you can continue to enjoy the tax benefits mentioned under Chapter XII-A. To avail these benefits, you must submit a written statement to the assessing officer, clearly stating your intention to apply Chapter XII-A provisions to income from foreign exchange assets.

A key benefit of this section is the special tax rate on investment income, generally 20%, which is lower than the standard rates applicable to Indian residents. This provision encourages NRIs to invest in India and rewards them for foreign exchange investments.

Benefits of Section 115H for NRIs

When NRIs become resident Indians, they can claim several benefits under Section 115H:

1. Tax Rate Concession on Investment Income

NRIs can get a 20% tax rate on income from foreign exchange asset investments, significantly lower than standard rates for residents.

2. Sustained Tax Rate Concession

The concessional tax rate applies until the foreign exchange asset is converted into money, allowing favorable tax treatment throughout the holding period.

3. Tax Benefits on Long-Term Capital Gains

NRIs can claim a tax concession of up to 10% on long-term capital gains from specified foreign exchange assets.

4. Financial Planning

This provision helps NRIs plan their finances better, knowing they do not have to pay higher taxes after becoming residents.

5. Encourage Investment

It motivates NRIs to invest in Indian assets, with the reassurance of tax rate concessions after becoming residents.

Provision of Section 115H

Section 115H contains several provisions offering concessional tax rates to NRIs. Key provisions include:

Residential Status Criteria:

An individual is considered an Indian resident if they meet either of the following:

• Stay 182 days or more in India in a financial year.
• Lived in India for 365 days or more in the four preceding years and 60 days or more in the relevant year (with exceptions for citizens leaving for employment or visiting India).

Resident but Not Ordinarily Resident (RNOR):

• An Indian resident for at least 2 of the 10 preceding years.
• Lived in India for 730 days or more in the seven preceding years.

Non-Resident Status for PIO:

A person of Indian origin (PIO) is considered an NRI if they do not qualify as an RNOR or resident. (PIO/OCI labels don’t determine tax residency; only stay criteria do.)

Eligibility for Concessional Tax Rate:

• Applies to individuals of Indian origin.
• Non-residents (PIO or OCI) are treated as NRIs based on residency criteria.

Foreign Exchange Asset:

Any asset acquired using convertible foreign exchange while being a non-resident.

Specified Assets:

Eligible assets include:

• Shares of an Indian company
• Debentures of a public Indian company
• Deposits with a public Indian company
• Securities issued by the Indian Central Government
• Other assets notified by the Central Government

Exclusion of Benefits:

Once a non-resident becomes an Indian resident, benefits apply only to foreign exchange assets acquired as an NRI, not other shareholding income.

Concessional Rates and Return Filing:

NRIs filing under Section 139 can enjoy tax concessions if they submit a written statement requesting applicability of Section 115H.

Inclusion of Dividend Income:

Dividend income from specified foreign exchange assets is eligible for concessional tax treatment.

Conditions for Availing Section 115H Benefits

NRIs must fulfill certain conditions to claim Section 115H benefits:

• Residency in a Double Taxation Avoidance Agreement (DTAA) Signatory Nation: A non-resident Indian should reside in the country with which India has signed the Double Taxation Avoidance Agreement (DTAA).
• Furnishing Tax Residency Certificate (TRC): NRIs should provide a tax residency certificate (TRC) from the tax authority of the country in which they currently reside. TRC is a vital document, as it serves as proof of their tax residency status, which further makes them eligible to receive benefits under section 115H.
• Possession of Indian Permanent Account Number (PAN): NRIs must have an Indian Permanent Account Number (PAN). Having a PAN card is vital for enjoying the tax benefits and filing ITR in India.
• Income from Specified Assets: Income earned by non-resident Indians from specified assets is also applicable to receive benefits under section 115H of the Income Tax Act. These are as follows:
  • Equity-oriented units of mutual funds
  • Indian bank deposits made in foreign currency
  • Indian company shares are listed on the stock exchange
  • Debt securities issued by Indian companies

These are the conditions that an NRI needs to fulfill to enjoy tax benefits under Section 115H. Furthermore, let's know the key highlights of this section.

Tips to Increase Section 115H Benefits

Here are the tips that you can follow as a non-resident Indian to increase the benefits of section 115H of the Income Tax Act:

• Provide a Written Statement: Certify your intent under Chapter XII-A when your status changes.
• Maintain Foreign Exchange Assets: Concessional tax rates apply only to specified assets.
• File Your ITR Under Section 139: Clearly mention your choice to continue Chapter XII-A benefits.
• Research Residential Status Criteria: Ensure compliance with Indian residency rules.
• Invest in Specified Assets: Such as public company deposits, government securities, and shares acquired using foreign exchange.
• Have a Tax Residency Certificate (TRC): Useful if using DTAA benefits.
• Maintain PAN Card: Vital for claiming tax benefits and smooth filing.
• Use DTAA (Optional): To optimize tax benefits if residing in a DTAA country.
• Stay Updated on Tax Laws: Ensures correct decisions and maximum benefits.
• Consult Professionals: Seek expert guidance to manage taxes and investments effectively.

These are the tips that, as a non-resident Indian, you can use under section 115H of the Income Tax Act after becoming an Indian resident.

Final Thoughts

Section 115H of the Income Tax Act, 1961, offers tax advantages to NRIs on income earned from specified assets. To enjoy these benefits after becoming a resident, it is crucial to understand the conditions and provisions of Section 115H.

This blog provided a complete overview of Section 115H, its benefits, and provisions. If you still have questions or need guidance, consulting a tax expert like Savetaxs is the best way forward. Our team of experienced professionals can assist with all your tax-related matters. Contact us for expert advice and to maximize your tax benefits confidently.