Section 115H of Income Tax Act: Benefits & Provisions

Do you know that having an understanding of the specific tax provisions can offer you several tax benefits, especially to those who have unique circumstances? In this, one such tax provision is section 115H. It is for people who were non-resident Indians (NRIs) in the previous year but became residents in the current financial year. In India, residential status is one of the essential factors that help the income tax officials to determine the tax liability of an individual. Considering this, under the provisions of the Income Tax Act, 1961, there are three types of residential status, i.e., resident, non-resident, and resident but not ordinarily resident, depending on the number of days a person stayed in India in a financial year. However, from year to year, the residential status of a person keeps changing. Depending on the residential status, an individual needs to fulfill his/her tax liability in India. Want to know what this section 115H is and how it benefits NRIs? Then you are at the right place. This blog consists of all the information related to section 115H, from its meaning to benefits and provisions. So, let's begin reading.

What Is Section 115H of Income Tax Act?

As mentioned above, section 115H of the Income Tax Act 1961 is for individuals who are non-Indian residents (NRIs) in the previous year and have now become Indian residents in the current fiscal year. Under Chapter XII-A, this section of the Income Tax Act offers unique benefits to NRIs. It allows them to enjoy tax concessions on the income generated from the investments made in foreign exchange assets. It is a privilege that is not provided to Indian residents.

Under this section, 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 tax benefits, you need to submit a written statement to the assessing officer. Additionally, the letter should clearly mention your intention to follow the application of Chapter XII-A provisions to your money generated from foreign exchange assets.

Furthermore, the key benefits of this section lie in its capability to provide a special rate of tax on investment income, which is generally 20%. It is less than the standard tax rates payable by Indian residents. Through this, the Indian government aims to reward and encourage foreign exchange investments made by NRIs. Additionally, it also aims to promote the participation of NRIs in the Indian economy.

This was all about section 115H of the Income Tax Act. Moving ahead, let's know the benefits of this section for NRIs.

What Are the Benefits of Section 115H of the Income Tax Act for NRIs?

Under section 115H of the Income Tax Act, 1961, when NRIs become resident Indians, they can claim the following benefits:

• Tax Rate Concession on Investment Income: From income accrued from foreign exchange assets investment, NRIs can get a 20% tax benefit. Compared to standard rates applicable to Indian residents, it is a significant concession tax rate that NRIs receive.
• Sustained Tax Rate Concession: Under section 115H of the Income Tax Act, the tax rates concession is applicable continuously till the foreign exchange asset is converted into money. This allows non-resident Indians to experience favourable tax treatment over the complete holding time of their foreign investment.
• Tax Benefits on Long-Term Capital Gains: On long-term capital gains, NRIs can claim up to a 10% tax concession. This tax concession is specifically available on specified assets and income from dividends.
• Financial Planning: This tax provision helps NRIs in better planning of their finances. Knowing that after becoming a resident Indian, on their investment, they do not need to pay higher taxes, helps them in making an informed investment decision.
• Encourage Investment: Section 115H of the Income Tax Act for NRIs also serves as an encouragement to invest their money in Indian assets, knowing that after becoming Indian residents, they can enjoy the tax rate concession.

These are the benefits that section 115H of the Income Tax Act offers to NRIs. Moving further, let's know the provisions under this section.

Provision of Section 115H of Income Tax Act

Section 115H consists of several tax provisions that provide benefits of tax rate concession to people of Indian origin who are NRIs. Below-mentioned are the key provisions that come under this section:

• Residential Status Criteria: An individual is considered a resident Indian if he/she fulfills any of the one conditions:
  • An individual is considered an Indian resident if he/she stays for 182 days or more in Indian in a financial year.
  • If a person lived in India for 365 days or more in the four years following the last fiscal year, or 60 days or more in the relevant last financial year.
• Resident but Not Ordinarily Resident (RNOR): Under section 115H, a person is eligible for RNOR status if:
  • Out of the 10 preceding years, if a person was an Indian resident for at least two years.
  • In the 7 preceding years, if an individual has lived in India for 730 days or more.
• Non-Resident Status for PIO: A person of Indian Origin or PIO is considered an NRI if they do not fall under the RNOR and resident category.
• Eligibility for Concessional Tax Rate: Here is the eligibility criterion for the concessional tax rate:
  • Under section 115H of the Income Tax Act, an individual who belongs to an Indian origin can avail the benefits of a concessional tax rate.
  • If a person of Indian origin is not an Indian resident, i.e., PIO or OCI, for the purpose of this section, he/she is considered as an NRI.
• Definition of Foreign Exchange Asset: A foreign exchange asset means any asset acquired by the taxpayer for using convertible foreign exchange.
• Specified Assets: These are assets eligible for tax rate concession. However, once a non-resident Indian becomes an Indian resident, the income benefits from shareholdings in Indian firms or companies cease. Specified assets include:
  • Shares of an Indian company
  • Under the 1944 Public Debt Act, securities issued by the Indian Central Government
  • Deposits with a public company in India
  • Debentures of a public company in India
  • Any asset mentioned by the Central Government
• Exclusion of Benefits After Becoming an Indian Resident: Once a non-resident becomes an Indian resident, he/she cannot enjoy the benefits of income generated from shareholding in a company in India.
• Concessional Rates and Return Filing: If NRIs, under section 139, fulfill their income tax returns and share their willingness in writing to be under section 115H, they can receive benefits from tax rate concession.
• Inclusion of Dividend Income: Since 1 April 2021, dividend income has also become part of the specified assets, making it eligible for tax rate concession under section 115H.

These are some of the provisions that come under section 115H of the Income Tax Act. Moving further, let's know the conditions of availing these benefits.

Conditions for Availing the Benefits of Section 115H of the Income Tax Act

If a non-resident Indian meets the following conditions, he/she can avail the benefits of section 115H of the Income Tax Act:

• 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 is used as proof of their tax residency status, which further makes they eligible to receive benefits under section 115H.
• Possession of Indian Permanent Account Number (PAN): NRIs should 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 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.

Key Highlights of Section 115H of the Income Tax Act

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

• Under section 115H, NRIs enjoy around 20% tax rate concession on income generated from foreign exchange assets.
• According to Chapter XII-A, by submitting a written statement to the assessing officer, NRIs can enjoy the benefits under section 115H even after becoming residents in India.
• Concessional tax rates on only applicable to income generated from specified assets.
• From specified assets, non-resident Indians can enjoy up to 10% tax concession on their long-term capital gains.
• Non-resident Indians can enjoy the concessional tax rates until their foreign exchange assets are converted into money.
• NRIs should be residents of a country with which India has signed the DTAA agreement.
• NRIs also need to submit a tax residency certificate issued by the tax authority of their current resident country.
• To enjoy the tax benefits under section 115H of the Income Tax Act and file an income tax return in India, it is important for an NRI to have a PAN card.

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 consists of the tips that increase the tax benefits of NRIs under 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: Under Chapter XII-A to enjoy the benefits constantly, certify that you provide a written statement to the assessing officer when your non-resident status changes to resident status in India.
• Maintain Foreign Exchange Assets: As the tax rates are concessional only to specified assets, keep your investments in foreign exchange assets.
• Under Section 139, File Your ITR: In India, always file your income tax return under Section 139. Additionally, clearly mention your choice for continuing the benefits under Chapter XII-A.
• Research Criteria for Residential Status: Have an understanding of the residential status criteria in India, and to increase the section 115H benefits, certify that you meet the conditions.
• Invest in Specified Assets: To get the concessional tax rates, invest your money in specified assets such as deposits with public companies in India, securities by the Indian central government, and shares in Indian companies.
• Have a Tax Residency Certificate (TRC): Certify that you have a tax residency certificate by your side from the tax officials of the country in which you reside currently. It serves as evidence to be eligible to get the tax benefits.
• Have an updated Permanent Account Number: Obtaining and maintaining a permanent account number (PAN) is vital to avail the tax perks and enjoy the smooth filing of income tax return in India.
• Use Double Taxation Avoidance Agreement (DTAA): If you are a resident in a country with which India has signed the Double Taxation Avoidance Agreement (DTAA), use it to optimise tax benefits and avoid paying tax on the same income twice.
• Stay Updated with Changes in Tax Laws: Keep yourself updated with the changes made in the rules and regulations of India. It helps you in making correct decisions and optimising the benefits that are available under section 115H.
• Consider Consulting: To get tips and proper guidance, increase the benefits of section 115H, consider taking the help of a professional tax expert, and manage your tax obligations 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 several tax advantages to non-resident Indians on the income they earn from specified assets. However, to enjoy the benefits after becoming a resident of India, it is vital to understand the conditions and provisions mentioned in section 115H of the Income Tax Act. Here, the complete blog was based on section 115H, its benefits, and provisions. Hope after reading this post, all your doubts about this section get cleared. If you still have any confusion or want to know more about this section, the best way is to get advice from a tax expert like Savetaxs. We have a team of professionals by our side who have years of experience in taxation and who can assist you with tax-related matters. So, why struggle when you have the best options by your side? Contact us and get the best guidance on your tax-related matter for sure.