Section 115H Insights: Smooth Tax Planning for Returning NRIs

An NRI who invested in Indian securities while living abroad upon returning to India, might expect their investment income to be taxed at higher resident rates. 

However, Section 115H allows the concessional tax treatment to continue, just as before. This provision eases the tax burden, ensures continuity in taxation, and makes the transition back to India far smoother, capturing the essence of this Income Tax section.

Quick Synopsis

• Section 115H lets NRIs retain concessional tax rates after becoming residents.
• 20% on investment income, 10% on long-term gains.
• Valid for specified assets only.
• Requires ITR filing with a written declaration.

What Does Section 115H of the Income Tax Act State?

Section 115H of the Income Tax Act provides a special tax benefit to non-resident Indians (NRIs) under Chapter XII-A. It allows them to pay a lower rate of tax on income earned from foreign exchange assets. 

They can continue to enjoy this benefit even after becoming a resident in any financial year. For that, they must file a written statement with the assessing officer while submitting their income tax return (ITR).

Benefits Under Section 115H

As an NRI, you must be aware of the following benefits of Section 115H:

1. NRIs can pay a concessional tax of 20% on income from foreign exchange assets.
2. They can also avail a 10% tax rate on long-term capital gains and 15% on short-term capital gains from specified assets and dividend income.
3. The concessional tax rate continues until the foreign exchange asset is converted into money.
4. The benefit remains valid as long as the person holds the specified asset.
5. The concessional tax treatment continues even if the foreign exchange is transferred from one bank to another.

Provisions Included Under Section 115H

The following are the key provisions included under Section 115H of the Income Tax Act:

1. Residential Status: A person qualifies as a resident if they stay in India for 182 days or more in a year. They can also qualify if they reside in India for at least 365 days during the last 4 years and at least 60 days in the relevant year.
2. Resident but Not Ordinarily Resident (RNOR): A person becomes RNOR if they stayed in India for 2 out of the last 10 years and for at least 730 days in the last 7 years.

In such cases, Section 115H for resident individuals helps them continue enjoying concessional tax benefits.

1. Non-Resident Classification: Persons of Indian origin (PIO) who do not meet the above criteria are treated as non-residents.
2. Foreign Exchange Asset: Any asset bought using convertible foreign exchange.

The assets include government securities, shares in an Indian company, debentures of a public company, deposits with a public company, and other assets notified by the Central Government.

Note: From April 1, 2021, dividend income also qualifies as a specified asset.

1. Condition: To keep the concessional rate, a person must file their return under Section 139 with a written statement.

Process to Avail the Benefits of Section 115H

Step 1: File your ITR in the year you become a resident under Section 139.

Step 2: Submit a written declaration stating that you wish to continue the benefits under Chapter XII-A.

Step 3: Attach documents such as your ITR, proof of asset investment, PAN, and, if available, a Tax Residency Certificate (TRC) or proof of Double Taxation Avoidance Agreement (DTAA) residency.

Step 4: Make sure to file before the deadline, usually 31 July. Missing this date means losing the benefit.

Conditions Under Which Section 115H Can Be Availed

• The NRI must be a resident of a country that has signed a DTAA with India.
• They must provide a valid TRC from the tax authority of their resident country.
• They must have a PAN card for filing returns and availing the benefits.
• The income should come only from specified assets.

Final Words

Section 115H of the Income Tax Act provides NRIs with sustained tax relief when they return as residents. It protects income from specified assets and ensures a smooth financial transition. Other than tax savings, this provision enhances financial planning and promotes investing in Indian assets.