Section 115H of Income Tax Act 1961 deals with the residential status of individuals which categorise them as residents, residents but not ordinarily residents (RNOR), or non-resident Indians (NRI). This classification is based on the number of days stayed in India.
The residential status of a person is not permanent and can change based on their stay in India and the purpose. Specifically, Section 115H apply for individuals who were NRIs in the previous year but have become residents in the current financial year.
In short, if someone was living abroad last year but has now returned to India and qualifies as a resident for tax purposes, Section 115H applies to them.
What is Section 115H of the Income Tax Act 1961?
Under Section 115H of Income Tax Act, non-residents get the special advantages related to taxation through Chapter XII-A. This provision gives them a unique tax concession of 20% on income from foreign exchange asset investments. This special tax rate is exclusive to non residents and does not apply to resident in India.
If a Non-Resident Indian (NRI) transitions to being assessed as a resident Indian during any year, they can still choose for the benefits of Chapter XII-A. For this, they are required to submit a written statement to the assessing officer expressing their desire to continue under the provisions of Chapter XII-A. This option can be choose only for their investment income arising from foreign exchange assets.
In short, if an NRI becomes a resident for tax purposes, He can get the special tax advantages for their foreign exchange asset investments by informing the assessing officer in writing as per Section 115H of Income Tax Act.
Provisions Under Section 115H of Income Tax Act
The provisions of this section are as follow-
- Indian Origin: Individuals of Indian origin can take the benefit of concessional tax rates under Section 115H, even if they are non-residents.
- Foreign exchange assets: Foreign exchange assets include assets acquired in convertible foreign exchange.
- Specified assets: These assets include securities issued by the Central Government, shares, debentures, deposits with Indian public companies, and other assets specified by the Central Government.
- Written expression: If a non resident files his return u/s 139 and expresses his choice in writing to be covered under Section 115H of Income Tax Act, he can get concessional tax rates on their assets.
- Dividend Income: Dividend income has been included in asset specification since April 1, 2021.
- Resident status: Resident status is determined by below conditions:
- Heis staying in India for 182 days or more in the relevant previous year or
- He is staying for 365 days or more in the 4 immediately preceding years and at least 60 days in the relevant previous year.
- RNOR: Resident but not ordinarily resident (RNOR) status is determined by below conditions:
- He is a resident for 2 years out of the preceding 10 years or
- He is staying in India for 730 days or more in the preceding 7 years.
- PIO: A Person of Indian Origin (PIO) who is not falling under the resident or RNOR categories is considered a non resident.
Conditions for Availing the Benefits u/s 115H
NRIs can enjoy benefits under Section 115H by meeting the following conditions –
- He must be resident in a country with which India has a Double Taxation Avoidance Agreement (DTAA).
- He must furnish a Tax Residency Certificate (TRC) issued by the tax authority of the country in which he is resident.
- He should have an Indian PAN.
- He has earned the Income from specified assets as mentioned above.
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Benefit Under Section 115H of Income Tax Act
By giving a written statement to the assessing officer along with his Income Tax Return, NRI can be assessed as residents under Section 115H of Income Tax Act and can get following benefits –
- He can get tax concessions on the tax payable @20% for the income from investment in foreign exchange assets.
- He can also get a 10% tax concession on Long-term capital gains. However, this benefit is available only for specified assets and dividend income.
- He can get the benefit of a concessional tax rate until he convert the foreign exchange asset into money.
- If the assessee owns a specified asset, he can get the benefit of discounted tax rates. These rates are applicable even if they transfer their convertible foreign exchange from one bank to another bank.
Conclusion
Section 115H of Income Tax Act provides significant advantages to NRIs which enable them to streamline tax responsibilities and handle financial matters effectively. By knowing about the extent, conditions, and benefits of this section, NRIs can make better decisions to maximize their tax benefits.
Frequently Asked Questions (FAQ)
A non resident is defined as a person who is not residing in India in the Income Tax Act. If an individual has stayed at least 60 days in India during the financial year and a total of 365 days in the preceding 4 years, he is considered a resident for tax purposes.
The specified assets under Section 115H of Income Tax Act 1961 include:
- Securities issued by the Central Government as defined by the Public Department Act 1944.
- Shares of an Indian company (Private or Public).
- Debentures of an Indian public company.
- Deposits with an Indian public company.
- Any other asset of a similar nature which has been specified by the Central Government covered u/s 115H.