Synopsis: Section 115H of the Income Tax Act provides concessional tax treatment for NRIs returning to India on income earned from specified foreign exchange assets acquired during their non-resident period. This article highlights who can be eligible, what investments qualify, tax concessions available, how to claim and errors to be avoided.
Returning to India after years abroad can create significant tax implications for NRIs. Once an individual becomes a resident of India, income from investments may generally be taxed under regular resident provisions. However, Section 115H provides a transition benefit by allowing eligible individuals to continue availing concessional tax treatment on certain investments made while they were NRIs.
What is Section 115H?
Section 115H is a special provision in Chapter XII-A of the Income Tax Act, 1961, that provides for an NRI who becomes a resident in future with an opportunity to avail himself of favorable tax treatment on income from certain foreign exchange assets that has acquired during the NRI status.
Who Can Claim Section 115H Benefit?
A taxpayer can claim Section 115H benefits if the following conditions are satisfied:
The provision applies to individuals whose residential status changes from Non-Resident to Resident under Section 6 of the Income Tax Act.
What Are Foreign Exchange Assets Under Section 115H?
Section 115H is applicable only with respect to incomes derived from certain foreign exchange investments. Foreign exchange investments have been defined in Section 115C of Income Tax Act, 1961. It means any specified investments that were acquired, purchased or subscribed by means of convertible foreign exchange when such person was a Non-Resident Indian (NRI). The investments which qualify for Section 115H include:
An important requirement is that the investment should have taken place while the person was an NRI. Any new investments made after returning to India will not qualify for the concessional tax benefit under Section 115H.
How Does Section 115H Reduce Tax Liability?
Under normal taxation provisions, once the NRI becomes a resident, he will no longer get the benefit of the concessional tax provisions that prevailed while he was an NRI. But as per Section 115H, certain taxpayers can avail of concessional tax provisions on income earned out of foreign currency assets acquired during their period as NRIs.
As per this section, taxable income of interest and dividend from these eligible assets will be taxed at 20% (plus surcharge/cess applicable). The long-term capital gains from such assets will be taxed at the concessional rate applicable for LTCG. One must remember that income charged under Chapter XII-A will not be allowed any further deductions under Chapter VI-A, such as Sections 80C or Section 80D.
Also read: How Much Penalty Will You Pay for Missing the ITR Deadline? 12 Penalties Taxpayers Should Not Ignore
How long does the Benefit Continue?
One of the key advantages of Section 115H is that there is no fixed time limit for claiming the benefit. The concessional tax treatment continues until the eligible foreign exchange asset is Transferred or sold, or Converted into money. For example, if an NRI purchased shares of an Indian company while working abroad and continues holding them after returning to India, the Section 115H benefit may continue until those shares are sold.
How to Claim Section 115H?
- Check Residential Status: Confirm whether you have become a resident of India under Section 6 of the Income Tax Act.
- Identify Eligible Investments:
- Ensure that the investments were acquired while you were an NRI.
- Verify that the investments were purchased using convertible foreign exchange.
- Check that the assets qualify as specified foreign exchange assets under Section 115C.
- File Declaration Along With ITR
- Submit a written declaration along with your income tax return for the year in which you become a resident.
- Mention your intention to continue availing the concessional tax benefits under Chapter XII-A.
- Maintain Supporting Documents: Keep relevant records such as investment purchase documents, proof of foreign remittance, demat account statements, deposit certificates, and proof of NRI status at the time of investment.
Documents Returning NRIs Should Keep Ready
- PAN card
- Passport and residency records
- Proof of NRI status
- Investment purchase documents
- Foreign remittance records
- Demat account statements
- Deposit certificates
- Tax Residency Certificate (TRC), if claiming benefits under a Double Taxation Avoidance Agreement (DTAA).
Bottom line
Under Section 115H, NRIs who return to India can continue to avail themselves of concessional tax treatment in respect of income from certain foreign exchange assets held by them during their period as NRIs. This, however, is subject to the condition that the NRIs undertake eligible investments and make a declaration in their income tax returns.
