A person's residential status under the Income Tax Act, 1961, can be one of three types — Resident, Non-Resident Indian (NRI), or Resident but Not Ordinarily Resident (RNOR).
This status is not fixed and is based on how many days the person has stayed in India during a particular financial year. It can change from year to year depending on stay duration and the reason for being in India.
Section 115H specifically deals with individuals who were NRIs in the previous year but have become residents in the current financial year. It allows them to continue receiving certain tax benefits related to foreign exchange asset investments. Let’s look at how this section works and who can benefit from it.
Tax laws can often seem complex and overwhelming, but understanding specific sections can greatly benefit taxpayers, especially those with unique circumstances. One such provision is Section 115H, which offers significant relief to non-resident Indians (NRIs) upon returning to India. This article delves deep into Section 115H of the Income Tax Act, explaining its implications, benefits, and relevance in the context of financial planning.
What is Section 115H of the Income Tax Act?
Section 115H provides a way for NRIs who have become residents to continue enjoying the tax benefits they had earlier. Under Chapter XII-A, NRIs can pay a concessional tax of 20% on income earned from investments made using foreign exchange. These lower tax rates are not normally available to Indian residents.
However, when an NRI becomes a resident in India for a given year, they can choose to keep receiving these benefits by submitting a written declaration to the assessing officer along with their income tax return. This declaration must mention their intention to continue availing the provisions of Chapter XII-A. These benefits only apply to income earned from eligible foreign exchange assets, such as specific government securities, shares, or deposits made using foreign currency.
Key features of Section 115H of the Income Tax Act
- Continuation of concessional tax rates: Under Section 115H, NRIs who have returned to India can continue to avail themselves of the concessional tax rates on investment income, which includes dividends, interest, and long-term capital gains, for a specified period.
- Eligibility criteria: To benefit from this provision, an individual must have been an NRI and should have made the investment while being an NRI. Upon returning to India, they should notify the assessing officer in the prescribed manner.
- Time period: The concessional tax rates can be availed for the financial year in which the individual becomes a resident and for subsequent years until such income is derived from the investment made while being an NRI.
Key provisions under Section 115H of the Income Tax Act
Below is a detailed explanation of the provisions included under Section 115H:
Any person of Indian origin (whose parents or grandparents are/were Indian citizens) may qualify for Section 115H benefits. However, this depends on their residential status. If they are not residents, they will be treated as non-residents.
A foreign exchange asset is an investment made using convertible foreign currency. This includes a variety of asset types acquired by NRIs while abroad.
Specified assets, as listed under Section 115C, include:
Securities issued by the Central Government under the Public Debt Act, 1944.
Shares in Indian companies.
Debentures issued by public Indian companies.
Deposits with public Indian companies.
Any other asset notified by the Central Government.
Once a non-resident becomes a resident Indian, they can no longer enjoy concessional tax on income from Indian company shares. However, they can still receive benefits on other specified assets.
From 1 April 2021 onwards, dividend income has been included under the scope of specified assets.
A person qualifies as a resident if they:
Stay in India for 182 days or more in a financial year, or
Stay in India for 60 days in the relevant year and 365 days in the last four years.
A person becomes an RNOR if they:
Were residents for at least 2 years in the last 10 years, and
Stayed in India for 730 days or more in the last 7 years.
If someone does not meet the conditions to be a resident or RNOR, they are treated as a non-resident for tax purposes.
Since residential status is based on past stay duration, it can change each year. A person could be a resident one year and a non-resident the next.
Section 115H allows returning NRIs to keep enjoying lower tax rates if they file their tax returns correctly and submit a written declaration. These benefits are available as long as the individual continues to hold specified foreign assets and follows the required procedure.
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How does Section 115H Work?
To understand how Section 115H works, consider the following scenario:
- An NRI invests in Indian securities while living abroad.
- After a few years, the NRI returns to India and becomes a resident.
- The income generated from the previously made investments continues to be taxed at concessional rates, thanks to Section 115H, instead of the regular tax rates applicable to residents.
This continuation of tax benefits can significantly reduce the tax burden on returning NRIs, ensuring that their transition back to India is financially smoother.
Benefits of Section 115H of Income Tax Act
If a former NRI submits a written statement to the assessing officer along with their tax return in the year they become a resident, they can enjoy the following benefits:
A 20% concessional tax rate on income from investments made using foreign exchange assets.
A 10% concessional rate on long-term capital gains from specified assets and dividend income.
They can enjoy these tax benefits until the asset is converted into money.
The benefits apply even if they move their convertible foreign exchange between banks.
These tax advantages remain available as long as they continue to own specified assets and meet the relevant conditions under the Act.
For example:
Imagine Mr. Rao, an NRI, invested in Indian mutual funds and fixed deposits while working abroad. After five years, he decides to return to India. Upon his return, Mr. Rao's investment income from these mutual funds and fixed deposits would typically be subject to higher tax rates applicable to residents. However, by invoking Section 115H, Mr. Rao can continue to enjoy the concessional tax rates that were applicable while he was an NRI, thereby reducing his tax liability.
Relevance in financial planning
Understanding and utilizing Section 115H can be a crucial aspect of financial planning for NRIs considering a return to India. It is essential for these individuals to be aware of the eligibility criteria and the procedural requirements to avail of this benefit. Proper planning and timely notification to the assessing officer can lead to substantial tax savings.
In the context of broader financial planning, it is also advisable for returning NRIs to evaluate other financial products that can complement their investment strategy. For instance, exploring tax-saving fixed deposits, National Pension System (NPS), and mutual funds designed for tax efficiency can provide additional avenues for optimising their tax liabilities.
As you explore various investment options, consider how home ownership fits into your financial portfolio. A home loan from Bajaj Finserv not only helps you secure property but also provides additional tax benefits under Section 80C and 24(b). Check your eligibility today. You may already be eligible, find out by entering your mobile number and OTP.
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Integrating home loans into financial planning
For NRIs returning to India and planning to settle down, considering a home loan can be a significant part of their financial strategy. Home loans offer tax benefits under Section 80C for the principal repayment and Section 24(b) for the interest payment, which can be beneficial in reducing taxable income.
Conclusion
Section 115H of the Income Tax Act serves as a valuable provision for NRIs returning to India, allowing them to continue benefiting from concessional tax rates on their investment income. This provision not only aids in tax savings but also facilitates better financial planning and encourages investment in Indian assets.
By integrating other financial products such as tax-saving fixed deposits, National Pension System (NPS), and mutual funds into their investment strategy, returning NRIs can optimize their tax liabilities further. Additionally, considering a home loan can provide additional financial leverage and tax benefits, aiding in a smoother transition back to India.
Ready to take the next step in your financial journey? Bajaj Finserv offers comprehensive home loan solutions with approval in just 48 hours* and no foreclosure charges for individual floating-rate borrowers. Start your home-buying journey – check your loan eligibility with Bajaj Finserv. You may already be eligible, find out by entering your mobile number and OTP.
