Section 115H Of Income Tax Act: Benefits & Provisions

According to the Income Tax Act 1961 provisions, a person can have one of the three residential statuses. They could either be a resident, non-resident India (NRI) or a resident but not ordinarily resident (RNOR). 

A person’s residential status is determined by number of days he/she resides in India. However, this doesn’t mean that the residential status is permanent. It can change depending on the reason for staying in India and the days of stay. 

Section 115H applies to people who were NRIs in the previous year but have become Indian residents in the current financial year. Let's understand the provisions of this section.

What Is Section 115H Of Income Tax Act? 

Non-residents can avail certain privileges under Chapter XII-A of the Income Tax Act. This allows them a special tax concession of 20% on their income from foreign exchange asset investments. However, this special tax rate does not apply to resident Indians.

Therefore, if an NRI becomes assessable as a resident Indian in any year, they can choose to avail of the benefits of Chapter XII-A. For this, they have to furnish a statement in writing to the assessing officer. The statement should mention that they want the provisions of Chapter XII-A to continue applying to them. However, this shall only apply to their investment income derived from foreign exchange assets.

Benefits Under Section 115H Of Income Tax Act 

If a non-resident furnishes in writing to the assessing officer of their intention, along with their income tax return of the relevant year for which they are assessable as a resident, they can continue to avail  following benefits:

• They will continue to receive concessions for the 20% tax payable on investment income from foreign exchange assets.
• They can also continue to avail 10% tax concession for long-term capital gains. However, this concession is available only for specified assets and dividend income.
• They can also avail the benefits of a concessional levy until they convert the foreign exchange asset into money.
• The assessee can enjoy concession tax rates if they own the specified asset. This applies even if they transfer their convertible foreign exchange from one bank to another.

Provisions Of Section 115H Of Income Tax Act

The following sections discuss in detail the provisions of Section 115H:

• Any person who is of Indian origin, i.e. their parents or grandparents are/were Indian, can avail of the benefits of Section 115H. However, despite being of Indian origin, if the person doesn’t have resident status, then he/she becomes a non-resident under this act.
• Foreign exchange asset means any asset that the assessee has acquired in convertible foreign exchange. 
• The specified asset refers to every asset mentioned below. However, once NRI acquires the status of a resident Indian, he/she cannot enjoy this privilege on their income from shareholdings in an Indian company.
• The definition of specified assets is given in section 115C, and they refer to the following:
  • Any security issued by the Central Government and defined by the Public Debt Act 1944.
  • Shares in an Indian company.
  • Debentures that a public Indian company has issued.
  • Deposits with a public Indian company.
  • If the Central Government specifies any other asset of any nature on this behalf, they shall also be considered for the purpose of Section 115C. 
• If a non-resident successfully manages to furnish their return under Section 139 and convey their choice in writing, they will be able to enjoy concessional rates on all the abovementioned assets except for shares in an Indian company. 
• Dividend income was previously not included in the asset specification, but since 01.04.2021, it has been included.
• A person gets the residential status if he/she satisfies any of the following two conditions:
  • He/she has stayed in India for 182 days or more in the relevant previous year.
  • In the four immediately preceding years, he/she stayed in India for 365 days or more. The person must also have stayed for at least 60 days in India for the relevant previous year. 
• A person becomes an RNOR if they satisfy both of the following conditions:
  • He/she has upheld the status of a resident in India for at least 2 years out of the immediately preceding 10 previous years. 
  • He/she has stayed in India for at least 730 days or more in the preceding seven previous years. 
• If a person of Indian origin (PIO) does not satisfy any criteria for either a resident or resident not ordinarily resident, they become a non-resident for income tax calculations.
• Since the residential status of a person is determined based on their period of stay in the previous years, it can keep on changing every year. For instance, a person who was a resident in the previous year, 2022-2023, he/she can become a non-resident in the previous year, 2023-2024 or vice versa. 

Section 115H allows non-resident taxpayers to continue enjoying the privileges of concessional tax even after they become a resident Indian in any subsequent year. If they timely furnish their tax returns, they can continue to avail of the tax benefits under this section as if they were non-resident Indians.

However, taxpayers must remember to disclose their income and file their returns under Section 139 for that relevant year for which their status has become a resident Indian.