Under the provisions of the Income Tax Act, 1961, an individual can have one of three residential statuses — Resident, Non-Resident Indian (NRI), or Resident but Not Ordinarily Resident (RNOR).
Residential status is determined based on the number of days a person stays in India during a financial year. However, this status is not fixed and can change depending on the purpose and duration of stay.
Section 115H applies to individuals who were NRIs in the previous year but have become residents in the current financial year.
What is Section 115H of Income Tax Act?
NRIs can claim certain benefits under Chapter XII-A of the Income Tax Act, including a concessional 20% tax rate on income from foreign exchange asset investments. This benefit is not available to residents by default.
If an NRI becomes a resident in any year, they can opt to continue receiving these benefits by submitting a written declaration to the Assessing Officer along with their income tax return. This concession applies only to investment income from foreign exchange assets.
Benefits under Section 115H of Income Tax Act
If a non-resident furnishes the required declaration with their return for the year in which they become a resident, they can continue to enjoy the following:
- Concession of 20% tax on investment income from foreign exchange assets.
- Concession of 10% tax on specified long-term capital gains and dividend income.
- Concessional rates applicable until the foreign exchange asset is converted into money.
- Concessional tax even if convertible foreign exchange is transferred from one bank to another, provided the specified asset is held.
Provisions of Section 115H of Income Tax Act
- Any person of Indian origin (with parents or grandparents being Indian) can claim the benefits of Section 115H.
- Foreign exchange asset means any asset acquired using convertible foreign exchange.
- Specified assets (as defined in Section 115C) include:
- Securities issued by the Central Government (Public Debt Act, 1944).
- Shares of an Indian company.
- Debentures issued by a public Indian company.
- Deposits with a public Indian company.
- Any other asset notified by the Central Government.
- Securities issued by the Central Government (Public Debt Act, 1944).
- Once an NRI becomes a resident, benefits are not available on income from shareholdings in an Indian company, except as provided by law.
- Dividend income was included in the definition of specified assets from 1 April 2021.
- To retain benefits, the individual must file their return under Section 139 and submit the written declaration.
Residential Status Rules
A person is considered Resident if:
- They stay in India for 182 days or more in the relevant year, OR
- They stay in India for 365 days or more during the four preceding years and at least 60 days in the relevant year.
A person is RNOR if:
- They have been a resident for at least 2 out of the preceding 10 years, AND
- They have stayed in India for 730 days or more in the preceding 7 years.
If neither resident nor RNOR conditions are met, the person is treated as a Non-Resident.
Since residential status depends on the period of stay, it can change each year. For example, a resident in FY 2022–23 may become a non-resident in FY 2023–24, or vice versa.
Section 115H enables NRIs who become residents to continue enjoying concessional tax benefits, provided they file returns on time and comply with the declaration requirement.
FAQs on Section 115H of Income Tax Act
1. Who can claim benefits under Section 115H?
Any person who was an NRI in the previous year but becomes a resident in the current year and holds foreign exchange assets can claim benefits, provided they file the necessary declaration.
2. What is the main benefit of Section 115H?
The main benefit is the continuation of concessional tax rates on investment income and specified long-term capital gains from foreign exchange assets, even after becoming a resident.
3. Is dividend income covered under Section 115H?
Yes. Since 1 April 2021, dividend income from specified assets is eligible for concessional tax rates under Section 115H.
4. Can I claim Section 115H benefits without filing a declaration?
No. A written declaration to the Assessing Officer along with the income tax return is mandatory to claim benefits.
5. What happens if I sell my foreign exchange asset?
The concessional rate benefit continues until the asset is converted into money. Once sold, the benefit ceases for that asset.
6. Is Section 115H applicable to all residents?
No. It applies only to individuals who were NRIs in the previous year and have become residents in the current year.
7. Can an RNOR claim Section 115H benefits?
Yes. If the individual meets the conditions and files the required declaration, RNORs can also avail benefits under Section 115H.
8. Are the benefits under Section 115H automatic?
No. The taxpayer must explicitly opt for them through a written statement when filing their tax return for the relevant year.
