Benefits Under Section 115H of Income Tax Act to NRI’s

The decision to return to India after residing abroad can be exciting yet come with financial considerations. One of the key concerns for Non-Resident Indians (NRIs) is the potential change in tax implications. Section 115H of the Income Tax Act, 1961, offers a welcome respite for these returning NRIs, providing them with a continuation of concessional tax rates on specific income sources.

This blog post delves deep into Section 115H, exploring its benefits, eligibility criteria, and crucial aspects for NRIs planning to return to India.

Understanding Section 115H

Section 115H acts as a bridge between an NRI’s pre-residency and post-residency tax status. It allows NRIs who become resident Indians to continue enjoying the benefits of lower tax rates on income generated from specific foreign exchange assets held during their non-resident period. This essentially provides a smoother transition in terms of tax liabilities for NRIs returning home.

Key Benefits of Section 115H for NRIs

Here’s a breakdown of the significant tax advantages NRIs can avail of under Section 115H:

• Reduced Tax on Investment Income: NRIs can benefit from a concessional tax rate of 20% on income generated from foreign exchange assets like interest on FCNR deposits, dividends from shares held in foreign companies, and rental income from immovable property situated outside India. This is significantly lower than the regular tax rates applicable to resident Indians on such income.
• Lower Tax on Long-Term Capital Gains: Section 115H offers a 10% concession on long-term capital gains arising from the sale of specified foreign exchange assets. These assets typically include shares or stocks in foreign companies, units of mutual funds invested in overseas markets, and bonds issued by foreign governments or companies.
• Extended Tax Benefit: The concessional tax rates under Section 115H are not time-bound. NRIs can continue to enjoy these benefits until they convert the foreign exchange assets into rupees or dispose of them through means other than sale (e.g., gifting).

Eligibility for Section 115H Benefits

Not all returning NRIs can automatically avail of the benefits under Section 115H. Here are the eligibility requirements:

• Resident Status: The NRI must have become a resident Indian in the current assessment year.
• Double Taxation Avoidance Agreement (DTAA): During their NRI period, the individual must have been a resident in a country with which India has a DTAA. These agreements aim to eliminate double taxation on income earned in both countries.
• Tax Residency Certificate (TRC): NRIs claiming benefits under Section 115H need to furnish a TRC issued by the tax authorities of their previous resident country. This certificate confirms their residency status in that country.
• Income Tax Return Filing: Timely filing of the income tax return under Section 139 for the year they become resident in India is crucial. Here, the NRI must specifically claim the benefits under Section 115H.

Important Considerations for NRIs

While Section 115H offers significant tax advantages, there are certain aspects NRIs should be aware of:

• Specified Assets: The concessional tax rates apply only to income generated from specific foreign exchange assets held during the NRI period. Income from assets acquired after becoming a resident Indian wouldn’t qualify.
• Shareholding in Indian Companies: Once the NRI becomes a resident Indian, income earned from shares held in an Indian company wouldn’t be eligible for benefits under Section 115H. These dividends would be taxed at the regular rates applicable to resident Indians.
• Record Keeping: Maintaining proper records of foreign exchange assets, income earned from them, and the TRC is essential for claiming benefits under Section 115H and for any potential future scrutiny by tax authorities.
• Professional Guidance: Consulting a qualified tax advisor specializing in NRI taxation is highly recommended. They can provide personalized advice based on your specific circumstances and ensure optimal utilization of Section 115H benefits.

Planning and Utilizing Section 115H Effectively

NRIs planning to return to India can leverage Section 115H to their advantage by carefully structuring their investments in foreign exchange assets. Here are some strategies to consider:

• Invest While an NRI: Maximizing investments in eligible foreign exchange assets while still an NRI can help generate a larger corpus that enjoys the concessional tax rates under Section 115H upon returning to India.
• Asset Diversification: Diversifying your foreign exchange asset portfolio across different categories like stocks, bonds, and real estate can provide a well-rounded investment strategy
• Long-Term Perspective: Since the benefits under Section 115H extend until the disposal of the foreign exchange asset, a long-term investment approach can be highly beneficial. This allows the assets to grow and potentially generate higher returns at a lower tax rate.
• Tax Planning with Family: NRIs can explore strategies involving gifting some foreign exchange assets to their resident Indian family members. However, careful consideration of tax implications on such gifts and potential implications on residency status is recommended when utilizing this strategy.

Beyond Section 115H: Additional Considerations for Returning NRIs

While Section 115H offers significant tax relief on specific income sources, returning NRIs should also consider other tax aspects:

• Tax Residency: Determining your residency status for tax purposes is crucial. Spending 182 days or more in India in a financial year typically establishes residential status in India. This can impact the tax treatment of your global income.
• Previously Filed Tax Returns: NRIs are generally not required to file tax returns in India unless they have income chargeable to tax in India. However, if you have filed Indian tax returns during your NRI period, it’s important to disclose those returns when filing as a resident Indian to avoid discrepancies.
• Permanent Account Number (PAN): Ensure you have a valid PAN card, which is a mandatory requirement for filing tax returns in India.
• NRE and NRO Accounts: NRIs might have Non-Resident (External) Rupee (NRE) and Non-Resident Ordinary (NRO) accounts. The tax treatment of income earned on these accounts can differ after becoming a resident Indian. Consulting a tax advisor can help navigate these nuances.

Conclusion

Section 115H is a valuable provision for NRIs returning to India, offering a smooth transition in terms of tax liabilities on specific income sources. By understanding the eligibility criteria, benefits, and limitations, NRIs can effectively utilize this section for tax optimization. Remember, consulting a tax advisor specializing in NRI taxation is highly recommended for personalized guidance and ensuring compliance with all tax regulations.

This blog post provides a general overview of Section 115H and its implications. Tax laws and regulations can be subject to change. It’s advisable to stay updated with the latest developments and seek professional advice for your specific situation.