What is Section 115H of Income Tax Act?

The Indian Income Tax Act has various provisions tailored to different categories of taxpayers. Section 115H is a crucial provision for non-resident Indians (NRIs) who have acquired resident status in India. This section allows NRIs to continue enjoying certain tax benefits on specific incomes even after their status changes to that of the resident. This article will explore the intricacies of Section 115H of the Income Tax Act, including its scope, benefits, and critical considerations.

Section 115H: A Tax Haven for Non-Resident Indians

Section 115H of the Income Tax Act offers specific tax benefits to individuals of Indian origin who are non-resident Indians (NRIs). This section provides concessions on income from foreign exchange assets and certain other investments.

Understanding Section 115H

To qualify for Section 115H benefits, an individual must:

• Be of Indian origin (parents or grandparents were Indian citizens).
• Be a non-resident as per the Income Tax Act.

If these conditions are met, and the individual informs the tax authorities in writing about their intention to continue availing benefits under Section 115H, they can enjoy the following concessions:

• Concessional tax rate of 20% on income from foreign exchange assets.
• Concessional tax rate of 10% on long-term capital gains from specified assets and dividend income.
• Continued enjoyment of concessional tax rates even after becoming a resident Indian, provided the conditions are met.

Conditions for Availing Section 115H Benefits:

To maintain non-resident status for tax purposes, an individual must meet one of the following conditions:

• Stay in India for less than 182 days in the relevant previous year.
• Stay in India for less than 365 days in the preceding four years and less than 60 days in the relevant previous year.

A person who meets these conditions for at least two out of the preceding ten years and stays in India for at least 730 days during those seven years is considered a Resident Not Ordinarily Resident (RNOR). If an individual does not meet the criteria for a resident or RNOR, they are classified as a non-resident for tax purposes.

Benefits of Section 115H:

Section 115H provides several critical benefits to NRIs transitioning to resident status:

• Lower Tax Rates: NRIs who have become residents can continue to pay taxes at the concessional rates applicable to non-residents on specified incomes. This is particularly advantageous for incomes taxed at higher rates for residents.
• Tax Stability: The provision offers financial stability by ensuring that NRIs do not face a sudden increase in tax liability upon becoming residents, which is crucial for long-term financial planning.
• Flexibility in Asset Management: Section 115H allows NRIs to continue enjoying tax benefits on foreign exchange assets, providing flexibility in managing and disposing of these assets.

Key Features of Section 115H:

• Continuation of Tax Benefits: Section 115H enables NRIs to continue benefiting from the special tax treatment accorded to them as non-residents, even after they become residents. This provision applies to certain types of income, such as dividends, interest, and capital gains from foreign investments.
• Applicability: The provision applies only to income derived from foreign exchange assets. These include assets acquired, purchased, or subscribed in convertible foreign exchange.
• Duration of Benefits: The benefits under Section 115H can be availed until the specified assets are converted into money or any asset other than a specified asset, whichever occurs earlier, ensuring financial stability during the transition to resident status.
• Declaration Requirement: To avail of the benefits under Section 115H, the taxpayer must furnish a declaration in their income tax return for the year in which they became a resident. This declaration indicates their intention to continue benefiting from the special provisions applicable to NRIs.

Additional Insights into Section 115H:

1. Understanding the Tax Liability Calculation

Calculating tax liability under Section 115H involves:

• Identifying Business Income: Business income, such as revenue from operations within India, is subject to a flat tax rate of 40%. However, passive incomes, like interest, are excluded from this category.
• Calculating Tax Liability: The tax payable on business income is calculated as: Tax Liability=Business Income×0.40\text{Tax Liability} = \text{Business Income} \times 0.40Tax Liability=Business Income×0.40
• Example Scenario: Suppose a foreign company earns ₹5 crores in business income in India. The tax liability would be: 
• ₹5,00,00,000×0.40 = ₹2,00,00,000 This example highlights how foreign companies are taxed flat on business income.

2. Double Taxation Avoidance Agreements (DTAA)

DTAAs play a significant role in mitigating double taxation for foreign companies:

• Purpose of DTAA: These agreements prevent the same income from being taxed both in India and the company’s home country.
• Impact on Section 115H: DTAA provisions may provide lower withholding tax rates or credits, reducing tax payable in India. This benefit is essential for minimising overall tax costs.
• Examples of DTAA Provisions: For instance, the DTAA between India and the US offers reduced rates on royalties, while the India-UK DTAA provides relief on dividend taxation, which benefits foreign investors in specific sectors.

3. Compliance Requirements

Foreign companies under Section 115H must meet specific compliance obligations:

• Filing Tax Returns: Foreign companies must file annual tax returns, with deadlines generally set for September 30th.
• Reporting Requirements: Detailed financial statements, including profit and loss accounts and balance sheets, must be submitted.
• Tax Deducted at Source (TDS): The TDS rate for business income typically aligns with DTAA provisions or the 40% standard rate.
• Penalties for Non-Compliance: Non-compliance can lead to penalties, such as fines and interest on unpaid taxes.

4. Implications for Foreign Companies

Section 115H impacts foreign companies’ investment decisions and tax strategies:

• Investment Decisions: The 40% tax rate may impact the attractiveness of certain investments, though DTAAs can provide relief.
• Business Strategies: Companies may adjust pricing and profit margins or explore cost-efficiency measures to remain profitable.
• Tax Planning Strategies: Leveraging DTAA benefits, investing in tax-saving instruments, and strategically structuring business operations can help minimise tax liabilities under Section 115H.

FAQs on Section 115H:

1. Who can avail of the benefits under Section 115H?
   NRIs who have become residents in India can avail themselves of benefits under Section 115H. The section applies specifically to income derived from foreign exchange assets.
   
2. What types of income are covered under Section 115H?
   Section 115H covers incomes such as dividends, interest, and capital gains from foreign exchange assets.
   
3. How long can the benefits under Section 115H be availed?
   The benefits can be availed until the specified asset is converted into money or another asset that is not selected.
   
4. Is it mandatory to declare the intention to avail of benefits under Section 115H?
   To avail of the benefits, the taxpayer must declare their intention in the income tax return filed for the year in which they become residents.
   
5. Can the benefits under Section 115H be availed for assets acquired after becoming a resident?
   No, the benefits are available only for assets acquired using convertible foreign exchange while the individual was an NRI.

Conclusion

Section 115H of the Income Tax Act is crucial for NRIs transitioning to resident status. It offers continued tax benefits on specific incomes, ensuring financial stability and flexibility. By understanding the nuances of Section 115H, NRIs and foreign companies can effectively manage tax liabilities and make informed financial decisions.Maximise your tax benefits and manage your investments wisely with Tap Invest. Whether an NRI or a resident, Tap Invest provides tailored investment solutions to help you grow your wealth. Sign up on Tap Invest today and start your journey toward financial freedom!