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 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 the status of a non-resident 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:

1. 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.
2. Tax Stability: The provision offers financial stability by ensuring that NRIs do not face a sudden increase in tax liability upon becoming residents. This can be crucial for long-term financial planning.
3. 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:

1. 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.
2. Applicability: The provision applies only to income derived from foreign exchange assets. These include assets acquired, purchased, or subscribed in convertible foreign exchange.
3. 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. This ensures that NRIs can maintain financial stability as they transition to resident status.
4. 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.

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 the 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?

• Yes, 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 can effectively manage their tax liabilities and make informed financial decisions.

Maximise your tax benefits and manage your investments wisely with TapInvest. Whether an NRI or a resident, TapInvest provides tailored investment solutions to help you grow your wealth. Sign up on TapInvest.in today and start your journey towards financial freedom!