Section 115H of the Income Tax Act: Key Features and Advantages

The Income Tax Act 1961 designates individuals as either residents, non-resident Indians (NRI), or residents but not ordinarily residents (RNOR) based on their days of presence in India. This residential status is not fixed and can shift based on the individual's duration of stay and purpose in India.

Section 115H is pertinent for those who were NRIs in the previous year but are now Indian residents in the current financial year. Here’s an in-depth look into the provisions of this section.

Understanding Section 115H of the Income Tax Act

Under Chapter XII-A of the Income Tax Act, non-residents enjoy tax perks, such as a 20% special tax concession on income from foreign exchange asset investments. However, this privilege is not extended to resident Indians. If an NRI transitions to a resident Indian during a financial year, they can apply for Chapter XII-A benefits by lodging a written application with the assessing officer, focusing on their foreign exchange investment income.

Benefits Offered by Section 115H

• Eligible non-residents receive a 20% tax concession on foreign exchange asset investment income.
• They also benefit from a 10% tax concession on long-term capital gains related to specified assets and dividends.
• The tax concessions remain in effect until the specified foreign asset is liquidated.
• Even when transferring convertible foreign exchange between banks, the benefits continue as long as the specific asset remains owned.

Explaining the Provisions of Section 115H

• Individuals of Indian origin are eligible for Section 115H benefits if they were NRIs. If not a resident, they revert to NRI status, despite Indian origins.
• The term 'foreign exchange asset' refers to assets acquired with convertible foreign exchange.
• 'Specified assets' includes government securities, Indian company shares, debentures of public Indian companies, and public company deposits. Section 115C further defines these assets, which may also include other assets specified by the Central Government.
• If a non-resident files a return under Section 139 with a written statement, they can enjoy concessional rates on all specified assets, excluding Indian company shares, until April 2021, when dividends were added to specified assets.
• 'Resident' status is achieved if an individual stays over 182 days in the preceding year or 365 days over the prior four years, with at least 60 days in the relevant preceding year.
• An RNOR has been a resident for at least 2 of the past 10 years and has stayed at least 730 days in the last 7 years.
• PIOs become non-residents for tax purposes if they don’t meet the resident or RNOR criteria.
• Residential status changes yearly; for instance, a 2022-2023 resident might become a 2023-2024 non-resident, and vice versa.
• Section 115H allows previous non-residents turned residents to retain concessional tax privileges through diligent tax filings, akin to non-resident status benefits.
• It is crucial for taxpayers to disclose their income and file returns under Section 139 in the year their status changes to a resident Indian.