Tax benefits for NRIs – Section 115H of Income Tax Act Explained The Tax obligations of a Non-Resident India (NRI) changes when they decide to move back to India. The returning individual becomes a “Resident,” making their global income taxable in India, often at higher rates. This transition can be a financial shock, especially for income earned from investments they made while living abroad. To soften this blow, they, government created this special rule: Section 115H of the Income Tax Act, 1961, to encourage the NRIs to invest their foreign earned money in India.
What is Chapter XII-A and Section 115H Section 115H is a part of the Income Tax Act, 1961, which deals with “Special provisions relating to certain incomes of Non-Residents.” This article outlines a beneficial, optional, and separate section for the taxation of investment income and long-term capital gains arising from specific assets acquired by an NRI in convertible foreign exchange.
The central idea of Chapter XII-A is to levy a flat, concessional tax rate on this specific income, bypassing the standard progressive tax slabs applicable to residents. Section 115H then extends this benefit forward.
The key concept: Section 115H does not grant a benefit to all NRI. Instead it provides a continuation of the Chapter XII-A benefits for an individual who was an NRI in the previous year but has become a Resident in the current assessment year.
Who is eligible for the Section 115H benefits? The applicability of Section 115H is dependent upon a change in the residential status of the individual, coupled with a specific type of investment.
Change in Residential Status The Primary criterion is that the person must have been:
An Non-Resident India (NRI) in the previous year
Assessed as a Resident (or Resident but not Ordinarily Resident i.e., RNOR) in the subsequent year
The determination of the residential status (Resident, RNOR, or Non-Resident) is governed by Section 6 of Income Tax Act, based on the number of days of physical stay in India. Section 115H specifically caters to people whose stay in India has now crossed the threshold, making from a Resident from an NRI.
Qualifying Assets: "Foreign Exchange Assets: The benefit of Section 115H is strictly limited to income derived from “Foreign Exchange Assets.” as defined under Section 115C, a Foreign Exchange Asset means any specified asset which the assessee has acquired, or purchased, with assets transferred from an account maintained in India by him in convertible exchange.
Specified Assets (as per Chapter XII-A) Shares in an Indian Company
Deposits with an Indian Public Company.
Securities of the Central Government
Assets under Central Government
These assets must have been purchased by the individual when they were an NRI.
Tax Concession under Section 115H The true benefit of Section 115H lies in the continuation of the concessional tax rates that the individual was entitled to as an NRI under Chapter XII-A.
Concessional Tax Rates Standard Resident Tax Rate 20% (plus surcharge and cess) Slab rates (up to 42.74% max) 10% (without indexation) plus surcharge and cess 20% (with indexation) or 10% (without indexation on equity/MFs)
Learn more about cess tax here.
Conditions of Claim The benefits under Section 115H are not automatic. When you first file your tax return as a new resident (the one that covers the year you come back), you must take a mandatory action:
You must submit a written declaration to the tax officer, clearly stating that you wish to continue having the income from these specific foreign exchange assets taxed under the specific foreign exchange assets taxed under the special Chapter XII-A rules.
If you miss this step or file your tax return late, the income from those assets will automatically be treated like any other resident’s income. That means that it will be added to your total income and taxed at your normal slab rate, potentially jumping from 20% to over 40%.
When do the benefits end? The concessional tax continues until the moment the qualifying asset is converted to money or is sold.
Example: you bought shares in an Indian company with foreign currency as an NRI.
Scenario 1 : The benefits continue. You return to India and receive its dividends from those shares. These dividends are taxed at a low rate of 20%.
Scenario 2: The benefits end. You decide to sell those shares. The capital gains is taxed at the low special rate of 10%. However, once they are sold, the benefits end.
Section 115H vs RNOR (for comparison) Feature Section 115H Benefits RNOR Status Goal Concessional tax rate (20% or 10%) on income from specific foreign exchange assets Exemption from tax on foreign income (income earned outside India ) Applies to Specific indian investments, even after becoming a Resident. All sources of income but only if the individual qualifies as RNOR. Duration Continues until the assets are converted into money. Limited to the specific years an individual qualifies as RNOR
Conclusion A smart returning NRI should plan to take both benefits if they qualify. The RNOR status protects your income earned outside India, and Section 115H protects your special Indian investments made with foreign funds.
In essence, Section 115H is just the government’s way of saying, “thank you for bringing foreign money home.”
FAQs What are the benefits under Section 115H? The benefits under Section 115H have been discussed right here .
What is FPI in Income Tax? Foreign Portfolio Investment is when a non-indian individual passively buys indian financial stocks or bonds.
What is the tax rate applicable to dividend income earned by NRIs under Section 115H? Applicable rates of the dividend income have been discussed here.
How to claim the benefits? To claim the benefits, the returning NRIs must inform their assessing officer in the prescribed manner. Learn more here .
What are the documents required to avail the benefits under Section 115H? Required documents include proof of NRI status when the investment was made, details of the investment, and a notification to the assessing officer upon return to India.
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