How Can NRI Save Tax In India Under Section 115H?

Table of Contents

• What is Section 115H of Income Tax Act?
• Benefits under Section 115H of the Income Tax Act
• Eligibility Criteria/ Provisions under Section 115H of the Income Tax
• Conditions to Avail Benefits from Under Section 115H
• Do You Want to Claim the Benefit Under Section?
• How Can NRI Save Tax in India
• Conclusion

What is Section 115H of Income Tax Act?

Section 115H is designed to cater to the taxation needs of NRIs. Non-Resident Indians (NRIs), can get some tax benefits through Chapter XII-A of the Income Tax Act. This special chapter lets them pay a lower tax rate of 20% on the money they make from investments in foreign exchange assets. But, this special tax rate doesn’t apply to people who live in India (resident Indians).

If a non-resident Indian (NRI) becomes a resident Indian for tax purposes in any year, they can still enjoy the benefits of Chapter XII-A. To do this, they need to tell the tax officer in writing that they want to keep getting the advantages of Chapter XII-A. However, this only applies to the money they make from foreign exchange asset investments.

Benefits under Section 115H of the Income Tax Act

If a person living outside India (NRIs) provides the tax officer in writing and submits their Income Tax Return for the year when they’re considered a resident, they can get some advantages, like:

1. NRIs can pay a lower tax rate of 20% on the money they make from investments in foreign exchange assets.
2. NRIs also get a 10% tax break on long-term capital gains, but this applies only to dividend income and certain assets.
3. NRIs can keep enjoying these tax benefits until they change their foreign exchange assets into money.
4. If they own specific assets, they can benefit from reduced tax rates, even when transferring their convertible foreign exchange between banks.

Eligibility Criteria/ Provisions under Section 115H of the Income Tax

Here are the Non-Resident Indians (NRIs) eligibility criteria for certain tax benefits under Section 115H of the Income Tax Act:-

Concessional Tax Rate Benefits 

Individuals of Indian origin can avail of the concessional tax rate benefits under section 115H. However, if, despite having Indian origin, the person does not reside in India, they are considered a non-resident.

Foreign Exchange Assets:

The eligibility criteria may involve having income from investments in foreign exchange assets. These assets may include things like foreign currency deposits, bonds, or shares.

Specified Assets:

Specified assets include all the assets listed below. However, once an NRI becomes a resident Indian, they can no longer enjoy the special benefits of the income generated from holding shares in an Indian company.

• Any security issued by the Central Government as defined by the Public Debt Act of 1944.
• Shares in an Indian company.
• Debentures issued by a public Indian company.
• Deposits made with a public Indian company. If the Central Government specifies any other asset for this purpose, it will also be considered.

Residential Status Criteria:

The individual must qualify as a Non-Resident Indian (NRI) under the Income Tax Act. This status is determined based on the number of days an individual stays in India during a financial year. A person is considered a resident if they meet either of the following two conditions:

• They have been in India for 182 days or more during the relevant previous year.
• They have been in India for a total of 365 days or more in the four immediately preceding years. Additionally, for the relevant previous year, they must have stayed in India for at least 60 days.

Resident but Not an Ordinarily Resident (RNOR) Criteria

A person is considered a Resident but Not an Ordinarily Resident (RNOR) if they meet either of the following two conditions:

• They have been a resident in India for 2 years out of the past 10 years.
• They have spent 730 days or more in India in the last 7 years.

Non-Resident Status for PIO

If a person of Indian origin (PIO) doesn’t meet the criteria to be classified as either a resident or a resident not ordinarily resident, they are considered a non-resident for income tax purposes.

Return Filing and Concessional Tax Rates

If a person living outside India can submit their tax return under Section 139 and express their choice in writing to be coveted under Section 115H, they can benefit from discounted tax rates on various assets mentioned earlier, except for shares in an Indian company.

Inclusion of Dividend Income

Until April 1, 2021, dividend income was not considered in the asset specifications. However, starting from that date, it has been included.

Conditions to Avail Benefits from Under Section 115H

NRIs can enjoy the advantages outlined in section 115H by fulfilling the following criteria:

• They must be residents of a country that has a Double Taxation Avoidance Agreement (DTAA) with India.
• They need to provide a Tax Residency Certificate (TRC) issued by the tax authority of their residing nation.
• NRIs should have an Indian PAN (Permanent Account Number) for tax identification purposes.
• Income earned by NRIs from specific assets includes:
• Foreign currency deposits in Indian banks
• Debt securities issued by Indian companies
• Units of equity-oriented mutual funds
• Shares of Indian companies listed on a stock exchange.

Do You Want to Claim the Benefit Under Section?

To claim benefits under Section 115H, NRIs typically need to follow these steps:

• Ensure that you qualify as a Non-Resident Indian (NRI) under the Income Tax Act.
• File your Income Tax Return, including a written statement to the assessing officer, for the year in which you are considered a resident.
• Declare your intention to avail of the benefits under Section 115H in the written statement provided to the assessing officer.
• Confirm that you meet the eligibility criteria, which may include having income from investments in foreign exchange assets.
• Stay compliant with the relevant regulations and keep updated with any changes to ensure a smooth process for claiming the benefits under Section 115H.

How Can NRI Save Tax in India

Here are some general strategies that NRIs often consider for tax planning in India:

• Residential Status and Tax Liability:

  NRIs are taxed in India based on their residential status. Understanding and managing the number of days spent in India during a financial year is crucial. Being an NRI for tax purposes can lead to certain tax benefits.

• Tax Planning for Investments:

  NRIs can strategically plan their investments to minimize tax liabilities. Investments in tax-efficient instruments and understanding the tax implications of various financial instruments are essential.

• Claiming Double Taxation Avoidance Agreements (DTAA):

  NRIs can take advantage of DTAA provisions to avoid being taxed on the same income in both their home country and India. This involves claiming relief under DTAA for specific types of income.

• Tax Exemptions on Certain Incomes:

  NRIs can benefit from exemptions on specific incomes, such as interest income from NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts.

Also Read:

NRI Bank Accounts

NRI Life Insurance Plans

Conclusion

Section 115H of the Income Tax Act is a key provision designed to benefit Non-Resident Indians (NRIs) by providing special advantages for income earned from specified assets. By understanding the scope, conditions, and benefits of this section, NRIs can make informed decisions to maximize their tax advantages. To access these benefits, NRIs need to meet the conditions outlined above. The purpose of this section is to create a more favorable tax environment for NRIs, encouraging financial inclusivity and cross-border investments. It is crucial for NRIs to stay updated about the changing tax rules and adhere to the applicable regulations. This helps maintain seamless financial operations and minimizes possible risks.