Tax laws can often seem complex and overwhelming, but understanding specific sections can greatly benefit taxpayers, especially those with unique circumstances. One such provision is Section 115H, which offers significant relief to non-resident Indians (NRIs) upon returning to India. This article delves deep into Section 115H of the Income Tax Act, explaining its implications, benefits, and relevance in the context of financial planning.
What is Section 115H of the Income Tax Act?
Section 115H of the Income Tax Act provides NRIs with the option to continue enjoying the concessional tax rates applicable to their investment income, even after they return to India and become residents. This provision ensures that NRIs are not immediately burdened by higher tax rates on their income from investments made while they were abroad.
Key features of Section 115H of the Income Tax Act
- Continuation of concessional tax rates: Under Section 115H, NRIs who have returned to India can continue to avail themselves of the concessional tax rates on investment income, which includes dividends, interest, and long-term capital gains, for a specified period.
- Eligibility criteria: To benefit from this provision, an individual must have been an NRI and should have made the investment while being an NRI. Upon returning to India, they should notify the assessing officer in the prescribed manner.
- Time period: The concessional tax rates can be availed for the financial year in which the individual becomes a resident and for subsequent years until such income is derived from the investment made while being an NRI.
Key provisions under Section 115H of the Income Tax Act
Below are the key provisions under Section 115H of the Income Tax Act:
1. Eligibility for concessional tax rates: Individuals of Indian origin can avail of concessional tax benefits under Section 115H. If an Indian-origin individual is not a resident of India, they are classified as a non-resident.
2. Foreign exchange asset definition: A foreign exchange asset refers to any asset acquired in convertible foreign exchange by the taxpayer.
3. Specified assets: These are specific assets eligible for concessional tax rates. However, once an NRI becomes a resident Indian, the benefits of income from shareholdings in Indian companies cease. Specified assets include:
- Securities issued by the Central Government under the Public Debt Act, 1944.
- Shares of an Indian company.
- Debentures of an Indian public company.
- Deposits with an Indian public company.
- Any asset specified by the Central Government.
4. Declaration for benefits: Non-residents can claim concessional tax rates by furnishing a return under Section 139 and explicitly stating their willingness to be covered under Section 115H.
5. Dividend income: As of April 1, 2021, dividend income is also covered under specified assets.
6. Definition of resident: A person is considered a resident if:
- They stay in India for 182 days or more in the relevant previous year, or
- They stay in India for at least 365 days in the preceding 4 years and 60 days in the relevant year.
7. Resident but Not Ordinarily Resident (RNOR): A person is RNOR if:
- They were a resident of India for at least 2 years out of the last 10 years, or
- They stayed in India for 730 days or more in the last 7 years.
8. Non-resident classification: A Person of Indian Origin (PIO) not meeting the resident or RNOR criteria is classified as a non-resident.
How does Section 115H Work?
To understand how Section 115H works, consider the following scenario:
- An NRI invests in Indian securities while living abroad.
- After a few years, the NRI returns to India and becomes a resident.
- The income generated from the previously made investments continues to be taxed at concessional rates, thanks to Section 115H, instead of the regular tax rates applicable to residents.
This continuation of tax benefits can significantly reduce the tax burden on returning NRIs, ensuring that their transition back to India is financially smoother.
Benefits of Section 115H
- Tax savings: The primary benefit of Section 115H is the potential tax savings. By continuing to enjoy concessional tax rates on investment income, returning NRIs can retain a larger portion of their earnings.
- Financial planning: This provision allows NRIs to plan their finances better. Knowing that their investment income will not be immediately subjected to higher tax rates upon their return helps in making more informed investment decisions.
- Encourages investment: Section 115H also serves as an encouragement for NRIs to invest in Indian assets, knowing that they can continue to benefit from concessional tax rates even after becoming residents.
For example:
Imagine Mr. Rao, an NRI, invested in Indian mutual funds and fixed deposits while working abroad. After five years, he decides to return to India. Upon his return, Mr. Rao's investment income from these mutual funds and fixed deposits would typically be subject to higher tax rates applicable to residents. However, by invoking Section 115H, Mr. Rao can continue to enjoy the concessional tax rates that were applicable while he was an NRI, thereby reducing his tax liability.
Relevance in financial planning
Understanding and utilizing Section 115H can be a crucial aspect of financial planning for NRIs considering a return to India. It is essential for these individuals to be aware of the eligibility criteria and the procedural requirements to avail of this benefit. Proper planning and timely notification to the assessing officer can lead to substantial tax savings.
In the context of broader financial planning, it is also advisable for returning NRIs to evaluate other financial products that can complement their investment strategy. For instance, exploring tax-saving fixed deposits, National Pension System (NPS), and mutual funds designed for tax efficiency can provide additional avenues for optimising their tax liabilities.
Integrating home loans into financial planning
For NRIs returning to India and planning to settle down, considering a home loan can be a significant part of their financial strategy. Home loans offer tax benefits under Section 80C for the principal repayment and Section 24(b) for the interest payment, which can be beneficial in reducing taxable income.
Conclusion
Section 115H of the Income Tax Act serves as a valuable provision for NRIs returning to India, allowing them to continue benefiting from concessional tax rates on their investment income. This provision not only aids in tax savings but also facilitates better financial planning and encourages investment in Indian assets.
By integrating other financial products such as tax-saving fixed deposits, National Pension System (NPS), and mutual funds into their investment strategy, returning NRIs can optimize their tax liabilities further. Additionally, considering a home loan can provide additional financial leverage and tax benefits, aiding in a smoother transition back to India.
