Introduction
The Income Tax Act plays a pivotal role in India's taxation system. For Non-Resident Indians (NRIs), the applicable provisions are crucial for both compliance and maximising tax advantages. Among these provisions, Section 115H of the Income Tax Act stands out as particularly impactful for NRIs. In this article, we'll delve into the intricacies of Section 115H and its benefits for NRIs in managing their tax responsibilities.
Understanding Section 115H
Section 115H is specifically designed to cater to the taxation needs of NRIs. It provides several benefits and exemptions for certain types of income earned by NRIs. However, understanding the scope and applicability of this section is vital for NRIs to fully take advantage.
Conditions for NRI Eligibility
To take advantage of the benefits of Section 115H, an NRI must meet certain conditions. Firstly, they must satisfy the residential status criteria as advised by the Income Tax Act. This categorization, based on physical presence and stay duration in India, divides individuals into residents, non-residents, or residents but not ordinarily residents (RNOR). Additionally, Section 115H benefits apply solely to certain types of income earned by NRIs, including income from foreign sources and specific investments.
Benefits of Section 115H
This section offers several advantages to NRIs, aiding them in reducing tax liabilities and streamlining fund repatriation processes. Let's explore the key benefits:
1. Tax exemption on specified income: NRIs enjoy exemptions on certain types of income, such as interest earned on NRE accounts and dividends from specified investments. This exemption facilitates maximising earnings while relieving tax burdens.
2. Lower tax rates for certain investments: NRIs benefit from reduced tax rates on specific investments in India, such as equity-oriented funds, infrastructure bonds, and contributions to the National Pension Scheme (NPS). These incentives encourage investment in India while offering tax advantages.
3. Facilitation of fund repatriation: Section 115H simplifies the process of repatriating funds for NRIs, allowing them to repatriate income earned in India and proceeds from investments made in the country, subject to regulations. This enhances financial flexibility and facilitates cross-border fund movement.
4. Avoidance of double taxation: NRIs can reduce the burden of double taxation, wherein income is taxed in both India and their country of residence, through double taxation avoidance agreements (DTAA). These agreements enable NRIs to claim tax credits or exemptions, thereby reducing tax liabilities.
Residential Status Criteria for NRIs
To determine the applicability of Section 115H, NRIs must understand the residential status criteria defined by the Income Tax Act. The act classifies individuals into three categories:
1. Residents: Individuals who satisfy the conditions of physical presence and stay in India for a specified period during the relevant financial year.
2. Non-Residents: Individuals who do not meet the criteria of physical presence and stay in India as specified by the act.
3. Resident but not Ordinarily Residents (RNOR): Individuals who do not meet the criteria of physical presence and stay in India but have been residents in India for a certain number of years in the past.
Determining factors for residential status
Several factors determine an individual’s residential status for income tax purposes. These include the number of days an individual stays in India during the financial year and the number of days stayed in India in the preceding years. Understanding these factors is crucial for NRIs to ascertain their residential status accurately.
Eligible Income Types
Section 115H applies to specific types of income earned by NRIs. These income types can be broadly categorised as income from foreign sources and income from specified investments made by NRIs.
1. Income from foreign sources: NRIs earn income from foreign sources, such as interest and dividends from foreign investments, capital gains from the sale of assets held abroad, and rental income from properties located outside India.
2. Income from specified investments: NRIs make investments in India through various channels like NRE/NRO accounts, FCNR (Foreign Currency Non-Resident) deposits, and foreign currency assets. Income generated from these investments falls under the purview of Section 115H.
Tax Exemption on Specified Income
Section 115H provides tax exemptions on certain types of income earned by NRIs. Let’s explore these exemptions in detail:
1. Exemption on interest and dividends: NRIs enjoy a tax exemption on the interest earned on their NRE accounts. This exemption extends to dividends received from specified investments as well. Such exemptions promote NRI investments and facilitate the growth of the Indian economy.
2. Exemption on capital gains: NRIs can avail of tax exemptions on capital gains arising from the sale of specified assets. However, certain conditions need to be met to qualify for these exemptions. The calculation of capital gains for tax purposes can be complex and requires adherence to the advice rules and regulations.
3. Exemption on rental income: NRIs who earn rental income from properties located outside India can also benefit from tax exemptions under Section 115H. However, specific conditions and documentation requirements must be fulfilled to claim these exemptions.
Lower Tax Rates for Certain Investments
Section 115H offers lower tax rates for NRIs on certain investments made in India. These lower tax rates encourage NRIs to invest in the Indian market and foster economic growth. Let’s explore the key aspects of this benefit:
1. Tax benefits on specified investments: NRIs can enjoy lower tax rates on investments made in equity-oriented funds, infrastructure bonds, and contributions to the National Pension Scheme (NPS). These investments not only provide potential returns but also reduce the tax burden on NRIs.
2. Long-term capital gains tax: NRIs can benefit from lower tax rates on long-term capital gains arising from the sale of specified assets. However, to take advantage of these benefits, NRIs must adhere to the holding period requirements specified by the Income Tax Act.
Facilitation of Repatriation of Funds
Repatriation of funds is a significant concern for NRIs. Section 115H simplifies the repatriation process by providing clear guidelines and procedures. Let’s explore the key aspects of fund repatriation for NRIs:
1. Repatriation of income: NRIs can repatriate income earned in India, subject to rules and restrictions imposed by the Reserve Bank of India (RBI). These rules aim to ensure the transparency and legality of funds being repatriated.
2. Repatriation of sale proceeds: NRIs can repatriate the sale proceeds from the disposal of immovable property and investments made in India. However, certain conditions and documentation requirements need to be fulfilled to facilitate the repatriation process.
Avoidance of Double Taxation
Double taxation can create a significant financial burden for NRIs. To mitigate this, India has entered into double taxation avoidance agreements (DTAA) with various countries. Let’s explore the key aspects of DTAA and how NRIs can benefit from them:
1. Double taxation agreements: DTAA is a bilateral agreement between two countries to prevent individuals from being taxed on the same income twice. India has signed the DTAA with several countries, which specify the rules for taxing various types of income earned by NRIs.
2. Claiming tax credits: Under the provisions of DTAA, NRIs can claim tax credits or exemptions in their country of residence for the taxes paid in India. This helps in avoiding double taxation and ensures that NRIs are not unfairly burdened by tax liabilities.
Compliance Requirements for NRIs
NRIs are required to comply with certain obligations to ensure tax compliance and smooth financial operations. Let’s explore the key compliance requirements for NRIs:
1. Filing of income tax returns: NRIs must file their income tax returns within the prescribed due dates using the appropriate forms. Timely filing of tax returns is crucial to avoid penalties and stay compliant with the tax laws.
2. Reporting of foreign investments: NRIs are required to disclose their foreign assets and income as per the Foreign Asset and Liabilities Disclosure (FALD) provisions. Additionally, NRIs need to report their foreign investments through the Foreign Account Tax Compliance Act (FATCA) if applicable.
Recent Amendments and Developments
The income tax landscape is subject to amendments and developments over time. Let’s explore some recent changes that have had a direct impact on NRIs:
1. Changes in tax rates and exemptions: The government periodically revises tax rates and exemptions to align with the evolving economic scenario. NRIs must stay updated with these changes to effectively plan their tax strategies and optimise their financial positions.
2. Introduction of e-assessment and e-filing: The income tax department has introduced e-assessment and e-filing processes to enhance transparency, efficiency, and ease of compliance. NRIs should familiarise themselves with these digital initiatives to simplify their tax-related interactions with the authorities.
3. Increased focus on anti-avoidance measures: Governments worldwide are intensifying their efforts to prevent tax avoidance and evasion. NRIs should be aware of the anti-avoidance measures and comply with the advice regulations to avoid legal and financial implications.
Conclusion
In conclusion, Section 115H of the Income Tax Act offers substantial benefits for NRIs, empowering them to optimise tax liabilities and manage financial affairs efficiently. By understanding the scope, conditions, and benefits of this section, NRIs can make informed decisions and seek professional advice to maximize their tax advantages. It is crucial for NRIs to stay updated with the evolving tax landscape and comply with the relevant regulations to ensure smooth financial operations and mitigate potential risks.
The author is a Chartered Accountant and former EY employee, serves as the Chief Consultant of the NRI Desk and Influencer Desk at AKT Associates. He specializes in offering consultancy services tailored for NRIs and is dedicated to creating educational content to raise awareness within the NRI community.
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