Section 115E of the Income Tax Act: An Overview
The Indian Income Tax Act has various provisions that govern the taxation of income earned by non-resident individuals and entities in India. Section 115E of the Act deals with the taxation of certain types of income earned by non-residents in India. In this blog, we will discuss the various provisions of Section 115E of the Income Tax Act.
Applicability of Section 115E
Section 115E is applicable to non-resident individuals who are not citizens of India. The section applies to income earned by non-residents in the form of interest, dividend, or long-term capital gains from investments made in India.
Taxation of Income under Section 115E
The income earned by non-residents under Section 115E is taxed at a flat rate of 20%. This tax is deducted at source by the Indian payer and is paid to the Indian government on behalf of the non-resident.
However, if the non-resident’s income is less than the basic exemption limit, which is currently Rs. 2.5 lakhs per year, the income is not subject to tax.
Exemption from Tax under Section 115E
If the income earned by a non-resident is in the form of long-term capital gains from the sale of listed securities or units of an equity-oriented fund, the tax liability can be waived under certain conditions.
The exemption from tax applies if the non-resident has invested in Indian securities or units of an equity-oriented fund before April 1, 2018, and the gains arise after April 1, 2018. The gains must also be subject to securities transaction tax (STT).
If the above conditions are satisfied, the non-resident can claim exemption from tax under Section 115E.
Tax Filing Requirements under Section 115E
Non-residents who earn income under Section 115E are required to file an income tax return in India. The return must be filed by July 31 of the assessment year in which the income was earned. Non-residents must also obtain a Permanent Account Number (PAN) from the Indian Income Tax Department.
Benefits of Section 115E
One of the benefits of Section 115E is that it provides a simplified tax structure for non-residents who earn income in India. The flat rate of 20% is easier to understand and calculate than the tax brackets and rates that apply to Indian residents. Additionally, the tax liability is deducted at source by the Indian payer, which means that non-residents do not have to worry about making tax payments or filing tax returns in India unless their income exceeds the basic exemption limit.
Exemption from Tax for Non-Residents
The exemption from tax under Section 115E for long-term capital gains on listed securities or equity-oriented funds provides an incentive for non-residents to invest in the Indian stock market. This exemption also helps to promote foreign investment in India, which can have a positive impact on the economy.
However, it is important to note that the exemption only applies to long-term capital gains. Short-term capital gains, which are gains from the sale of listed securities or units of an equity-oriented fund held for less than 12 months, are still subject to tax under Section 111A of the Income Tax Act.
Compliance Requirements for Non-Residents
Non-residents who earn income in India must comply with the provisions of the Income Tax Act. This includes filing an income tax return and obtaining a PAN, as mentioned earlier. Non-residents must also ensure that they receive Form 15CB from a Chartered Accountant, which certifies that the income is subject to tax in India and that the appropriate tax has been deducted and paid.
Challenges of Section 115E
While Section 115E provides benefits to non-residents, it also presents some challenges. For example, the flat rate of 20% may be higher than the tax rate that would apply to the same income earned by an Indian resident. This can make it more expensive for non-residents to invest in India, which may discourage foreign investment.
Another challenge is that non-residents may not always be aware of their tax obligations in India, especially if they are not familiar with the Indian tax system. This can lead to non-compliance and penalties, which can be costly.
Finally, the requirement to obtain a PAN and file an income tax return in India can be time-consuming and expensive for non-residents. This can discourage non-residents from investing in India, especially if they have to comply with similar requirements in their home country.
Ways to Encourage Foreign Investment in India
To encourage foreign investment in India, the government can take various steps, such as:
- Simplifying the tax structure – The government can simplify the tax structure for non-residents, such as by reducing the tax rate or providing more exemptions. This can make investing in India more attractive for foreign investors.
- Streamlining compliance requirements – The government can streamline compliance requirements for non-residents, such as by simplifying the process of obtaining a PAN or reducing the number of tax filings required. This can reduce the burden on non-residents and encourage more investment in India.
- Providing incentives – The government can provide incentives for foreign investors, such as tax breaks, subsidies, or other financial benefits. This can make investing in India more attractive for foreign investors.
- Enhancing infrastructure – The government can invest in infrastructure, such as transportation, telecommunications, and power supply, to make it easier and more cost-effective for foreign investors to do business in India.
- Improving the business environment – The government can improve the business environment in India, such as by reducing bureaucracy, increasing transparency, and simplifying regulations. This can make India a more attractive destination for foreign investment.
Conclusion
Section 115E of the Income Tax Act provides a simplified tax structure for non-residents who earn income in India. While this provision provides benefits to non-residents, it also presents challenges, which may discourage foreign investment in India. To encourage more foreign investment, the government can take various steps, such as simplifying the tax structure, streamlining compliance requirements, providing incentives, enhancing infrastructure, and improving the business environment. By taking these steps, the government can promote economic growth and make India a more attractive destination for foreign investment.
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