Understanding Section 115H of the Income Tax Act for Non-Resident Indians (NRIs)

Section 115H of the Income Tax Act: An Overview

The Income Tax Act of 1961 is a comprehensive tax law that covers all aspects of taxation in India. It provides for a wide range of taxes, including income tax, capital gains tax, and wealth tax, among others. One of the key provisions of the Income Tax Act is Section 115H, which deals with the taxation of income earned by non-resident Indians (NRIs) from specified assets.

What is Section 115H?

Section 115H of the Income Tax Act was introduced in the Finance Act, 1992, with the aim of attracting foreign investment in India. It provides for a special taxation regime for NRIs, whereby certain specified incomes earned by them are taxed at a lower rate than the normal tax rate applicable to residents.

Specified assets under Section 115H

Section 115H applies to income earned by NRIs from the following specified assets:

1. Shares and securities
2. Deposits with Indian companies
3. Deposits with public sector banks
4. Deposits with certain financial institutions
5. Units of Unit Trust of India or Mutual Funds
6. Other assets as may be notified by the Central Government

Taxation of specified incomes under Section 115H

Under Section 115H, the following incomes earned by NRIs from specified assets are taxed at a lower rate:

1. Dividend income: Dividend income earned by NRIs from Indian companies is taxed at a flat rate of 20%, as against the normal tax rate of 30%.
2. Long-term capital gains: Long-term capital gains arising from the transfer of specified assets are taxed at a flat rate of 10%, as against the normal tax rate of 20%.
3. Short-term capital gains: Short-term capital gains arising from the transfer of specified assets are taxed at a flat rate of 15%, as against the normal tax rate of 30%.

Conditions for availing the benefits of Section 115H

NRIs can avail the benefits of Section 115H if they satisfy the following conditions:

1. The NRI must be a resident of a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA).
2. The NRI must furnish a tax residency certificate (TRC) from the tax authorities of the country where he/she is a resident.
3. The NRI must have a Permanent Account Number (PAN) in India.
4. The income earned by the NRI must be from specified assets.

In addition to the benefits mentioned above, Section 115H also provides for exemption from tax deduction at source (TDS) on the specified incomes earned by NRIs. This means that the income earned by NRIs from specified assets is not subject to TDS, provided they meet the conditions laid down in the Act. This can be a significant advantage for NRIs, as it helps them avoid the hassle of claiming a refund of excess TDS deducted on their income.

However, it is important to note that the benefits of Section 115H are available only to NRIs who are residents of countries with which India has entered into a DTAA. NRIs who are residents of countries that do not have a DTAA with India are not eligible for the benefits of this section.

Moreover, NRIs must also comply with the tax laws of the country where they are residents. This means that they must report their income earned from India in their tax returns filed in their country of residence. Failure to comply with the tax laws of the country of residence can lead to penalties and other legal consequences.

Conclusion

Section 115H of the Income Tax Act provides for a special taxation regime for NRIs, which aims to attract foreign investment in India. NRIs can avail the benefits of this section if they satisfy the conditions laid down in the Act. By taxing specified incomes earned by NRIs at a lower rate, the government hopes to encourage NRIs to invest in India and contribute to the growth of the economy.

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Frequently Asked Questions (FAQs)

What is Section 115H of the Income Tax Act?
Section 115H is a special taxation regime for non-resident Indians (NRIs) that provides for a lower tax rate on certain specified incomes earned by them from assets in India.

What are the specified assets covered under Section 115H?
The specified assets covered under Section 115H include shares and securities, deposits with Indian companies, public sector banks, and certain financial institutions, units of Unit Trust of India or Mutual Funds, and other assets as notified by the Central Government.

What is the tax rate applicable to dividend income earned by NRIs under Section 115H?
Dividend income earned by NRIs from Indian companies is taxed at a flat rate of 20%, as against the normal tax rate of 30%.

What is the tax rate applicable to long-term capital gains earned by NRIs under Section 115H?
Long-term capital gains arising from the transfer of specified assets are taxed at a flat rate of 10%, as against the normal tax rate of 20%.

What is the tax rate applicable to short-term capital gains earned by NRIs under Section 115H?
Short-term capital gains arising from the transfer of specified assets are taxed at a flat rate of 15%, as against the normal tax rate of 30%.

What are the conditions for availing the benefits of Section 115H?
NRIs can avail the benefits of Section 115H if they are residents of a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA), furnish a tax residency certificate (TRC) from the tax authorities of the country of residence, have a Permanent Account Number (PAN) in India, and earn income from specified assets.

Is TDS applicable on the specified incomes earned by NRIs under Section 115H?
No, TDS is not applicable on the specified incomes earned by NRIs under Section 115H, provided they meet the conditions laid down in the Act.

Can NRIs who are not residents of countries with which India has entered into a DTAA avail the benefits of Section 115H?
No, NRIs who are not residents of countries with which India has entered into a DTAA cannot avail the benefits of Section 115H.

What are the penalties for non-compliance with the tax laws of the country of residence?
The penalties for non-compliance with the tax laws of the country of residence may vary depending on the laws of the country. In some cases, non-compliance may result in fines, penalties, and legal action.

Can NRIs claim a refund of excess TDS deducted on their income under Section 115H?
Yes, NRIs can claim a refund of excess TDS deducted on their income under Section 115H if they have paid tax on the income in their country of residence, and if the DTAA provides for a refund of excess TDS.