Section 115D: The Special Rule That Changes Tax for Non-Residents

With globalization, cross-border investments are more common than ever. Non-residents frequently invest in India through deposits, bonds, and other financial instruments denominated in foreign currency. To bring clarity and uniformity in the taxation of such investments, the Income Tax Act introduced Section 115D, a special provision that lays down clear guidelines for how the income of non-residents should be computed.

This section is particularly important in 2025, as India continues to attract foreign investment. Understanding how income from foreign currency assets is taxed ensures non-resident investors remain compliant while optimizing their tax liability.

What is Section 115D of the Income Tax Act?

Section 115D of the Income Tax Act is a special provision for computation of total income of non-residents. It specifically applies to:

• Income earned from foreign currency assets or investments in India.
• Non-resident Indians (NRIs) who hold such assets."

The section clearly states that while computing this income, no deduction in respect of any expenditure or allowance shall be allowed. In other words, the gross income from such assets is taxable, without allowing deductions like interest expenses, management charges, or other claims.

This provision simplifies taxation & prevents misuse of deductions in cross-border transactions.

Why Section 115D Was Introduced

The government introduced Section 115D with three main objectives:

1. Clarity – To establish a mechanism for the computation of total income of non-residents.
2. Uniformity – To ensure consistent treatment of income earned from foreign currency assets.
3. Prevention of Abuse – To stop non-residents from reducing tax liability through artificial deductions.

Thus, the provision protects revenue while still encouraging foreign investment.

Also Read: A Complete Guide to Draft Assessment and Dispute Resolution Panel (DRP)

Types of Income Covered Under Section 115D

The section applies when non-residents earn income from:

• Deposits in Indian banks held in foreign currency.
• Bonds or debentures issued in foreign currency.
• Shares or securities purchased with convertible foreign exchange.
• Other notified investments denominated in foreign currency.

For all these incomes, no expenditure or allowance can be claimed against the taxable amount.

Example of Section 115D in Practice

Let’s say Mr. Khan, an NRI, invests $50,000 in a foreign currency deposit in India. In FY 2024–25, he earns $4,000 interest income.

• Without Section 115D: He could attempt to claim deductions for travel expenses, bank charges, or other costs."
• With Section 115D: The entire $4,000 is taxable as per special rates, with no deductions allowed.

This ensures fair, straightforward taxation.

Computation of Total Income under Section 115D

The method is simple:

Total Income = Gross Income from Foreign Currency Assets (without deductions)

Key rules:

• No deductions under Sections 28 to 44C (business/professional expenses).
• No allowance for interest, commission, or management fees.
• No set-off against other incomes, unless specifically permitted.

This makes the system transparent and less prone to disputes.

Also Read: The Hidden Tax-Free Benefit on NRE & FCNR Accounts

Impact on Non-Resident Investors

For NRIs, Section 115D has both pros & cons:

• Pros:
  • Simpler compliance – no need to calculate or justify deductions.
  • Predictability – easy to compute exact tax liability.
  • Encourages straightforward investments.
• Cons:
  • Lack of deductions may feel restrictive."
  • Higher effective taxation if actual expenses are significant.

However, when combined with special tax rates available for non-residents, the system remains balanced.

Relation to Other Provisions

While Section 115D governs computation of non-resident income, exemptions & deductions are available under other sections of the Act for different scenarios:

• Section 80C – Investments in eligible schemes.
• Section 54 & 54EC – Exemptions on capital gains.
• Section 10(4) & 10(15) – Exemptions on certain NRI deposits & bonds.

But specifically for foreign currency asset income, Section 115D strictly bars deductions.

Real-Life Case Study (2025)

Ms. Patel, an NRI living in Canada, invests in RBI’s FCNR (Foreign Currency Non-Resident) bonds. She earns annual income of ₹6 lakh.

• Under Section 115D, her total taxable income = ₹6 lakh, without any deductions."
• If she had expenses like bank transfer charges or advisory fees, these are not deductible.
• She pays tax as per special NRI rates prescribed in the Act.

This case reflects the real-world impact for thousands of NRIs holding Indian assets.

Also Read: Save Capital Gains Tax by Investing in Bonds

Key Points to Remember

1. Special provision for computation of total income of non-residents – applies only to foreign currency asset income.
2. Deals with taxation of income earned from foreign currency assets or investments.
3. No deduction in respect of any expenditure or allowance shall be allowed.
4. Applies to NRIs, not resident taxpayers.
5. Tax is computed on gross income, making it simple but rigid.

Conclusion

Section 115D of the Income Tax Act is a vital rule that simplifies taxation for non-resident Indians. By establishing a clear mechanism for the computation of total income & disallowing all deductions, it ensures straightforward compliance and prevents misuse of provisions.

For NRIs, this means clear expectations—income from foreign currency assets is taxed at prescribed rates, without deductions. While it may limit flexibility, it provides certainty and protects India’s revenue base.

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