Section 115H of the Income Tax Act: Special Provisions for Non-Residents Turning Resident

Section 115H of the Income Tax Act: Special Provisions for Non-Residents Turning Resident

India's tax laws make special considerations for non-resident Indians (NRIs) when they return home and become residents again. One such important, yet lesser-known, provision is Section 115H of the Income Tax Act. This section offers a way for returning NRIs to continue enjoying some benefits on their foreign income, even after becoming Indian residents.

Let’s dive deep into what Section 115H means, who can use it, how it works, and why it matters.

What Is Section 115H of the Income Tax Act?

Section 115H of the Income Tax Act deals with benefits available to a non-resident Indian who becomes a resident in India in any subsequent financial year. It allows the individual to continue availing certain tax concessions on income earned from foreign assets.

In simple terms, even after an NRI settles back in India, they can still be taxed as per the special NRI rules, but only under specific conditions and for a limited time.

This is especially helpful for NRIs with foreign deposits, investments, or assets that continue to earn income after they return.

Purpose of Section 115H

The Indian government introduced this section to encourage NRIs to return and settle in India without facing an immediate and full-fledged tax burden on their global income.

Section 115H is not about exemption, but rather about continuing to get taxed under the beneficial provisions originally applicable to NRIs for a period after their return.

Who Can Avail Section 115H Benefits?

To be eligible for the benefits under Section 115H:

1. The individual must have been a non-resident Indian in previous years.
2. They must become a resident Indian in the relevant assessment year.
3. The income earned must be from specified foreign sources, such as:
   • Deposits in foreign currency accounts
   • Shares or debentures of Indian companies purchased in foreign currency
   • Specified assets acquired while being a non-resident
4. The individual must declare their intention to continue taxation under Chapter XII-A in their first return of income after becoming resident.

Declaration Is Mandatory

To opt for benefits under Section 115H, it is compulsory to make a declaration in the income tax return filed in the first year of becoming a resident.

If this declaration is not submitted, the taxpayer will not be able to claim the benefits, and their foreign income will be taxed as per normal resident taxation rules.

This is a one-time opportunity and must not be missed.

Duration of Section 115H Benefits

The benefits under Section 115H do not continue indefinitely. They last only until the income is earned from the eligible foreign assets, and only so long as those assets were acquired during the non-resident period.

Once the income ceases or the asset is sold or converted, the benefit ends.

Also, the status of the taxpayer must have transitioned from non-resident to resident. If the person becomes a resident and ordinary resident (ROR), regular tax rules will eventually apply.

Example of Section 115H in Practice

Let’s say Mr. Sharma was living in the UK for 12 years and held fixed deposits in a foreign currency account. He returns to India in April 2024 and becomes a resident.

He earns interest of ₹2 lakh on those foreign FDs in FY 2024–25.

Now, if he declares in his ITR that he wants to be taxed under the provisions of Chapter XII-A (which includes Sections 115C to 115-I), he can continue to pay tax on that income under special NRI rates, instead of the regular slab rates applicable to residents.

Tax Rates Under Chapter XII-A

If a returning NRI opts for Section 115H, their income from specified assets may be taxed as follows:

• 20% on dividends (if applicable)
• 10% on long-term capital gains from listed securities
• 20% on interest income from foreign currency deposits

These flat concessional rates may be more favourable than standard income tax slabs, especially for high-income earners.

Section 115H vs RNOR Status

It’s worth noting that Section 115H is different from the RNOR (Resident but Not Ordinarily Resident) status.

While RNOR is a residential status, Section 115H is a taxation benefit that applies on a declaration basis.

However, in practice, both benefits can often align in the early years after an NRI returns to India, helping reduce their tax liability.

Things to Remember

• Section 115H of the Income Tax Act can only be exercised once, at the time of the first ITR filing after becoming a resident.
• Benefits apply only to income from foreign assets acquired while being a non-resident.
• You must declare your intent clearly and correctly to claim the benefit.
• Once opted, taxation under Chapter XII-A continues only for relevant income and only until the asset qualifies.

Final Thoughts

Section 115H of the Income Tax Act is a thoughtful and useful tax provision that helps smooth the financial transition for NRIs returning to India. It ensures that returning residents aren’t hit with full-scale tax liabilities immediately, especially on foreign investments and income earned from assets accumulated abroad.

Let’s summarise:

• Section 115H provides tax relief to returning NRIs
• You must declare your intent in your first income tax return
• It allows continued taxation under Chapter XII-A
• Applies only to income from foreign assets acquired as an NRI
• The benefit continues only for income from such assets and only if the declaration is timely

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