Income Tax

Section 115H and its Impact on Income of NRI’s

Introduction

The tax regime of every country is an integral component of its economy since it is one of the primary sources of government funding. In India, the Income Tax Act, 1961 was enacted for levying a tax on services & products or income of the Indian residents. The Indian taxation system levies tax on an assessee income based on several criteria. One such criterion is the “residential status” of the assessee. an analysis on section 115h of the income tax act, covering benefit under section 115h resident.

Meaning of Residential Status

Residential Status of an individual refers to the time period for which he/she has stayed in the Indian territory in the financial year for which taxable income is being computed.

In modern times, the prospects of jobs have increased manifold, and people are no more confined to their domestic country when it comes to earning income. Therefore, the question arises on how to charge those residents who are not permanently residing in India. Under the Income Tax Act, provisions have been included for the imposition of tax on the income of such Non-Resident Indians (NRIs)^[1].  

Determining Residential Status

As per the Income Tax Act, 1961, a person may be:

• Resident
• A Resident not Ordinarily Resident
• Non-Resident

1. Resident

An individual is considered to be a resident of India if he satisfies one of the following two conditions:

1. Has been in India for a period of 182 days or more in the relevant previous year

OR

• Has been in India for a period of 365 days or more in the preceding four previous years and 60 days or more in the relevant financial year

• Resident Not Ordinarily Resident

An individual is said to be Resident Not Ordinarily Resident (RNOR) if he meets both the following conditions:

1. Residential status has been “Resident of India” for at least 2 years out of 10 previous years.

OR

• Has been in India for a period of 730 days or more in the preceding seven previous years.

• Non-Resident Indian (NRI)

If an individual doesn’t satisfy any of the above conditions of the resident of India or Resident Non-Ordinarily resident is said to be Non-Resident Indian (NRI).

Residential status of Crew Members of Ships

• Period of starting date to end date of Continuous Discharge Certificate shall not be considered as a period of stay in India. Continuous Discharge certificate is an identity certificate for seafarer issued by his own country.
• Continuous Discharge Certificate must be made as per the merchant shipping act, 1958.
• This certificate is issued for the voyage that dispatches from the Indian port and reaches to any port outside India.
• An assessee who is a crew member & has spent less than 3 months in India is said to be NRI.

• Residential status of crew members sailing in foreign ships

An Indian crew member who sails in foreign ships for 182 days or more has the residential status of an NRI irrespective of the coastal boundaries of ships, i.e., whether they are in Indian boundaries or not.

• Residential status of crew members sailing in foreign ships

An Indian crew member who sails in Indian ship for 182 days or more is considered as an NRI. And the time spent in Indian water is considered in calculating days spent in India.

what is Section 115H

As per Section 115H, an individual with Non-residential Status (NRI) gets a certain amount of concession on the tax rates applicable on Interest earned from their deposit or any Interest Income. Concessional tax rates apply even if the deposits are transferred from one bank account to another without changing its identity of convertible foreign exchange. Benefits can be availed by the NRI assessee in certain cases, even he becomes an Indian resident.

This section applies to the assessee who was NRI in the previous year and becomes an Indian resident in the current Financial Year. An assessee has to file a declaration to the Assessing Officer along with his Income Tax Return for the current financial year so that provisions of this chapter apply to him till his investments are transferred into money value.

NRIs get a concession on their tax at the rate of 20% on Investment Income and a 10% concession on tax for long term capital gains from specified assets.

Non-residents Indians have to pay tax if they fall under the jurisdiction of Income Tax Act, 1961, and they can claim certain benefits even after they are assessable as Indian residents under section 115H.

Following conditions are stipulated under Section 115H:

• Assessee needs to file a declaration and his income tax return for the financial year in which he becomes assessable as a resident of India.
• Benefits under this section will apply only to the income from foreign assets.
• Benefits of concessional levy under this section can be availed until and unless the asset is converted into money and it retains its foreign exchange nature.
• The benefits under this section are not applicable to dividend income.

Taxable Income for NRIs as per Income Tax Act, 1961

• Taxable Income of NRIs has to be taxed in India if they are earned or incurred in India.
• Income earned outside India does not become assessable under the Income Tax Act, 1961. 
• Any income that accrues or arises in India” & “is received in India” is said to be income earned in India.
• Salary of a crew member who is an NRI for serving outside India on Foreign ship is not included in taxable income for taxation in India.

For instance, Salary credited in NRE account with Indian Banks of seafarer giving service in Europe for more than 182 days will not be considered as taxable income in India.

Key-points for Taxation of NRIs

Taxation rules are different for NRIs as compared to the rules that apply to Indian Residents. Following are the major points for understanding the taxation of NRIs in India:

• Tax slabs for NRIs depend only upon their income.
• TDS is levied on all the earnings of NRIs irrespective of the threshold.
• There are no rules regarding deductions that can be claimed for investing in specified activities.
• No deduction can be claimed by the assessee on every income earned that is in the form of long-term capital gain.

Tax slab for NRIs

TAXABLE INCOME	TAX RATES
Up to INR 2500000	N/A
INR 250000 to INR 500000	10%
INR 500000 to INR 1000000	20%
Above INR 1000000	30%

Exempted income for NRIs

Following incomes are exempted for NRIs:

• Interest on NRE accounts with Indian Banks of crew members.
• Interest on Government bonds & saving certificates
• Long-term capital gains from MF & equity shares
• Dividends issued by domestic Indian Companies
• Capital gains as per section 54, 54E & 54C