Section 115H of Income Tax Act: Everything You Need to Know in 2023

Section 115H is a provision under the Income Tax Act that deals with the taxation of long-term capital gains made by a non-resident Indian (NRI). The section provides certain benefits to NRIs who are looking to sell their assets in India. In this blog post, we will discuss the various provisions of Section 115H and its implications for NRIs.

What is Section 115H of the Income Tax Act?

Section 115H of the Income Tax Act, 1961 was introduced in 1992 to provide relief to non-resident Indians (NRIs) who are looking to sell their assets in India. It provides certain tax benefits to NRIs who earn long-term capital gains on the sale of their assets. This section applies to NRIs who are eligible to claim relief under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.

The provisions of Section 115H apply to long-term capital gains earned by NRIs on the sale of any capital asset such as land, building, shares, securities, and other investments. The section provides relief to NRIs in the form of a lower tax rate on the long-term capital gains earned by them.

Eligibility criteria for claiming benefit under Section 115H

To claim the benefit under Section 115H of the Income Tax Act, the following eligibility criteria must be met:

1. The NRI must be a resident of a country with which India has signed a Double Taxation Avoidance Agreement (DTAA).
2. The NRI must have earned long-term capital gains from the sale of any capital asset in India.
3. The NRI must have furnished a tax residency certificate (TRC) issued by the tax authorities of the country in which he/she is a resident.
4. The NRI must not have taxable income in India, apart from the long-term capital gains from the sale of the asset.

Benefits of Section 115H

The benefits of Section 115H are as follows:

1. Lower tax rate: Under Section 115H, the tax rate on long-term capital gains earned by NRIs is lower than the tax rate applicable to resident Indians. As per the current tax laws, the tax rate applicable to NRIs on long-term capital gains is 20%, while for resident Indians, it is 30%.
2. Exemption from filing tax returns: NRIs who have earned long-term capital gains from the sale of their assets in India and have no other income taxable in India, except for the gains, are not required to file income tax returns.
3. No TDS deduction: Under Section 115H, no tax is required to be deducted at source (TDS) on the long-term capital gains earned by NRIs.
4. Time period for reinvestment: If an NRI wishes to avail the benefits of Section 115H, he/she must reinvest the long-term capital gains earned from the sale of the asset in India within six months from the date of sale. This reinvestment can be made in specified assets such as residential property, bonds, or shares of an Indian company.
5. Indexed cost of acquisition: The cost of acquisition of the asset is indexed to inflation as per the Income Tax Act. This means that the cost of acquisition is adjusted for inflation, which reduces the capital gains tax liability of the NRI.

Procedure for claiming benefit under Section 115H

To claim the benefit under Section 115H, the NRI must file Form 10F along with the tax return. The NRI must also furnish a tax residency certificate (TRC) issued by the tax authorities of the country in which he/she is a resident. The TRC must be valid for the relevant assessment year and must contain the following details:

• Name and address of the individual
• Tax identification number or unique identification number in the country of residence
• Residential status for the purpose of tax in the country of residence
• Period for which the certificate is valid

The NRI must also provide a declaration stating that his/her taxable income in India, after considering all deductions and exemptions, does not exceed the basic exemption limit for the relevant assessment year.

It is important to note that the benefit under Section 115H is available only to NRIs and not to resident Indians. Additionally, the benefit is available only for long-term capital gains arising from the sale of equity shares or equity-oriented mutual funds, and not for short-term capital gains.

It is also important to note that the benefit under Section 115H is available only for NRIs who are residents of a country that has a tax treaty with India. The tax treaty must have a clause related to the taxation of capital gains. If the NRI is a resident of a country that does not have a tax treaty with India, then he/she will not be eligible for the benefit under Section 115H.

Conclusion:

Section 115H of the Income Tax Act provides a beneficial tax regime for NRIs who earn long-term capital gains from the sale of equity shares or equity-oriented mutual funds. The section allows NRIs to claim a lower tax rate of 10% on such gains, provided certain conditions are met. NRIs must file Form 10F along with their tax returns and provide a tax residency certificate issued by the tax authorities of the country in which they are a resident. It is important to note that the benefit under Section 115H is available only to NRIs who are residents of a country that has a tax treaty with India. By taking advantage of this section, NRIs can effectively manage their tax liabilities and optimize their returns on investments in the Indian stock market.