Section 115F — Section 115F — NRI: LTCG Reinvestment…

STATUTORY ARCHITECTURE — 18-ROW MAP

Statutory text — Income-tax Act, 1961

115F. (1) Where, in the case of an assessee being a non-resident Indian, any long-term capital gains arise

from the transfer of a foreign exchange asset (the asset so transferred being hereafter in this section referred

to as the original asset), and the assessee has, within a period of six months after the date of such transfer,

invested the whole or any part of the net consideration in any specified asset, or in any savings certificates

referred to in clause (4B) of section 10 (such specified asset, or such savings certificates being hereafter in

this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following

provisions of this section, that is to say,—

(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the

whole of such capital gain shall not be charged under section 45;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so

much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of

acquisition of the new asset bears to the net consideration shall not be charged under section 45.

Explanation.—For the purposes of this sub-section,—

(i) "cost", in relation to any new asset, being a deposit referred to in sub-clause (iii), or specified

under sub-clause (v), of clause (f) of section 115C, means the amount of such deposit;

(ii) "net consideration", in relation to the transfer of the original asset, means the full value of the

consideration received or accruing as a result of the transfer of such asset as reduced by any

expenditure incurred wholly and exclusively in connection with such transfer.

(2) Where the new asset is transferred or converted (otherwise than by transfer) into money, within a period

of three years from the date of its acquisition, the amount of capital gain arising from the transfer of the

original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause

(a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the

head "Capital gains" relating to capital assets other than short-term capital assets of the previous year in

which the new asset is transferred or converted (otherwise than by transfer) into money.

Function in the statutory architecture

Section 115F applies to a non-resident Indian who transfers a foreign exchange asset and earns long-term capital gains. If, within six months of the transfer, he invests the whole or part of the net consideration in a specified asset, or in savings certificates referred to in s. 10(4B), the gain is relieved. Where the cost of the new asset is not less than the net consideration, none of the gain is charged under s. 45. Otherwise, the gain is exempt in the proportion that the cost of the new asset bears to the net consideration.

Net consideration is the full value of consideration received or accruing, less expenditure incurred wholly and exclusively in connection with the transfer. For a deposit, cost means the amount of the deposit.

Operative consequences

If the new asset is transferred, or converted into money otherwise than by transfer, within three years of acquisition, the gain earlier exempted becomes long-term capital gains of the year of that transfer or conversion.
Relief turns on reinvestment of the net consideration, not merely of the gain.
Only assets meeting the definitions in s. 115C qualify as the original asset or the new asset, together with the savings certificates referred to in s. 10(4B).

Status

Section 115F is operative for AY 2026-27. The Finance Act, 2026 does not amend it.

s. 215 reproduces the relief, with the same six-month and three-year periods; its new asset is a specified asset and it does not mention savings certificates. Where a sum not included in income under the 1961 Act must be included in a tax year beginning on or after 1 April 2026 because of a breach of conditions, s. 536(2)(h) deems it income of that later year.

The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 215.

Case Laws & Commentary

Section 115F — Capital Gains on Transfer of Foreign Exchange Assets Not to be Charged in Certain Cases

Chapter XII-A: Special Provisions Relating to Certain Incomes of Non-Residents

1. Statutory Snapshot

Where an NRI transfers a long-term foreign exchange asset and, within six months of the transfer, invests/deposits the whole or any part of the net consideration in a new specified asset (s. 115C(f)) or in savings certificates referred to in s. 10(4B), the LTCG is exempt as follows:

New asset ≥ net consideration: the whole of the LTCG is exempt.
New asset < net consideration: the exemption is proportionate — LTCG × (cost of new asset ÷ net consideration).
Lock-in / clawback: if the new asset is transferred or converted into money within three years, the LTCG earlier exempted is deemed to be income chargeable under 'Capital gains' of the year in which the new asset is transferred/converted.

Contrast with ss. 54/54EC/54F: s. 115F requires reinvestment of the net consideration (not merely the gain), and the eligible reinvestment universe is the specified (financial) assets, not real estate.

Position under the Income-tax Act, 2025 (w.e.f. AY 2027-28):

The roll-over exemption for NRIs is carried forward (the new-Act analogue of s. 115F), retaining the six-month window, the net-consideration basis, the proportionate formula and the three-year lock-in/clawback. Confirm the section number and the cross-reference to the savings-certificate provision (old s. 10(4B)) in the bare Act.

2. Commentary

2.1 'Net consideration', not 'gain' — the harsher base

The exemption is rationed by reference to net consideration (full value of consideration less transfer expenditure), so to exempt the whole gain the NRI must redeploy the entire sale proceeds, not just the profit. Partial redeployment yields only proportionate exemption — structurally tighter than s. 54F, and a point to flag before the client spends part of the proceeds.

2.2 Eligible reinvestment = financial 'specified assets'

Reinvestment must be into a specified asset under s. 115C(f) — shares of an Indian company, public-company debentures/deposits, Central Government securities, notified assets — or s. 10(4B) savings certificates. Immovable property does not qualify. The new asset itself need not be acquired in convertible foreign exchange (the forex test attaches to the original asset transferred).

2.3 The three-year clawback trap

If the new asset is sold or converted into money (which includes premature encashment/redemption) within three years, the previously exempted gain is resurrected and taxed in the year of that second transfer — possibly a year in which the assessee has become resident. Diarise the three-year date for every roll-over.

2.4 Bonus/rights shares as the asset transferred

Following Sanjay Gala, bonus shares carrying the forex character of the original holding are themselves a foreign exchange asset, so their LTCG is eligible for the s. 115F roll-over.

3. Key Issues / Practice Points

Compute the exemption on net consideration, and reinvest the whole of it within 6 months to exempt the entire gain; document the reinvestment date.
Reinvest only into specified financial assets / s. 10(4B) certificates — never immovable property.
Diarise the 3-year lock-in; warn the client that premature sale/encashment revives the exempted gain.
Preserve evidence that the transferred asset was a foreign exchange asset; the new asset need not be forex-funded.
Where part of the proceeds must be spent, quantify the proportionate exemption upfront.

4. Case Laws

Direct decision under Chapter XII-A:

Sanjay Gala v. Income Tax Officer

ITA No. 2989/Mum./2008 — decided 15 July 2011 | ITAT 'L' Bench, Mumbai (P.M. Jagtap, AM & V. Durga Rao, JM) | DIRECT decision under Chapter XII-A — the leading s. 115C/115F authority

Facts

The assessee, a non-resident Indian, filed a return for AY 2006-07 declaring income of Rs. 60,000.
He held shares in Indian companies. It was undisputed that the original shares had been acquired by investing convertible foreign exchange, making them foreign exchange assets. Bonus shares had subsequently been allotted to him on those original shares.
On the transfer of shares, the assessee claimed Chapter XII-A benefit (s. 115F), treating the bonus shares also as foreign exchange assets.
In the assessment under s. 143(3), the Assessing Officer refused to treat the bonus shares as foreign exchange assets, denied the s. 115C/115F benefit, and assessed the total income at Rs. 11,23,265.
The CIT(A) upheld the AO, reasoning that s. 115C(b) defines a 'foreign exchange asset' as one acquired or purchased with, or subscribed to in, convertible foreign exchange, whereas bonus shares were issued free and were neither acquired, purchased nor subscribed for by the assessee. The assessee appealed to the Tribunal.

Question(s) for determination

Whether bonus shares received in respect of original shares (admittedly acquired in convertible foreign exchange) are themselves a 'foreign exchange asset' within s. 115C(b), so as to be eligible for the s. 115F exemption.

Rival contentions

Assessee: bonus shares cannot be divorced from the original forex-funded shares; on issue of bonus shares the cost of the original shares is spread over the enlarged holding, so the forex character of the original investment flows to the bonus shares.
Revenue: the words of s. 115C(b) require acquisition/purchase/subscription in convertible foreign exchange; bonus shares involve no such payment and therefore fail the statutory test.

Decision & reasoning

The Tribunal held that the assessee had acquired the original shares by investing convertible foreign exchange, and the bonus shares cannot be considered in isolation from those original shares.

It noted that the Supreme Court and various High Courts have settled the valuation of bonus shares: the cost of acquisition of the original shares is to be spread over both the original and the bonus shares (the averaging method), because on issue of bonus shares the value of the original shares is proportionately diminished — the holding is, in effect, 'split up'. The cost and value of the original and bonus shares are therefore closely interlinked and interdependent, and once bonus shares are issued the averaging formula applies to the whole holding.

Applying that principle, the bonus shares partake of the character of the original (forex-funded) shares and are covered by s. 115C(b) as a foreign exchange asset; they are accordingly eligible for benefit under s. 115F.

The appeal of the assessee was allowed.

Ratio decidendi

The forex character of an original foreign-currency-funded shareholding flows through to bonus shares issued on it; bonus shares are a 'foreign exchange asset' under s. 115C(b) and qualify for s. 115F.

The cost-averaging principle for bonus shares (the Dalmia Investment line of authority) governs both the characterisation of the bonus shares and the quantification of the qualifying gain.

Application to this section

The leading authority defending s. 115F claims on accreted securities: bonus shares carry the forex character of the originals, are a foreign exchange asset, and the LTCG on them is eligible for the s. 115F roll-over. The cost-averaging principle also fixes the quantum of the qualifying gain that may be rolled over.

Practice note: The leading authority to defend Chapter XII-A claims on accreted/derivative securities. Retain the original FIRC / contract notes to anchor the forex 'flow-through'.

Allied / foundational (verify before citing):

Commissioner of Income Tax v. Dalmia Investment Co. Ltd.

[1964] 52 ITR 567 | Supreme Court of India | FOUNDATIONAL — cost of bonus shares (relied on in Sanjay Gala)

Facts

The assessee company held shares and was allotted bonus shares ranking pari passu with the originals. On a subsequent sale, the question arose as to the cost at which the bonus shares should be taken in computing the profit/gain.

Question(s) for determination

What is the correct method of determining the cost of acquisition of bonus shares?

Decision & reasoning

The Supreme Court examined the competing methods — taking the cost of bonus shares as nil, at face value, at market price on the date of issue, or by spreading the original cost — and held that, where the bonus shares rank pari passu with the original shares, the correct method is to spread the cost of the original shares over the whole holding (original + bonus) and take the average.

The Court reasoned that the issue of bonus shares depresses the market value of the original shares, so the cost must be re-distributed over the enlarged holding to reflect economic reality.

Ratio decidendi

Cost of bonus shares is to be computed by averaging the original cost over original and bonus shares; the two are interdependent.

Application to this section

Governs the quantification of the s. 115F-eligible gain on bonus shares by averaging the original cost over the enlarged holding.

Practice note: This is the precise principle the Mumbai Tribunal applied in Sanjay Gala to characterise bonus shares as a foreign exchange asset and to quantify the s. 115F-eligible gain.

Bajaj Tempo Ltd. v. Commissioner of Income Tax

[1992] 196 ITR 188 | Supreme Court of India | FOUNDATIONAL — construction of beneficial / incentive provisions

Facts

The case concerned an incentive provision for new industrial undertakings and the construction of the conditions attached to that exemption (including the requirement that the undertaking not be 'formed' by transfer of previously used assets).

Question(s) for determination

How should a provision granting an incentive/exemption, and the conditions limiting it, be construed?

Decision & reasoning

The Supreme Court held that a provision granting an incentive for promoting economic growth and industrialisation should be construed liberally so as to advance the objective of the provision; and that the restrictions/conditions attached to it should be construed so as not to frustrate the purpose, while remaining within the statutory language.

Ratio decidendi

Beneficial provisions receive a liberal, purposive construction; their conditions are not read in a manner that defeats the relief where the assessee is otherwise within the provision.

Application to this section

Supports a purposive reading of the reinvestment conditions where the assessee has substantially complied (e.g., reinvested within time into a qualifying specified asset) — conditions are not read to defeat the relief.

Practice note: Supports a purposive reading of the *benefit* limbs of Chapter XII-A (the s. 115F reinvestment conditions and the s. 115H continuation declaration) where there is substantial compliance — balanced, of course, against the strict computation rule in s. 115D.

5. Cross-references

s. 115C(b)/(f) • s. 10(4B) (savings certificates) • s. 48 (computation; provisos barred by s. 115D) • ss. 54/54EC/54F (parallel roll-overs — contrast the 'net consideration' base) • s. 115H (continuation).

Standing Disclaimer & Verification Note

← All sections (940)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025
s. 115F(1): long-term gains on a foreign exchange asset not charged where the net consideration is reinvested within six months	s. 215(1)
s. 115F(1), Explanation: "cost" and "net consideration"	s. 215(2)
s. 115F(2): exempted gain taxed if the new asset is transferred or converted into money within three years	s. 215(3)