Section 115G — NRI: Return Filing Exemption

Case Laws & Commentary

Section 115G — Return of Income Not to be Filed in Certain Cases

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

1. Statutory Snapshot

An NRI is not required to furnish a return under s. 139(1) if both conditions are met:

1. his total income during the previous year consisted only of investment income and/or LTCG on a foreign exchange asset (i.e., only Chapter XII-A income); and
2. the tax deductible at source under Chapter XVII-B has been deducted from such income.

2. Commentary

2.1 A filing relaxation, not an exemption from tax

s. 115G does not exempt income; it dispenses with the return where the tax has already been fully collected at source and there is no 'other' income. TDS at the s. 115E rates is treated as the final discharge. The moment the NRI has any other income (Indian rent, business income, a non-Chapter capital gain), condition (i) fails and a return becomes due.

2.2 When a return is still advisable / mandatory

A return should still be filed to (a) claim a refund (TDS exceeding the treaty/effective rate); (b) claim a DTAA rate not applied at source; (c) carry forward a capital loss; or (d) meet any independent s. 139 filing trigger. s. 115G removes the s. 139(1) compulsion in the narrow case; it does not bar a voluntary return.

2.3 Interaction with the s. 115H / s. 115-I declarations

Both the s. 115H continuation declaration and the s. 115-I opt-out are made in / along with the return. An NRI who relies on s. 115G and files no return necessarily forgoes those return-based elections for the year.

3. Key Issues / Practice Points

• Confirm the income is exclusively Chapter XII-A income; a single rupee of 'other' income defeats s. 115G.
• Verify that TDS under Chapter XVII-B has actually been deducted on the whole of the income.
• File a voluntary return where a refund, treaty rate or loss carry-forward is sought, or any s. 139 trigger applies.
• Remember that not filing means no s. 115H / 115-I election for that year.

4. Case Laws

s. 115G is a procedural relaxation and is rarely the subject of independent litigation; it is construed on its plain language. The boundary of 'Chapter XII-A income' — the gateway condition — is, however, governed by the decision below.

Facts

• The assessee, Dr. M. Manohar, was a non-resident Indian who had made deposits with banks/companies in India out of funds brought by him from abroad. As these deposits were funded by convertible foreign exchange and answered the description of 'specified assets', they were foreign exchange assets within s. 115C.
• On maturity the assessee periodically renewed the deposits, rolling over both the original principal and the accrued interest into fresh deposits — so that successive deposits contained an 'interest-on-interest' element.
• For AY 1996-97 the assessee claimed the concessional treatment under s. 115H not only on the interest referable to the original foreign-currency-funded principal, but also on the interest earned on the re-deposited interest portion, contending it was traceable to the original foreign exchange asset.
• The Commissioner of Income Tax declined the concession on the interest-on-interest, holding that interest which had accrued in India on the re-deposited interest did not acquire the status of an investment made with foreign exchange. The Tribunal upheld that view; the assessee carried the matter to the High Court.

Question(s) for determination

Whether interest earned on a deposit made out of interest income (i.e., re-deposited interest) qualifies for the concessional rate under s. 115H as 'investment income derived from a foreign exchange asset', on the footing that it is ultimately traceable to the original foreign-currency-funded deposit.

Rival contentions

• Assessee: the interest on interest is traceable to, and a continuation of, the original foreign exchange asset; a beneficial, source-tracing construction should apply. Reliance was placed on RBI Circular No. 4 dated 11.02.1987 (referred to in the decision reported at [1987] 165 ITR 320).
• Revenue: ss. 115H/115C confine the concession to investment income derived from a foreign exchange asset that retains its specified-asset character; interest accruing in India on the re-deposited interest is fresh Indian-source income and is not an investment made with convertible foreign exchange.

Decision & reasoning

The Court read s. 115H as imposing two conditions: (i) the assessee must file a declaration along with the return for the assessment year in which he first becomes assessable as a resident, seeking the benefit; and (ii) the benefit continues only in respect of income derived from a foreign exchange asset falling within the 'specified assets' definition in s. 115C(f)(ii) to (v), and only so long as each asset retains its character as a foreign/specified asset.

On the plain language, the Court held the concessional levy is available only to investment income derived from the foreign exchange asset. The interest on the re-deposited interest had accrued in India and did not acquire the status of an investment made with foreign exchange.

The RBI circular relied on by the assessee was held to have no relevance to the assessee's situation.

Finding the section clear and free from ambiguity, the Court saw no ground to enlarge the concession and confirmed the order of the Tribunal against the assessee.

Ratio decidendi

The s. 115H/115E concession attaches to investment income derived from the original foreign exchange (specified) asset and is not infinitely inheritable; second-generation, Indian-source accretions (interest on interest) fall outside it.

A clear statutory concession is applied on its own terms; a beneficial RBI/administrative circular cannot enlarge the statutory benefit.

Application to this section

Helps decide whether the NRI's income is exclusively Chapter income (condition (i) of s. 115G). Income such as interest on re-deposited interest is not Chapter income; its presence is 'other income' that defeats the s. 115G relaxation and obliges the NRI to file a return.

Practice note: The single most-cited High Court authority on s. 115H. Useful both offensively (to fix the eligible income on becoming resident) and defensively (to resist Revenue attempts to tax non-forex accretions at normal rates only where the income genuinely flows from the forex asset).

5. Cross-references

s. 139(1) (return) • Chapter XVII-B (TDS) • s. 115A(5) (parallel no-return relaxation) • s. 115C/115E (qualifying income & rate) • s. 115H / 115-I (return-based elections).

Standing Disclaimer & Verification Note