Section 115H — NRI Becoming Resident: Continued Benefit

Case Laws & Commentary

Section 115H — Benefit Under Chapter to be Available in Certain Cases Even After the Assessee Becomes Resident

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

1. Statutory Snapshot

Where a person who was an NRI in any previous year becomes assessable as a resident in a subsequent year, he may furnish to the Assessing Officer a declaration in writing along with his return of income under s. 139 for that assessment year, to the effect that the provisions of Chapter XII-A shall continue to apply to him in relation to the investment income derived from a foreign exchange asset being an asset referred to in sub-clauses (ii), (iii), (iv) or (v) of s. 115C(f) — i.e., public-company debentures, public-company deposits, Central Government securities and notified assets (note: shares, sub-clause (i), are excluded).

If he does so, the Chapter continues to apply to that income for that assessment year and every subsequent year until the transfer or conversion (otherwise than by transfer) into money of such assets.

2. Commentary

2.1 Purpose — grandfathering a concession for the returning NRI

s. 115H protects the NRI who repatriates and becomes resident: the concessional 20% rate on investment income from qualifying assets continues as if he were still an NRI, until those assets are sold or converted into money. The object is to avoid penalising the act of returning to India in respect of investments already made out of foreign exchange.

2.2 Two strict conditions (Dr. M. Manohar)

The Madras High Court in CIT v. Dr. M. Manohar distilled the section into two conditions: (i) a declaration along with the return for the assessment year in which the assessee first becomes assessable as resident; and (ii) the benefit continues only for income from an asset that retains its character as a 'specified (foreign exchange) asset' under s. 115C(f)(ii)–(v). Once the asset is transferred or converted into money, the benefit ends.

2.3 Shares are excluded; the asset must keep its character

Critically, s. 115H lists only sub-clauses (ii)–(v) of s. 115C(f) — debentures, deposits, Government securities and notified assets. Shares [sub-clause (i)] are not eligible for continuation. Further, the income must be traceable to the same foreign exchange asset; second-generation Indian-source income (e.g., interest on re-deposited interest) is outside the concession, as Dr. M. Manohar held.

2.4 Timing — the first-resident-year declaration

The declaration is filed with the return for the first year of residence. As the relief is elective and tied to that return, a careful, contemporaneous declaration is essential; the benefit then runs forward automatically until the asset is transferred or monetised. Treat the first-resident-year return as the single opportunity to capture the grandfathering.

3. Key Issues / Practice Points

• File the written declaration with the return of the first year of residence — it triggers the whole continuation period.
• Eligible assets are debentures, deposits, Government securities and notified assets — not shares.
• The benefit endures until transfer or conversion into money; encashing/redeeming the asset ends it. Diarise maturities and renewals.
• Income must be traceable to the original forex asset; interest-on-interest and similar accretions are taxed normally (Dr. M. Manohar).
• If the asset is shares (continuation unavailable), model s. 115-I / normal taxation instead.

4. Case Laws

Direct, leading authority:

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

This is the leading s. 115H decision. It fixes (i) the procedural condition (declaration with the first-resident-year return), (ii) the substantive condition (income from an asset that retains its s. 115C(f)(ii)–(v) character), and (iii) the boundary that excludes Indian-source accretions such as interest on re-deposited interest from the continued concession.

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).

Allied / foundational:

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 s. 115H continuation where the assessee has substantially complied with the declaration requirement — the condition is not read to defeat a bona fide claim.

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.

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

Useful by analogy on which assets 'retain their character' as foreign exchange assets — noting, however, that shares are themselves excluded from s. 115H continuation by the statute (only s. 115C(f)(ii)–(v) assets qualify).

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'.

5. Cross-references

s. 115C(f)(ii)–(v) (eligible assets) • s. 139 (return) • s. 6 (residence) • s. 115E (rate continued) • s. 115-I (alternative — opt out) • Income-tax Act, 2025, s. 217 (analogue).