Special taxation regime applicable to non-residents and foreign companies : Clause 212 of Income Tax Bill, 2025 Vs. Section 115C of Income-tax Act, 1961

Clause 212 Interpretation.

Income Tax Bill, 2025

Introduction

Clause 212 of the Income Tax Bill, 2025 introduces interpretative provisions governing the special taxation regime applicable to non-residents and foreign companies. It provides definitions for key terms such as "foreign exchange asset," "investment income," "long-term capital gains," "non-resident Indian," and "specified asset," which are foundational for the operation of subsequent sections (213 to 218) under the new legislative framework. These definitions are critical as they determine the scope of concessional tax treatment and eligibility for benefits under the special provisions for non-resident Indians (NRIs) and certain foreign investors. Section 115C of the Income-tax Act, 1961, which forms part of Chapter XII-A (inserted by the Finance Act, 1983), serves a similar function by defining the same set of terms for the purposes of special provisions relating to certain incomes of non-residents. The 1961 Act's definitions have been the cornerstone for the application of beneficial tax rates and exemptions for NRIs investing in India. The proposed Clause 212 is thus both a continuation and an evolution of the existing legal regime. This commentary examines the objectives, detailed provisions, and practical implications of Clause 212, followed by a comparative analysis with Section 115C of the Income-tax Act, 1961.

Objective and Purpose

Clause 212 seeks to provide clarity and certainty regarding the interpretation of key terms for the special regime applicable to non-residents and foreign companies. The legislative intent is to ensure that the concessional tax regime is targeted, transparent, and consistent with broader economic and policy objectives, such as attracting foreign investment, facilitating capital inflows, and providing tax certainty to NRIs and foreign entities investing in specified assets in India. Historically, India has provided a favourable tax regime for NRIs and foreign investors to encourage the inflow of foreign capital and remittances. The definitions in Section 115C were crafted to ensure that only genuine foreign investments made in convertible foreign exchange, and into specified categories of assets, are eligible for tax concessions. The new Clause 212 appears to retain this policy approach while updating references and potentially broadening the scope in light of contemporary economic realities and legislative developments.

Detailed Analysis of Key Provisions

(a) "Foreign Exchange Asset"

Clause 212 (2025): Defines "foreign exchange asset" as any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

Section 115C (1961): The definition is identical: "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

Analysis: The definition is critical as it restricts the concessional regime to assets acquired with convertible foreign exchange, ensuring that the tax benefits are available only where there is a net inflow of foreign currency into India. This aligns with the policy objective of attracting foreign investment. The term "specified asset" is cross-referenced, and its scope is further delineated in the provision. No substantive change is observed between the two provisions, indicating continuity in legislative intent. The focus remains on channeling foreign currency into India through legitimate, traceable investments.

(b) "Investment Income"

Clause 212 (2025): "Investment income" means any income derived from a foreign exchange asset.

Section 115C (1961): "Investment income" means any income derived from a foreign exchange asset. (Earlier, there was an exclusion for dividends referred to in section 115-O, but this was omitted by the Finance Act, 2020.)

Analysis: This definition is pivotal as it determines the types of income (interest, dividends, etc.) that are eligible for concessional tax treatment. The removal of exclusions for certain dividends in the 1961 Act aligns the scope with the 2025 Bill, ensuring parity and reflecting changes in the dividend taxation regime (i.e., the abolition of the Dividend Distribution Tax and the shift to taxing dividends in the hands of shareholders). The absence of reference to excluded categories in both versions simplifies the definition and broadens the scope of "investment income," potentially increasing the attractiveness of Indian assets for NRIs and foreign investors.

(c) "Long-term Capital Gains"

Clause 212 (2025): "Long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset.

Section 115C (1961): The definition is verbatim: "Long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset.

Analysis: Both provisions tie the definition of long-term capital gains to the holding period and the nature of the asset (i.e., a foreign exchange asset). This is significant because long-term capital gains are often taxed at a lower rate or are eligible for exemptions under certain conditions. The uniformity in language ensures that there is no interpretative divergence between the old and new law. The use of the phrase "not a short-term capital asset" is consistent with the general scheme of capital gains taxation.

(d) "Non-resident Indian"

Clause 212 (2025): "Non-resident Indian" means an individual, who is not a resident and is (i) a citizen of India; or (ii) a person of Indian origin.

Section 115C (1961): "Non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a 'resident.' Explanation: A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.

Analysis: While the core definition remains unchanged, there is a notable omission in Clause 212: the absence of the detailed explanation regarding "person of Indian origin." The 1961 Act provides a clarificatory explanation, which is crucial for determining eligibility, especially in cases involving second or third-generation diaspora. The absence of this explanation in the 2025 Bill could lead to interpretative uncertainty unless it is included elsewhere in the Bill or in subordinate legislation. Additionally, the phraseology in Clause 212 is more succinct, possibly reflecting a trend toward brevity in legislative drafting. However, this brevity should not come at the cost of clarity, particularly for a class of taxpayers as diverse as NRIs.

(e) "Specified Asset"

Clause 212 (2025): "Specified asset" means any of the following assets:

• Shares in an Indian company;
• Debentures issued by an Indian company which is not a private company as defined in the Companies Act, 2013;
• Deposits with an Indian company which is not a private company as defined in the Companies Act, 2013;
• Any security of the Central Government as defined in section 2(c) of the Public Debt Act, 1944;
• Such other assets as the Central Government may specify by notification.

Section 115C (1961): "Specified asset" means any of the following assets:

• Shares in an Indian company;
• Debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956;
• Deposits with an Indian company which is not a private company as defined in the Companies Act, 1956;
• Any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944;
• Such other assets as the Central Government may specify by notification in the Official Gazette.

Analysis: The most significant change is the updating of references from the Companies Act, 1956 to the Companies Act, 2013. This is a necessary legislative housekeeping step, given the repeal and replacement of the 1956 Act by the 2013 Act. The definition of "private company" under the 2013 Act (section 2(68)) is similar in substance to the previous law, but the cross-reference ensures legal consistency. Another minor change is the reference to "section 2(c)" (2025 Bill) as opposed to "clause (2) of section 2" (1961 Act) of the Public Debt Act, 1944. This appears to be a stylistic update rather than a substantive change. The power of the Central Government to notify additional assets remains intact, preserving flexibility to respond to evolving financial instruments and policy priorities.

Interpretation of Key Provisions

• Convertible Foreign Exchange: Although not separately defined in Clause 212, the term is integral to the definition of "foreign exchange asset." In the absence of a definition, it is likely to be interpreted in accordance with the prevailing RBI regulations and the Foreign Exchange Management Act, 1999.
• Person of Indian Origin (PIO): Clause 212 does not provide an explicit explanation of who qualifies as a PIO. However, the legislative intent is to cover individuals with ancestral roots in India, and it is reasonable to expect that the explanation under the existing law (Section 115C) or rules framed under the new regime will be adopted.
• Specified Asset: The definition is broadly similar to the existing law but updates references to the Companies Act, 2013, thereby ensuring legislative coherence and contemporaneity. The power to notify additional assets provides flexibility to the government to respond to evolving investment patterns.
• Exclusion of Private Companies: The exclusion of debentures and deposits with private companies is retained, reflecting a continuing policy concern about the opacity and potential misuse of private company structures for tax avoidance or money laundering.

Practical Implications

The definitions in Clause 212 have significant practical consequences for NRIs, foreign investors, Indian companies, and tax authorities:

• Eligibility for Concessional Tax Regime: Only investments meeting the precise criteria (i.e., made in convertible foreign exchange and into specified assets) will qualify for concessional tax rates or exemptions under subsequent sections. This places an onus on investors to maintain proper documentation regarding the source of funds and the nature of investments.
• Compliance and Record-keeping: Companies and financial institutions dealing with NRIs will need to verify and document the nature of investments to determine eligibility for benefits. This may require changes to onboarding and KYC procedures.
• Regulatory Coordination: The regime's reliance on RBI definitions and notifications by the Central Government means that the tax treatment of certain assets could change over time, requiring stakeholders to monitor regulatory developments.
• Policy Flexibility: The ability to notify additional "specified assets" allows the government to adapt to financial innovation and changing economic priorities, such as the development of new financial instruments or government securities.
• Exclusion of Private Companies: The continued exclusion of private companies ensures that the regime is not misused for tax avoidance, but may limit investment options for NRIs seeking exposure to unlisted entities.

Comparative Analysis: Clause 212 vs. Section 115C

A clause-by-clause comparison reveals that Clause 212 is largely a restatement, with certain updates, of Section 115C. The following table and analysis highlight the similarities and differences:

Provision	Section 115C of the Income-tax Act, 1961	Clause 212 of the Income Tax Bill, 2025	Comments
Convertible Foreign Exchange	Defined as per RBI and FEMA (explicit definition in 115C(a))	Not separately defined; referenced in "foreign exchange asset"	Potential ambiguity; likely to be interpreted per FEMA/RBI norms
Foreign Exchange Asset	Specified asset acquired with convertible foreign exchange	Same definition	No substantive change
Investment Income	Income derived from foreign exchange asset (earlier excluded certain dividends)	Income derived from foreign exchange asset	Omission of exclusion for certain dividends is in line with post-2020 law
Long-term Capital Gains	Income under "Capital gains" from a foreign exchange asset which is not a short-term capital asset	Same definition	No substantive change
Non-resident Indian	Citizen of India or person of Indian origin, not a resident; explicit explanation for PIO	Individual, not a resident, who is a citizen of India or PIO; no explicit explanation for PIO	Omission of explanation for PIO may lead to interpretive challenges; likely to be clarified by rules
Specified Asset	Shares, debentures, deposits (excluding private companies as per Companies Act, 1956), Central Govt. securities, notified assets	Shares, debentures, deposits (excluding private companies as per Companies Act, 2013), Central Govt. securities, notified assets	Update to Companies Act, 2013; otherwise identical

Key Points of Divergence

• Reference Updates: Clause 212 updates references to the Companies Act, 2013, replacing the earlier references to the Companies Act, 1956. This ensures legislative consistency and reflects the transition to the new company law regime.
• Omission of Explicit Explanation for PIO: Section 115C includes an Explanation deeming a person to be of Indian origin if he or either of his parents or grandparents was born in undivided India. Clause 212 omits this, potentially creating ambiguity regarding the scope of the term "person of Indian origin." This may require clarification through subordinate legislation or rules.
• Convertible Foreign Exchange: Section 115C(a) provides an explicit definition, tying it to RBI and FEMA. Clause 212 does not define the term, which could lead to interpretational disputes unless clarified by rules or notifications.
• Flexibility for Notified Assets: Both provisions allow the Central Government to notify additional specified assets, preserving policy flexibility.

Policy and Legal Continuity

The comparative analysis demonstrates a strong element of continuity between the two regimes. The changes are primarily editorial (updating statutory references) or relate to streamlining the text. The core policy objective-providing tax incentives for foreign investments by NRIs and PIOs into specified, regulated asset classes-remains intact.

Potential Issues and Ambiguities

• Definition of PIO: The absence of an explicit explanation for "person of Indian origin" in Clause 212 could lead to disputes or uncertainty, particularly as the concept has varied across different statutes and notifications. It is essential for the government to clarify this either in the rules or through a separate notification.
• Convertible Foreign Exchange: The lack of a definition may create interpretational challenges, especially as the concept is central to eligibility for the regime. It is advisable for the government to either incorporate a definition by reference to FEMA or issue clarificatory guidelines.
• Regulatory Overlap: The regime's reliance on RBI and government notifications means that changes in regulatory policy could have immediate tax implications, requiring stakeholders to be vigilant.

Practical Implications for Stakeholders

• For NRIs and PIOs: The regime continues to offer significant tax incentives for investment in specified Indian assets, but eligibility will depend on compliance with the detailed requirements regarding source of funds and nature of assets.
• For Indian Companies: Companies seeking to attract NRI investment must ensure that their instruments qualify as "specified assets" and that investments are made in accordance with the regime's requirements.
• For Tax Authorities: The definitions provide a clear framework for assessment, but ambiguities regarding PIO status or convertible foreign exchange may require adjudicatory or administrative clarification.
• For Policymakers: The regime balances the need for tax incentives with safeguards against abuse, but ongoing monitoring and periodic review will be necessary to ensure continued effectiveness and relevance.

Comparative Perspective: International Practice

Many jurisdictions offer special tax regimes for expatriates or foreign investors, often tying eligibility to the use of foreign currency and investment in regulated securities. The Indian regime is broadly consistent with such international practice, though the exclusion of private companies and the detailed definition of PIO reflect India-specific policy considerations.

Conclusion

Clause 212 of the Income Tax Bill, 2025, is a carefully crafted interpretative provision that updates and largely preserves the existing legal framework established by Section 115C of the Income-tax Act, 1961. The definitions provided are foundational for the operation of the special tax regime for NRIs and foreign investors. While the core policy and legal structures remain unchanged, certain editorial and reference updates reflect legislative modernization. However, potential ambiguities regarding the definition of "person of Indian origin" and "convertible foreign exchange" may require further clarification to ensure smooth administration and to prevent disputes. The provision continues to play a critical role in attracting foreign investments, supporting India's economic objectives, and providing tax certainty to overseas investors.

Alternative Titles for the Commentary

1. Interpretation and Evolution: Special Provisions for Non-Resident Indians under the Income Tax Bill, 2025
2. Clause 212 and Section 115C: A Comparative Analysis of India's Tax Regime for NRIs and Foreign Investors
3. Defining Foreign Investment Incentives: Legal Commentary on Clause 212 of the Income Tax Bill, 2025
4. Continuity and Change: The Legal Framework for NRI Investments in Indian Tax Law

 

---

Full Text:

Clause 212 Interpretation.

 

Dated: 5-5-2025