Taxation of Foreign Exchange Asset Transfers by NRIs : Clause 215 of the Income Tax Bill, 2025 Vs. Section 115F of the Income-tax Act, 1961

Clause 215 Capital gains on transfer of foreign exchange assets not to be charged in certain cases.

Income Tax Bill, 2025

Introduction

Clause 215 of the Income Tax Bill, 2025 ("the Bill") seeks to provide special provisions for non-resident Indians (NRIs) regarding the non-taxation of long-term capital gains arising from the transfer of foreign exchange assets, subject to certain conditions. This clause is a direct successor to Section 115F of the Income-tax Act 1961 ("the 1961 Act"), which has been the cornerstone provision governing similar tax reliefs for NRIs for decades. The legislative intent behind both provisions is to incentivize NRIs to reinvest proceeds from foreign exchange assets into specified assets within India, thereby channeling foreign funds into the Indian economy while providing tax relief on capital gains.

Given the evolving landscape of global tax laws, capital flows, and India's increasing engagement with its diaspora, an in-depth analysis of Clause 215, juxtaposed with the established Section 115F, is essential to understand the continuity, changes, and potential impact of the proposed legislation.

Objective and Purpose

The primary objective of Clause 215, much like its predecessor Section 115F, is to promote investment by NRIs in India by offering tax incentives. The provision aims to:

• Encourage NRIs to reinvest capital gains derived from foreign exchange assets into specified assets within India.
• Provide tax exemption for long-term capital gains, subject to reinvestment conditions, thereby making India an attractive investment destination for the diaspora.
• Ensure that the benefit is available only if the investment is retained for a minimum period, preventing short-term capital flight.

Historically, the policy rationale has been to attract foreign capital, stabilize forex reserves, and foster economic growth by leveraging the financial strength of NRIs. The provision also reflects India's commitment to providing a favorable tax regime for its citizens abroad, aligning with international best practices.

Detailed Analysis of Clause 215 of the Income Tax Bill, 2025

1. Applicability and Eligible Assessees

Clause 215 applies specifically to non-resident Indians (NRIs), a term which, as per the Income Tax Act, refers to individuals of Indian origin or citizens of India who do not reside in India. The provision is not applicable to other non-residents such as foreign companies or foreign nationals, unless otherwise specified elsewhere in the Bill.

The focus on NRIs is consistent with the government's policy to facilitate and incentivize the Indian diaspora's engagement with the Indian economy.

2. Nature of Capital Gains Covered

The clause covers long-term capital gains arising from the transfer of a foreign exchange asset. The term "foreign exchange asset" generally refers to assets acquired, held, or transferred in foreign currency, typically including shares, debentures, deposits, or other securities notified by the government.

The exclusive coverage of long-term capital gains (as opposed to short-term) is significant, as it aligns with the policy of rewarding sustained investment rather than speculative trading.

3. Reinvestment Requirement and Timeframe

The exemption is available only if the NRI invests the whole or any part of the net consideration from the transfer of the original asset into a specified asset (the "new asset") within six months of the transfer.

This six-month window is designed to ensure prompt reinvestment, thereby minimizing the risk of capital outflows and ensuring that the proceeds remain within the Indian economy or are quickly redeployed into productive assets.

4. Quantum of Exemption

The clause provides for two scenarios:

• Full Exemption: If the cost of the new asset is not less than the net consideration received from the transfer, the entire capital gain is exempt from taxation u/s 67.
• Proportionate Exemption: If the cost of the new asset is less than the net consideration, a proportionate amount of the capital gain is exempt, calculated using the formula:
  A = B x C / D
  Where:
  A = capital gains not to be charged
  B = whole of the capital gain
  C = cost of acquisition of the new asset
  D = net consideration in respect of the original asset

This approach ensures fairness and proportionality, rewarding the reinvestment of capital gains to the extent actually made by the assessee.

5. Definitions and Explanations

Clause 215 provides specific definitions:

• "Cost" in relation to a new asset (being a deposit referred to in section 212(e)(iii)(v)) means the amount of such deposit.
• "Net consideration" is defined as the full value of consideration received or accruing as a result of the transfer, reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

These definitions are crucial for computational clarity and to avoid disputes regarding the eligibility and quantum of exemption.

6. Lock-in Period and Taxability on Premature Conversion

If the new asset is transferred or converted (otherwise than by transfer) into money within three years from the date of acquisition, the capital gain previously exempted becomes taxable in the year of such transfer or conversion.

This "claw-back" provision is intended to prevent abuse of the exemption by ensuring that the reinvested amount remains locked into the specified asset for a reasonable period, thereby serving the policy objective of long-term capital formation.

7. Reference to Section 67

Clause 215 refers to "section 67" as the charging section for capital gains in the new Bill, analogous to section 45 in the 1961 Act. The cross-reference is important for determining the operative provisions for computation and taxation of capital gains.

Practical Implications

1. For Non-Resident Indians

NRIs stand to benefit significantly from Clause 215, as it allows them to defer or avoid long-term capital gains tax by reinvesting in specified assets. This not only provides a tax-efficient exit route from existing investments but also encourages continued engagement with the Indian economy.

However, NRIs must be vigilant about:

• Strict adherence to the six-month reinvestment window.
• Proper computation of net consideration and cost of new asset.
• Maintaining the investment for at least three years to avoid claw-back of the exemption.

2. For Businesses and Financial Intermediaries

Financial institutions, asset managers, and intermediaries catering to NRIs will need to align their product offerings to facilitate eligible investments and provide guidance on compliance with the new law. They must also ensure robust documentation and reporting to withstand scrutiny by tax authorities.

3. For Tax Authorities

The provision necessitates vigilant monitoring of reinvestment timelines, asset types, and subsequent transfers or conversions to ensure that the exemption is not misused. The clear definitions and computational formulae provided in Clause 215 should aid in minimizing interpretational disputes.

4. Compliance and Procedural Aspects

Taxpayers availing the exemption must maintain meticulous records of:

• Sale consideration and associated transfer expenses.
• Dates and amounts of reinvestment.
• Nature and cost of new assets acquired.
• Subsequent transfers or conversions of the new asset.

Any procedural lapses or non-compliance could result in denial of exemption or triggering of the claw-back provision.

Comparative Analysis: Clause 215 vs. Section 115F

1. Structural Parity

Clause 215 of the Bill closely mirrors Section 115F of the 1961 Act in both structure and substantive content. Both provisions:

• Apply to NRIs and cover long-term capital gains from foreign exchange assets.
• Require reinvestment of net consideration in specified assets within six months.
• Offer full or proportionate exemption based on the quantum of reinvestment.
• Define "cost" and "net consideration" in similar terms.
• Provide for claw-back of exemption if the new asset is transferred or converted into money within three years.

2. Differences in Language and Cross-References

While the substantive content is largely identical, there are some notable differences:

• Section References: Clause 215 refers to "section 67" for charging capital gains, whereas Section 115F refers to "section 45." This is a result of the renumbering and restructuring in the new Bill.
• Specified Asset Definitions: Section 115F refers to assets as defined in section 115C(f), whereas Clause 215 refers to section 212(e)(iii)(v). The actual scope of "specified asset" may vary depending on the definitions adopted in the new Bill.
• Language Simplification: Clause 215 uses more streamlined language, possibly to enhance clarity and legislative drafting standards.
• Reference to Savings Certificates: Section 115F explicitly refers to savings certificates u/s 10(4B), while Clause 215 does not mention savings certificates, possibly reflecting a change in the scope of eligible assets.
• Transitional and Editorial Changes: Certain editorial and transitional provisions in Section 115F (such as references to omitted clauses and savings certificates) are absent in Clause 215, suggesting a move towards simplification and modernization.

3. Substantive Differences and Policy Implications

• Eligible Assets: The exclusion of savings certificates and possible redefinition of "specified asset" under Clause 215 could narrow or otherwise alter the range of eligible reinvestment options for NRIs.
• Reference to Deposits: The definition of "cost" in relation to a deposit refers to section 212(e)(iii)(v) in Clause 215, which may represent a shift in focus compared to the earlier cross-reference to section 115C(f) in Section 115F. The actual impact will depend on how "deposit" and "specified asset" are defined in the new Bill.
• Claw-back Mechanism: Both provisions retain the three-year lock-in period, but Clause 215 uses the phrase "converted (otherwise than by transfer) into money," which could potentially broaden the scope of triggering events compared to the language in Section 115F.
• Terminology and Clarity: Clause 215 appears to be drafted with greater precision, potentially reducing interpretational disputes that have arisen u/s 115F.

4. Ambiguities and Potential Issues

Despite the similarities, some ambiguities may arise:

• Definition of "Specified Asset": The precise scope of "specified asset" and "deposit" under the new Bill needs to be examined in the context of the full text of section 212(e)(iii)(v) and related provisions. Any narrowing or broadening of the definition could materially impact the availability of the exemption.
• Transitional Issues: For NRIs with investments straddling the old and new regimes, transitional provisions (if any) will be critical to ensure continuity of benefits and avoid double taxation or denial of exemption.
• Interpretation of "Conversion (otherwise than by transfer) into money": The practical scope of this phrase may require clarification, especially in cases of partial withdrawals, pledges, or other forms of encumbrance.

5. International and Comparative Perspective

Similar tax exemption provisions for reinvestment of capital gains exist in other jurisdictions, such as the United States (Section 1031 like-kind exchanges) and the United Kingdom (rollover relief). The Indian approach, as reflected in Clause 215, is consistent with international best practices, though with its own eligibility criteria and lock-in periods tailored to the Indian context.

Conclusion

Clause 215 of the Income Tax Bill, 2025, represents a continuation of the policy framework established under section 115F of the Income-tax Act, 1961, with certain refinements and modernizations. It retains the core incentive structure for NRIs, offering exemption from long-term capital gains tax on foreign exchange assets, subject to timely reinvestment in specified assets and adherence to a lock-in period.

While the provision is largely a restatement of existing law, the changes in cross-references, terminology, and possible redefinition of eligible assets warrant careful scrutiny. Stakeholders, including NRIs, financial intermediaries, and tax authorities, must familiarize themselves with the new legislative framework to ensure compliance and optimal utilization of the exemption.

Areas meriting further attention include the precise definition of "specified asset," the scope of "conversion into money," and the treatment of transitional cases. Judicial or administrative clarification may be required to address any ambiguities that arise in the course of implementation.

---

Full Text:

Clause 215 Capital gains on transfer of foreign exchange assets not to be charged in certain cases.

 

Dated: 5-5-2025