Exemption from Income Tax Return Filing for Non-Resident Indians : Clause 216 of Income Tax Bill, 2025 Vs. Section 115G of Income-tax Act, 1961

Clause 216 Return of income not to be furnished in certain cases.

Income Tax Bill, 2025

Introduction

Clause 216 of the Income Tax Bill, 2025, and Section 115G of the Income-tax Act, 1961, both address a critical compliance aspect for non-resident Indians (NRIs) concerning the filing of income tax returns in India. These provisions aim to streamline the tax compliance regime for NRIs, particularly in scenarios where their Indian-sourced income is limited to certain passive categories and has already been subjected to tax deduction at source (TDS). The legislative intent behind such provisions is to reduce the procedural burden on NRIs, facilitate ease of doing business, and ensure that the tax administration focuses on cases where further scrutiny is warranted. This commentary offers a detailed examination of Clause 216, systematically analyzes its contents, and juxtaposes it with the existing Section 115G, highlighting similarities, differences, and the implications for stakeholders.

Objective and Purpose

The primary objective of both Clause 216 and Section 115G is to provide a conditional exemption from the mandatory filing of income tax returns for NRIs whose Indian income profile is simple and transparent. The underlying policy considerations include:

• Reducing unnecessary compliance for NRIs with limited and straightforward income sources in India.
• Ensuring that the revenue's interests are protected through the mechanism of TDS.
• Aligning Indian tax compliance requirements with global best practices for non-resident taxation.
• Encouraging foreign investment and remittance flows by making the tax regime more NRI-friendly.

Historically, the compliance burden for NRIs has been a matter of concern, especially given the complexities of dual taxation, foreign exchange rules, and the need to maintain tax residency status. Section 115G was introduced as part of a special regime for NRIs under Chapter XII-A of the 1961 Act, and Clause 216 appears to be its successor in the proposed 2025 Bill, reflecting a continuity of legislative purpose with possible updates in terminology and procedural references.

Detailed Analysis

1. Applicability and Scope

Clause 216: Applies to a "non-resident Indian" and provides that it shall not be necessary for such a person to furnish a return of income u/s 263(1) if two conditions are met:

1. The total income during the tax year consisted only of investment income or income by way of long-term capital gains or both; and
2. The tax deductible at source under Chapter XIX-B has been deducted from such income.

Section 115G: Applies to a "non-resident Indian" and provides that it shall not be necessary to furnish a return u/s 139(1) if:

1. The total income in respect of which the person is assessable under the Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and
2. The tax deductible at source under Chapter XVII-B has been deducted from such income.

Comparison: Both provisions are nearly identical in their applicability, focusing on NRIs with income limited to investment income and/or long-term capital gains. The key differences are in the references to the relevant sections for return filing (section 263(1) in the Bill and section 139(1) in the 1961 Act) and the chapters governing TDS (XIX-B vs. XVII-B).

2. Definitions and Terminology

Non-resident Indian: Both provisions employ the term "non-resident Indian," which is typically defined elsewhere in the respective statutes. The definition generally includes an individual being a citizen of India or a person of Indian origin, who is not a resident in India.

Investment Income: This term is specifically defined in Chapter XII-A of the 1961 Act and refers to income derived from foreign exchange assets. It is expected that the 2025 Bill would carry forward or suitably modify this definition.

Long-term Capital Gains: Both provisions include income by way of long-term capital gains, which refers to gains arising from the transfer of capital assets held for a specified period.

Tax Deductible at Source: The requirement is that TDS must have been deducted as per the relevant chapter (XVII-B in the 1961 Act, XIX-B in the 2025 Bill). This ensures that the tax liability on such income has been discharged at source.

3. Procedural Aspects

Return Filing Requirement: The core relief under both provisions is the exemption from filing the return of income. In the 1961 Act, the general obligation to file a return is u/s 139(1). In the 2025 Bill, it is u/s 263(1), which presumably serves a similar function.

Conditions for Exemption:

• The NRI's total income must be exclusively from investment income and/or long-term capital gains.
• TDS must have been properly deducted on all such income.

If either condition is not met-such as the NRI having other sources of income or TDS not being deducted-the exemption does not apply, and the NRI is required to file a return.

4. Chapter Reference and Legislative Framework

1961 Act: Chapter XVII-B deals with TDS provisions. Section 139(1) is the principal provision mandating the filing of income tax returns.

2025 Bill: The references are to Chapter XIX-B for TDS and section 263(1) for return filing. These changes are likely a result of the re-codification and restructuring of the statute in the new Bill. The substance, however, remains consistent.

5. Ambiguities and Issues in Interpretation

• Definition Consistency: The precise definitions of "investment income" and "non-resident Indian" must be consistently maintained to avoid interpretational disputes.
• Scope of Income: The phrase "consisted only of investment income or income by way of long-term capital gains or both" excludes NRIs with any other Indian income (e.g., salary, business, or short-term capital gains) from the exemption.
• TDS Compliance: The requirement is that TDS "has been deducted," but the provision does not clarify the consequences if TDS is deducted at an incorrect rate or if there is a shortfall.
• Procedural Reference Changes: The shift from Chapter XVII-B/section 139(1) to Chapter XIX-B/section 263(1) may create transitional confusion unless the corresponding provisions are clearly mapped in the new legislation.

Practical Implications

For Non-Resident Indians

• Compliance Relief: NRIs with only investment income or long-term capital gains, and where TDS has been deducted, are spared the procedural burden of return filing.
• Risk of Non-Compliance: If an NRI erroneously assumes exemption but has other income or insufficient TDS, penalties for non-filing may be attracted.
• Documentation: NRIs should retain evidence of TDS deduction and the nature of their income to defend their exemption status in case of scrutiny.

For Tax Authorities

• Administrative Efficiency: The exemption allows the tax department to focus resources on more complex cases, as simple, fully-taxed incomes are filtered out.
• Monitoring Mechanism: Effective information exchange with financial institutions and TDS deductors is essential to ensure that the exemption is not misused.

For Financial Institutions and Deductors

• Accurate TDS Deduction: Banks and other intermediaries must ensure correct TDS rates are applied to NRI investment incomes and capital gains.
• Reporting Obligations: Deductors should provide TDS certificates and report such deductions to the tax authorities to facilitate cross-verification.

For Policymakers

• Policy Continuity: The near-identical framing of Clause 216 and Section 115G reflects a policy continuity and a recognition of the efficacy of the existing exemption.
• Modernization and Clarity: The restructuring of chapter and section references should be accompanied by clear transitional provisions and public awareness initiatives.

Comparative Table: Clause 216 of the Income Tax Bill, 2025 vs. Section 115G of the Income-tax Act, 1961

Provision	Clause 216	Section 115G
Return of Income Not to be Furnished	Exemption from furnishing return u/s 263(1)	Exemption from furnishing return u/s 139(1)
Eligibility	Non-resident Indian	Non-resident Indian
Nature of Income	Only investment income or long-term capital gains or both	Only investment income or long-term capital gains or both
Tax Deducted at Source	Deducted under Chapter XIX-B	Deducted under Chapter XVII-B
Time Reference	Tax year	Previous year

Comparative Analysis

1. Legislative Continuity and Changes

The comparison reveals that Clause 216 is a direct successor to Section 115G, with cosmetic changes in procedural references due to the reorganization of the statute. The substance, scope, and conditionalities remain unchanged, signaling that the legislature finds the existing framework effective and uncontroversial.

2. Key Similarities

• Both target NRIs with income limited to investment income and/or long-term capital gains.
• Both require that TDS must have been deducted on all such income for the exemption to apply.
• Both grant a complete exemption from filing a return if conditions are satisfied.

3. Key Differences

• Section References: The 1961 Act refers to section 139(1) and Chapter XVII-B, while the 2025 Bill refers to section 263(1) and Chapter XIX-B. These are essentially equivalent in their respective statutes.
• Terminology Updates: The 2025 Bill may have updated definitions and procedural frameworks, which could affect the practical application of the provision.

4. International Comparison

Globally, many jurisdictions offer similar compliance relief to non-residents with limited and fully-taxed income sources. For instance, the United States exempts certain non-residents from filing returns if their only U.S. income is subject to withholding at source at the correct rate. The Indian approach aligns with these international best practices, promoting ease of compliance for inbound investments and remittances.

5. Potential Issues and Recommendations

• Clarity in Definitions: The definitions of "investment income," "long-term capital gains," and "non-resident Indian" must be harmonized and clearly cross-referenced in the new Bill to avoid interpretational disputes.
• Transition Management: The migration from the 1961 Act to the 2025 Bill should be managed with clear guidance to taxpayers and professionals regarding the mapping of old and new provisions.
• Addressing TDS Errors: The provision could clarify the treatment of cases where TDS is deducted at a lower rate or not at all due to deductor error, to avoid penalizing innocent NRIs.
• Digital Integration: The exemption regime can be further strengthened by integrating TDS data with the tax portal, allowing automatic recognition of exemption eligibility for NRIs.

Conclusion

Clause 216 of the Income Tax Bill, 2025, represents a faithful continuation of the policy enshrined in Section 115G of the Income-tax Act, 1961, providing targeted compliance relief to NRIs with simple, fully-taxed income profiles. The provision strikes a balance between administrative efficiency, taxpayer convenience, and revenue protection. Its effectiveness, however, depends on clear definitions, robust information exchange, and careful transition management as the new regime is implemented. The approach aligns with global practices and will likely continue to serve as a model for NRI taxation in India. Policymakers may consider further refinements to address practical issues such as TDS errors and to leverage technology for seamless compliance verification.

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Full Text:

Clause 216 Return of income not to be furnished in certain cases.

 

Dated: 5-5-2025