Concessional Tax Regime to non-resident Indians (NRIs) become residents of India : Clause 217 of the Income Tax Bill, 2025, Vs. Section 115H of the Income-tax Act, 1961

Clause 217 Benefit to be available in certain cases even after assessee becomes resident.

Income Tax Bill, 2025

Introduction

Clause 217 of the Income Tax Bill, 2025, and Section 115H of the Income-tax Act, 1961, are both statutory provisions designed to provide continued tax benefits to non-resident Indians (NRIs) on certain investment incomes even after they become residents of India. These provisions are situated within special chapters of their respective legislations that deal with the taxation of non-resident Indians and foreign companies, aiming to encourage foreign investment and maintain tax certainty for returning NRIs. The transition from non-resident to resident status can have significant tax implications, and these provisions serve to mitigate potential adverse effects by grandfathering certain tax benefits. This commentary provides a comprehensive analysis of Clause 217 and Section 115H, delving into their objectives, key provisions, practical implications, and comparative aspects, with a focus on legislative intent, interpretive issues, and policy considerations.

Objective and Purpose

The legislative intent behind both Clause 217 and Section 115H is to incentivize investment in India by NRIs and to provide certainty and continuity in tax treatment when their residential status changes. Historically, the Indian tax regime has sought to attract foreign capital, particularly from its diaspora, by offering concessional tax rates or exemptions on income from specified assets acquired in foreign currency. However, a challenge arises when an NRI, who has made investments under the beneficial regime, returns to India and becomes a resident. Without a grandfathering provision, such individuals would lose the concessional treatment, potentially resulting in higher taxes and discouraging repatriation or continued holding of such investments.

Section 115H was introduced as part of a broader legislative framework to address this concern under the Income-tax Act, 1961. Similarly, Clause 217 in the Income Tax Bill, 2025, seeks to modernize and continue this policy, adapting it to the contemporary tax landscape and aligning with the new legislative framework. The provisions reflect a policy choice to balance revenue considerations with the need to maintain an investor-friendly environment for NRIs, thereby fostering long-term economic engagement with the Indian economy.

Detailed Analysis

1. Scope and Applicability

Both Clause 217 and Section 115H apply to individuals who were non-resident Indians in a particular year and subsequently become residents in a later year. The key condition is that the benefit is not automatic; the individual must make a specific declaration to the Assessing Officer, along with their return of income, for the year in which they become a resident. This requirement ensures that only those who actively seek to avail the benefit, and who comply with procedural formalities, are eligible.

In Clause 217(1)(a), the term "non-resident Indian" is used, and the provision is triggered when such a person "becomes assessable as a resident in India in a subsequent year." Section 115H similarly refers to "a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year." Both provisions thus hinge on the change in residential status and are closely tied to the definitions of "non-resident Indian" and "resident" as per the respective statutes.

2. Declaration Requirement

A critical procedural requirement is the furnishing of a declaration in writing to the Assessing Officer. Under Clause 217(1)(b), this declaration must be submitted "along with his return of income u/s 263 for the tax year for which he is so assessable." Section 115H similarly requires the declaration to be furnished "along with his return of income u/s 139 for the assessment year for which he is so assessable." The declaration must state that the provisions of the relevant sections (or Chapter) shall continue to apply to the investment income derived from specified assets.

The requirement of a contemporaneous declaration serves several purposes: it evidences the taxpayer's intention, aids in administrative efficiency, and prevents retrospective claims. However, it also raises practical issues, such as the consequences of inadvertent omission or late filing, which have been the subject of interpretive disputes and litigation in the past.

3. Nature of Income and Qualifying Assets

A significant aspect of both provisions is the limitation of the benefit to "investment income derived from any foreign exchange asset." Clause 217 refers to assets "referred to in section 212(e) other than a share in an Indian company," while Section 115H refers to assets "of the nature referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of clause (f) of section 115C." The exclusion of shares in Indian companies under Clause 217 is notable and marks a divergence from the 1961 Act.

The term "foreign exchange asset" generally refers to assets acquired using convertible foreign exchange, such as deposits, bonds, debentures, and government securities, but the precise scope depends on the cross-referenced definitions in the respective statutes. The exclusion of shares in Indian companies in Clause 217 suggests a policy shift, potentially to align with changes in the tax treatment of such instruments or to prevent unintended tax arbitrage.

4. Continuation of Benefits and Termination

Once the declaration is made, both provisions allow the continued application of the concessional regime "for that tax year and every subsequent tax year until the transfer or conversion (otherwise than by transfer) of such assets into money" (Clause 217) or "until the transfer or conversion (otherwise than by transfer) into money of such assets" (Section 115H). This ensures that the benefit persists as long as the qualifying asset is held and is not liquidated or otherwise converted into money.

The reference to "conversion (otherwise than by transfer)" is crucial, as it covers scenarios where the asset ceases to exist in its original form without a formal transfer, thus preventing circumvention of the termination trigger. The legislative design ensures that the benefit is not perpetual but is tied to the continued holding of the original qualifying investment.

5. Cross-referencing and Integration with Other Provisions

Clause 217 references "provisions of sections 212 to 218," thereby integrating the benefit with the broader regime for non-resident Indians and foreign companies. Section 115H refers to "the provisions of this Chapter," i.e., Chapter XIIA of the Income-tax Act, 1961. The cross-referencing ensures that the specific rules for concessional taxation, definitions, and procedural requirements for non-resident investments remain operative for the qualifying income, despite the change in residential status.

This design also ensures that any amendments or updates to the core regime automatically extend to those availing the benefit under the grandfathering provision, thereby maintaining legislative coherence and reducing interpretive uncertainty.

6. Ambiguities and Issues in Interpretation

Several interpretive issues arise from the drafting of these provisions:

• Scope of Qualifying Assets: The exclusion of shares in Indian companies under Clause 217 may give rise to disputes regarding the eligibility of hybrid or derivative instruments, or assets acquired through corporate actions.
• Procedural Compliance: The strict requirement of contemporaneous declaration may result in denial of benefit for inadvertent lapses, leading to potential hardship and litigation.
• Interaction with Anti-avoidance Rules: The continued application of concessional regimes may be challenged under general anti-avoidance rules (GAAR) if perceived as facilitating tax arbitrage, especially in the context of repeated changes in residential status.
• Definition of "Conversion": The meaning of "conversion (otherwise than by transfer)" may be contentious, particularly in cases of mergers, demergers, or succession events.

Practical Implications

1. Impact on Returning NRIs

The primary beneficiaries of these provisions are NRIs who have invested in specified assets while non-resident and subsequently return to India. The grandfathering of concessional tax treatment provides certainty and encourages continued holding of such investments, reducing the incentive to liquidate assets prematurely for tax reasons. This is particularly relevant for long-term investments, such as bonds or deposits, which may have multi-year maturities.

The requirement of a declaration ensures that only those who are aware of and actively seek the benefit can avail it, but it also places a burden of procedural compliance on returning NRIs. The exclusion of shares in Indian companies under Clause 217 may affect investment choices, potentially discouraging equity investment by NRIs if similar benefits are not available.

2. Administrative and Compliance Considerations

For tax authorities, the provisions provide a clear framework for the continued application of the concessional regime, reducing disputes over transitional cases. However, the reliance on declarations and the need to track the status of qualifying assets over time require robust administrative processes. There is also a risk of disputes over the timing and validity of declarations, as well as over the characterization of assets and income.

For taxpayers, careful record-keeping and timely compliance are essential to ensure continued eligibility. Professional advice may be necessary to navigate the procedural requirements and to assess the implications of changes in the status or form of the qualifying assets.

3. Policy and Revenue Considerations

From a policy perspective, the provisions strike a balance between attracting foreign investment and preventing revenue leakage. The exclusion of shares in Indian companies under Clause 217 may reflect a policy decision to limit the benefit to debt-like instruments or to align with changes in the taxation of equity investments. The termination of the benefit upon transfer or conversion ensures that the concessional regime is not exploited indefinitely.

For the government, the provisions may result in some revenue loss in the short term but are justified by the broader objectives of maintaining investor confidence and encouraging repatriation of funds and expertise by returning NRIs.

Comparative Analysis: Clause 217 vs. Section 115H

1. Structural Similarities

Both provisions are structurally similar, providing for the continuation of beneficial tax treatment on qualifying investment income for NRIs who become residents, subject to a declaration and until the asset is transferred or converted. They both serve as grandfathering provisions, ensuring continuity and certainty in tax treatment for returning NRIs.

2. Key Differences

• Scope of Assets: Section 115H covers assets as defined in sub-clauses (ii) to (v) of clause (f) of section 115C, which includes shares in Indian companies. Clause 217, however, specifically excludes "a share in an Indian company" from the definition of qualifying assets, thereby narrowing the scope of the benefit. This marks a significant policy shift and may have implications for NRI investment patterns.
• Cross-referenced Provisions: Section 115H refers to "the provisions of this Chapter," i.e., Chapter XIIA, while Clause 217 refers to "sections 212 to 218," suggesting a more focused application within the new legislative framework.
• Procedural References: Section 115H requires the declaration to be filed along with the return u/s 139 (the general return-filing provision), whereas Clause 217 refers to section 263 (the corresponding provision in the new Bill). This reflects the structural changes in the new legislation.
• Terminology: The 1961 Act uses "assessment year" and "previous year," while the 2025 Bill uses "tax year," reflecting the modernization and harmonization of terminology in the new Bill.

3. Policy Evolution

The exclusion of shares in Indian companies in Clause 217 may be driven by several factors: to prevent tax arbitrage through equity investments, to align with changes in international tax practices, or to focus the benefit on more stable, debt-like instruments. This change may be seen as a tightening of the grandfathering regime, possibly in response to revenue considerations or perceived misuse under the earlier provision.

The continued requirement for a declaration and the tying of the benefit to the continued holding of the original asset remain consistent, reflecting the enduring policy rationale of providing certainty to returning NRIs while safeguarding the tax base.

4. International Comparisons

Similar grandfathering provisions exist in other jurisdictions that seek to attract expatriate investment, though the scope and duration of benefits vary. The Indian approach, as reflected in both provisions, is relatively conservative, limiting the benefit to specific assets and requiring active compliance. The narrowing of the scope in Clause 217 aligns with global trends towards greater scrutiny of preferential regimes and the need to comply with international tax standards.

Comparative Table: Key Features

Feature	Section 115H of the Income-tax Act, 1961	Clause 217 of the Income Tax Bill, 2025
Eligible Person	Non-resident Indian becoming resident	Non-resident Indian becoming resident
Eligible Income	Investment income from foreign exchange asset (including shares in Indian companies)	Investment income from foreign exchange asset (excluding shares in Indian companies)
Declaration Requirement	With return u/s 139	With return u/s 263
Duration of Benefit	Until transfer/conversion into money	Until transfer/conversion into money
Reference to Provisions	Provisions of Chapter XIIA	Sections 212 to 218
Procedural Framework	1961 Act	2025 Bill

Conclusion

Clause 217 of the Income Tax Bill, 2025, and Section 115H of the Income-tax Act, 1961, are key provisions aimed at providing continued tax certainty and incentives to NRIs who return to India. While both provisions share the core objective of grandfathering concessional tax treatment for investment income from specified assets, Clause 217 introduces important changes, notably the exclusion of shares in Indian companies. This reflects an evolution in policy, balancing the need to attract NRI investment with concerns about tax arbitrage and revenue protection. The requirement for a contemporaneous declaration and the tying of the benefit to the continued holding of the original asset ensure that the provisions are targeted and administratively manageable. Stakeholders must be vigilant in complying with procedural requirements and in understanding the evolving scope of qualifying assets. Future developments may include further refinements to address interpretive ambiguities and to respond to changes in international tax norms and domestic policy priorities.

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Full Text:

Clause 217 Benefit to be available in certain cases even after assessee becomes resident.

 

Dated: 6-5-2025