Section 115F of the Income Tax Act, 1961, provides a tax exemption to Non-Resident Indians (NRIs) on long-term capital gains (LTCG) arising from the transfer of foreign exchange assets if the proceeds are reinvested in specified assets within India. This provision is designed to encourage NRIs to repatriate and reinvest their foreign earnings in India while offering tax relief.
Key Features of Section 115F
1. Applicability
- Applies only to NRIs(not other non-residents).
- Asset must be a “foreign exchange asset”—acquired and held in convertible foreign currency.
- Only long-term capital gains (LTCG)qualify—assets must be held for >12 months (for shares, mutual funds) or >24 months (for other assets like property).
2. Eligible Foreign Exchange Assets
Under Section 115F, the following assets qualify:
- Shares of an Indian company.
- Debentures issued by an Indian public company(not private companies).
- Deposits with an Indian public limited company.
- Central Government securities.
- National Savings Certificates (VI & VII issues).
3. Conditions for Tax Exemption
To claim exemption, NRIs must:
- Reinvest the net sale proceeds(not just the gain) in specified Indian assets within 6 months of transfer.
- Hold the new asset for at least 3 years—if sold earlier, the exemption is revoked, and the original capital gain becomes taxable.
- Maintain NRI statusduring the reinvestment period.
4. Calculation of Exemption
The exemption is proportional to the amount reinvested:
- If full reinvestment:Entire LTCG is exempt.
- If partial reinvestment:Only a proportionate part is exempt.
Formula:
Exempt Gain = (Amount Reinvested / Net Sale Consideration) × Total LTCG
Example:
- Sale of shares:₹4 crore (Cost: ₹2 crore, LTCG: ₹2 crore).
- Reinvestment:₹3 crore in government bonds.
- Exempt Gain:(₹3 crore / ₹4 crore) × ₹2 crore = ₹1.5 crore (tax-free).
- Taxable Gain:₹50 lakh (subject to 12.5% LTCG tax) .
5. Withdrawal of Exemption (Clawback Clause)
If the new asset is sold or converted into cash within 3 years, the exempted gain is added back to taxable income in the year of sale.
6. Compliance & Documentation
- Proof of foreign exchange remittance(e.g., FIRC—Foreign Inward Remittance Certificate).
- Investment records(bank statements, purchase documents).
- Tax return filing(even if exempt, reporting is required).
Comparison with Clause 215 (2025 Income Tax Bill)
The 2025 Bill proposes updates to Section 115F, including:
- Broader eligibility(all non-residents, not just NRIs).
- Extended reinvestment window(beyond 6 months, subject to CBDT notification).
- More investment options(potentially including mutual funds, REITs).
Strategic Takeaways for NRIs
✔ Plan reinvestments within 6 months to avoid losing exemption.
✔ Choose eligible assets carefully—real estate and gold do not qualify.
✔ Maintain records for tax compliance and audit purposes.
✔ Monitor 2025 Bill updates for new reinvestment options
