Income Tax 2025

Appearance

Interpretation ​

212 ​

In sections 213 to 218,—

  • (a) “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;
  • (b) “investment income” means any income derived from a foreign exchange asset;
  • (c) “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;
  • (d) “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;
  • (e) “specified asset” means any of the following assets:— (i) shares in an Indian company; or (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 2013; or (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 2013; or (iv) any security of the Central Government as defined in section 2(c) of the Public Debt Act, 1944; or (v) such other assets as the Central Government may specify in this behalf by notification.
Explanation

Section Summary: ​

Section 212 provides definitions for key terms used in sections 213 to 218 of the Income Tax Act. These definitions are crucial for understanding the tax treatment of income derived from foreign exchange assets, particularly for non-resident Indians (NRIs). The section clarifies what constitutes a "foreign exchange asset," "investment income," "long-term capital gains," "non-resident Indian," and "specified asset."

Key Changes: ​

This section is primarily a clarification and does not introduce new changes. However, it consolidates and defines terms that are critical for interpreting the subsequent sections (213 to 218). The definitions align with existing laws, such as the Companies Act, 2013, and the Public Debt Act, 1944.

Practical Implications: ​

  1. For NRIs: The definitions help NRIs understand how their income from foreign exchange assets (e.g., shares, debentures, or deposits in Indian companies) will be taxed. This is particularly relevant for NRIs who invest in India using convertible foreign exchange.
  2. For Businesses: Companies issuing shares, debentures, or accepting deposits from NRIs must ensure compliance with the definitions provided, especially when reporting income or capital gains derived from these assets.
  3. For Tax Authorities: The section provides a clear framework for assessing and taxing income from foreign exchange assets, reducing ambiguity in interpretation.

Critical Concepts: ​

  1. Foreign Exchange Asset: Any asset acquired or purchased using convertible foreign exchange. This includes shares, debentures, deposits, or government securities.
  2. Investment Income: Income derived from foreign exchange assets, such as dividends, interest, or capital gains.
  3. Long-Term Capital Gains: Gains from the sale of a foreign exchange asset held for more than 36 months (or 12 months in the case of certain assets like listed shares).
  4. Non-Resident Indian (NRI): An individual who is not a resident of India but is either a citizen of India or a person of Indian origin.
  5. Specified Asset: Includes shares, debentures, deposits in Indian companies (excluding private companies), and government securities.

Compliance Steps: ​

  1. For NRIs: Ensure that investments in India are made using convertible foreign exchange to qualify as "foreign exchange assets."
  2. For Businesses: Maintain proper records of investments made by NRIs and ensure that income derived from these assets is correctly classified and reported.
  3. For Tax Authorities: Use the definitions provided in Section 212 to assess and tax income from foreign exchange assets accurately.

Examples: ​

  1. Scenario 1: An NRI invests $10,000 in shares of a publicly listed Indian company using convertible foreign exchange. The dividends received from these shares qualify as "investment income" under Section 212.
  2. Scenario 2: An NRI sells shares of an Indian company after holding them for 24 months. The gains from this sale are classified as "long-term capital gains" because the shares are a foreign exchange asset held for more than 12 months.

This section lays the groundwork for understanding the tax implications of income derived from foreign exchange assets, particularly for NRIs, and ensures clarity in the application of subsequent sections.