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

217(1)

Where a non-resident Indian in any tax year,–

• (a) becomes assessable as a resident in India in a subsequent tax year; and
• (b) furnishes a declaration in writing to the Assessing Officer along with his return of income under section 263for the tax year for which he is so assessable,to the effect that provisions of sections 212 to 218 shall continue to apply to him in relation to the investment income derived from any foreign exchange asset referred to in section 212(e) other than a share in an Indian company, then the provisions of this Chapter shall continue to apply in relation to such income until the transfer or conversion (otherwise than by transfer) of such assets into money.

Explanation

Section Summary:

This section allows a non-resident Indian (NRI) who becomes a resident in India to continue enjoying certain tax benefits on their foreign investment income, even after they become a resident. The benefits apply to income derived from specific foreign exchange assets (excluding shares in Indian companies) until those assets are transferred or converted into money.

Key Changes:

• Continuation of Benefits for NRIs: Previously, NRIs who became residents in India would lose certain tax benefits on their foreign investment income. This section now allows them to retain these benefits under specific conditions.
• Declaration Requirement: The taxpayer must submit a written declaration to the Assessing Officer along with their income tax return to avail of this benefit.

Practical Implications:

• For NRIs Becoming Residents: NRIs who transition to resident status can continue to enjoy tax benefits on income from foreign exchange assets (e.g., foreign currency bonds, deposits, etc.) until they sell or convert those assets.
• Exclusion of Indian Shares: The benefits do not apply to income from shares in Indian companies, which will be taxed as per regular resident tax rules.
• Compliance Burden: Taxpayers must proactively declare their intent to continue availing these benefits by submitting a written declaration with their tax return.

Critical Concepts:

• Foreign Exchange Assets: These are assets like foreign currency bonds, deposits, or other investments held in foreign currency, as defined under Section 212(e). Shares in Indian companies are excluded.
• Transfer or Conversion: The benefits cease when the foreign exchange asset is sold, transferred, or converted into money (e.g., redeemed or liquidated).
• Interaction with Other Laws: This section interacts with Sections 212 to 218, which govern the taxation of foreign exchange assets for NRIs.

Compliance Steps:

1. File a Declaration: Submit a written declaration to the Assessing Officer along with your income tax return under Section 263.
2. Specify Assets: Clearly mention the foreign exchange assets for which you want to continue availing the benefits.
3. Maintain Records: Keep documentation of the foreign exchange assets and their income to substantiate the declaration.

Examples:

• Scenario 1: An NRI holds foreign currency bonds and becomes a resident in India. They submit a declaration to continue availing tax benefits on the interest income from these bonds. The benefits will apply until they sell or redeem the bonds.
• Scenario 2: An NRI holds shares in an Indian company and becomes a resident. They cannot avail of these benefits for dividends from the Indian shares, as the law excludes income from Indian company shares.

This section provides a transitional benefit for NRIs becoming residents, ensuring they are not immediately subject to higher tax liabilities on their foreign investment income.