My client is a person of Indian origin living in Dubai. He bought shares in an Indian listed company out of rupees lying in his NRO account. The assessing officer says Chapter XII-A does not apply to him at all and has taxed the gain at the ordinary rate. Is he right?
On these facts, yes — and the reason is the funding, not the status. Section 115C(b) defines a "foreign exchange asset" as any specified asset "which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange", so an asset bought out of rupee funds is not a foreign exchange asset, and nothing in Chapter XII-A — not s.115E, not s.115F, not s.115H — can reach it. Being a non-resident Indian within s.115C(e) is a necessary condition but never a sufficient one.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-04-01, reported as Income-tax Act, 1961, s.115C, as it stands after the omission of the words 'other than dividends referred to in section 115-O' with effect from 1 April 2021. It bears on section 115C, section 115C(a), section 115C(b), section 115C(c), section 115C(d), section 115C(e), section 115C(f), section 115D, section 115E, section 115F, section 115G, section 115H, section 115-I, section 6, section 2(42A) of the Income Tax Act 1961, in Residence & Treaty Benefit, Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
Chapter XII-A has two independent gates and practitioners routinely argue only the first. The first gate is the person: s.115C(e) defines "non-resident Indian" as an individual, being a citizen of India or a person of Indian origin, who is not a "resident" — and the Explanation deems a person to be of Indian origin if he, or either of his parents, or any of his grand-parents, was born in undivided India, which reaches a great many second and third generation families. The second gate is the asset, and it is the one that is failed. Section 115C(f) contains a CLOSED list of five "specified assets": shares in an Indian company; debentures issued by an Indian company which is not a private company; deposits with an Indian company which is not a private company; any security of the Central Government as defined in s.2(2) of the Public Debt Act 1944; and such other assets as the Central Government may specify by notification. Immovable property is not in that list. Bank deposits with a bank are not "deposits with an Indian company" unless the bank is an Indian company that is not a private company. Debentures of, and deposits with, a private company are expressly outside it. And even an asset that is on the list becomes a "foreign exchange asset" only if s.115C(b) is satisfied — acquired or purchased with, or subscribed to in, convertible foreign exchange. "Convertible foreign exchange" is not defined by the tax statute at large: s.115C(a) borrows the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 and the rules made thereunder, and before 1 April 2013 the same clause referred to the Foreign Exchange Regulation Act 1973. Two further definitions do the work downstream: "investment income" in s.115C(c) is any income derived from a foreign exchange asset — the qualification "other than dividends referred to in section 115-O" has now gone, omitted with effect from 1 April 2021 when the dividend distribution tax was dismantled — and "long-term capital gains" in s.115C(d) is income under the head Capital gains relating to a capital asset being a foreign exchange asset which is not a short-term capital asset. Read together, that is why the documentary trail of the remittance, and not the client's passport, is what decides these cases.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 115C reads: '115C. In this Chapter, unless the context otherwise requires,— (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder; (b) "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; (c) "investment income" means any income derived from a foreign exchange asset; (d) "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; (e) "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident". Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India; (f) "specified asset" means any of the following assets, namely :— (i) shares in an Indian company; (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944); (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.' An earlier text prints the same operative words and adds a footnote against the reference to a private company: 'Now section 2(68) of the Companies Act, 2013.'
Chapter XII-A applies only where two conditions are satisfied together. The assessee must be a 'non-resident Indian' within s.115C(e) — an individual who is a citizen of India or a person of Indian origin and who is not a resident — and the asset must be a 'foreign exchange asset' within s.115C(b), that is, one of the five specified assets listed in s.115C(f) which the assessee acquired or purchased with, or subscribed to in, convertible foreign exchange. 'Convertible foreign exchange' takes its meaning from the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 (the Foreign Exchange Regulation Act 1973 for periods before 1 April 2013). 'Investment income' is any income derived from a foreign exchange asset, without the dividend carve-out that the clause carried until 1 April 2021, and 'long-term capital gains' for the chapter means gains on a foreign exchange asset which is not a short-term capital asset.
Not applicable — this is a statement of the statutory text and of the amendment footnotes carried on the section. No judicial reasoning is involved.
"foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;
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Handle my notice → Ask a CA on WhatsAppOn these facts, yes — and the reason is the funding, not the status. Section 115C(b) defines a "foreign exchange asset" as any specified asset "which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange", so an asset bought out of rupee funds is not a foreign exchange asset, and nothing in Chapter XII-A — not s.115E, not s.115F, not s.115H — can reach it. Being a non-resident Indian within s.115C(e) is a necessary condition but never a sufficient one. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 115C, section 115C(a), section 115C(b), section 115C(c), section 115C(d), section 115C(e), section 115C(f), section 115D, section 115E, section 115F, section 115G, section 115H, section 115-I, section 6, section 2(42A) of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.115C, as it stands after the omission of the words 'other than dividends referred to in section 115-O' with effect from 1 April 2021. Chapter XII-A has two independent gates and practitioners routinely argue only the first. The first gate is the person: s.115C(e) defines "non-resident Indian" as an individual, being a citizen of India or a person of Indian origin, who is not a "resident" — and the Explanation deems a person to be of Indian origin if he, or either of his parents, or any of his grand-parents, was born in undivided India, which reaches a great many second and third generation families. The second gate is the asset, and it is the one that is failed. Section 115C(f) contains a CLOSED list of five "specified assets": shares in an Indian company; debentures issued by an Indian company which is not a private company; deposits with an Indian company which is not a private company; any security of the Central Government as defined in s.2(2) of the Public Debt Act 1944; and such other assets as the Central Government may specify by notification. Immovable property is not in that list. Bank deposits with a bank are not "deposits with an Indian company" unless the bank is an Indian company that is not a private company. Debentures of, and deposits with, a private company are expressly outside it. And even an asset that is on the list becomes a "foreign exchange asset" only if s.115C(b) is satisfied — acquired or purchased with, or subscribed to in, convertible foreign exchange. "Convertible foreign exchange" is not defined by the tax statute at large: s.115C(a) borrows the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 and the rules made thereunder, and before 1 April 2013 the same clause referred to the Foreign Exchange Regulation Act 1973. Two further definitions do the work downstream: "investment income" in s.115C(c) is any income derived from a foreign exchange asset — the qualification "other than dividends referred to in section 115-O" has now gone, omitted with effect from 1 April 2021 when the dividend distribution tax was dismantled — and "long-term capital gains" in s.115C(d) is income under the head Capital gains relating to a capital asset being a foreign exchange asset which is not a short-term capital asset. Read together, that is why the documentary trail of the remittance, and not the client's passport, is what decides these cases. If it applies to you, the first step is this: Establish the funding trail before you argue anything else: the inward remittance advice or FIRC, the bank's certificate that the subscription or purchase was made out of convertible foreign exchange, and the contemporaneous account statement. This is the point the assessing officer will press and it is the one that is most often undocumented years later.
Section 115C reads: '115C. In this Chapter, unless the context otherwise requires,— (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder; (b) "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; (c) "investment income" means any income derived from a foreign exchange asset; (d) "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; (e) "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident". Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India; (f) "specified asset" means any of the following assets, namely :— (i) shares in an Indian company; (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944); (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.' An earlier text prints the same operative words and adds a footnote against the reference to a private company: 'Now section 2(68) of the Companies Act, 2013.' The matter was decided on 2021-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Chapter XII-A applies only where two conditions are satisfied together. The assessee must be a 'non-resident Indian' within s.115C(e) — an individual who is a citizen of India or a person of Indian origin and who is not a resident — and the asset must be a 'foreign exchange asset' within s.115C(b), that is, one of the five specified assets listed in s.115C(f) which the assessee acquired or purchased with, or subscribed to in, convertible foreign exchange. 'Convertible foreign exchange' takes its meaning from the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 (the Foreign Exchange Regulation Act 1973 for periods before 1 April 2013). 'Investment income' is any income derived from a foreign exchange asset, without the dividend carve-out that the clause carried until 1 April 2021, and 'long-term capital gains' for the chapter means gains on a foreign exchange asset which is not a short-term capital asset.
Not applicable — this is a statement of the statutory text and of the amendment footnotes carried on the section. No judicial reasoning is involved. In the words reproduced by the source cited on this page: ""foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;"
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Income-tax Act, 1961, s.115C, as it stands after the omission of the words 'other than dividends referred to in section 115-O' with effect from 1 April 2021. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 115C, section 115C(a), section 115C(b), section 115C(c), section 115C(d), section 115C(e), section 115C(f), section 115D, section 115E, section 115F, section 115G, section 115H, section 115-I, section 6, section 2(42A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Chapter XII-A applies only where two conditions are satisfied together. The assessee must be a 'non-resident Indian' within s.115C(e) — an individual who is a citizen of India or a person of Indian origin and who is not a resident — and the asset must be a 'foreign exchange asset' within s.115C(b), that is, one of the five specified assets listed in s.115C(f) which the assessee acquired or purchased with, or subscribed to in, convertible foreign exchange. 'Convertible foreign exchange' takes its meaning from the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 (the Foreign Exchange Regulation Act 1973 for periods before 1 April 2013). 'Investment income' is any income derived from a foreign exchange asset, without the dividend carve-out that the clause carried until 1 April 2021, and 'long-term capital gains' for the chapter means gains on a foreign exchange asset which is not a short-term capital asset. It arises in Residence & Treaty Benefit, Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 115C, section 115C(a), section 115C(b), section 115C(c), section 115C(d), section 115C(e), section 115C(f), section 115D, section 115E, section 115F, section 115G, section 115H, section 115-I, section 6, section 2(42A) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check which account the money came from. Rupee funds in an NRO account generated in India will not satisfy s.115C(b); funds remitted from abroad, or held in an NRE or FCNR account and traceable to an inward remittance, will normally do so, and where an account has been redesignated the trail has to be carried through the redesignation — see CIT v. N. Sundarraman (Madras High Court, 7 February 2012) on NRE accounts redesignated as NRNR. Test the asset against the closed s.115C(f) list before anything else. If it is immovable property, a partnership interest, a mutual fund unit, gold, or a debenture or deposit of a private company, Chapter XII-A does not apply however the purchase was funded. Decide residence under s.6 of the Income-tax Act, not under FEMA. The two definitions of 'non-resident' are different instruments and a person can be a non-resident for FEMA and a resident for the Act, or the reverse. If the client is a citizen of India or a person of Indian origin, plead the Explanation to s.115C(e) expressly and prove the birthplace of the parent or grandparent — birth in undivided India is enough, so a grandparent born in what is now Pakistan or Bangladesh qualifies. For a period before 1 April 2013, do not cite the Foreign Exchange Management Act 1999 in the clause: s.115C(a) then referred to the Foreign Exchange Regulation Act 1973, and an assessing officer who notices the wrong instrument will use it to discredit the rest of the submission.
Still good law. In force. Two texts of the section, four years apart, print identical operative words, which is the strongest evidence available here that nothing has displaced the position established when the s.115-O dividend carve-out was omitted from clause (c) with effect from 1 April 2021. That is not the same as reading the current Finance Act. No Finance Act text has been read for this entry, and the amending statute is recorded only by the number the amendment footnote gives it, Act No. 12 of 2020. Two consequences follow for anyone using older material. An authority, a commentary or a software setting that applies the dividend carve-out in s.115C(c) to a year after AY 2020-21 is superseded by amendment: the words 'other than dividends referred to in section 115-O' are no longer in the clause. And a submission citing the Foreign Exchange Regulation Act 1973 in s.115C(a) for a period on or after 1 April 2013 is likewise out of date; the clause has referred to the Foreign Exchange Management Act 1999 since then. Nothing has been found narrowing or widening the closed list of specified assets in clause (f), and no notification under sub-clause (v) has been checked for — a notification adding an asset to that list would change the answer in a given case and is the one thing on this page most likely to move. What would displace the entry: an amendment to clause (b), which is the funding test that decides most of these disputes, or to the Explanation to clause (e). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Every word of the current text has been taken from the section itself, which prints the heading 'Definitions' under the chapter heading 'CHAPTER XII-A — SPECIAL PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS'. It has been taken independently a second time from an earlier text of the same section, which prints identical operative words. The current text prints a 'Footnotes' heading with NO footnote entries under it, so no amendment can be dated from it. The dates below come from earlier texts of the section, used as legislative history and never to state the current position. The fullest apparatus carries four footnotes: 'Chapter XII-A, consisting of sections 115C, 115D, 115E, 115F, 115G, 115H and 115-I, inserted by the Finance Act, 1983, w.e.f. 1-6-1983'; 'Substituted for "the Foreign Exchange Regulation Act, 1973 (46 of 1973)" by the Finance Act, 2013, w.e.f. 1-4-2013'; 'Inserted by the Finance Act, 2003, w.e.f. 1-4-2004. Words "other than dividends referred to in section 115-O" inserted by the Finance Act, 1997, w.e.f. 1-4-1998 and later on omitted by the Finance Act, 2002, w.e.f. 1-4-2003'; and 'Now section 2(68) of the Companies Act, 2013'. A later text carries 'Words "other than dividends referred to in section 115-O" Omtt. by the Act No. 12 of 2020, w.e.f. 1-4-2021', which is the omission reflected in the current text. The insertion date of 1 June 1983 is independently printed in two earlier texts. And the substitution of the 1999 Act for the 1973 Act is bracketed independently of its footnote: the Foreign Exchange Regulation Act 1973 still appears in clause (a) in every text up to 2010, and the Foreign Exchange Management Act 1999 appears in every text from 2014 onwards. It has NOT been verified from anything read here that Act No. 12 of 2020 is the Finance Act 2020. The Act number is given deliberately as the footnote gives it. 'decided_on' is the COMMENCEMENT DATE of the most recent change to this section, 1 April 2021, and not a decision date. 'bench' is 'Not applicable — statutory text' and 'favours' is null for the same reason. One point of precision on clause (d). It is a definition of 'long-term capital gains' for this Chapter, but it fixes no holding period of its own: it works through s.2(42A) and the ordinary definition of a short-term capital asset, so the holding period has to be taken from there and can change without clause (d) changing at all. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Chapter XII-A applies only where two conditions are satisfied together. The assessee must be a 'non-resident Indian' within s.115C(e) — an individual who is a citizen of India or a person of Indian origin and who is not a resident — and the asset must be a 'foreign exchange asset' within s.115C(b), that is, one of the five specified assets listed in s.115C(f) which the assessee acquired or purchased with, or subscribed to in, convertible foreign exchange. 'Convertible foreign exchange' takes its meaning from the Reserve Bank of India's treatment of it for the purposes of the Foreign Exchange Management Act 1999 (the Foreign Exchange Regulation Act 1973 for periods before 1 April 2013). 'Investment income' is any income derived from a foreign exchange asset, without the dividend carve-out that the clause carried until 1 April 2021, and 'long-term capital gains' for the chapter means gains on a foreign exchange asset which is not a short-term capital asset.
TaxSphere, “Statutory position — s.115C: the Chapter XII-A definitions, and the convertible-foreign-exchange condition that the whole chapter turns on”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-115c-convertible-foreign-exchange-and-the-chapter-xii-a-definitions/ (validity last checked 2026-09-08)
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My client, a returned NRI, keeps renewing his bank deposits by rolling the accrued interest back into the principal, and has claimed the concessional rate under section 115H on the whole of the interest each year. The Commissioner has revised the assessment under section 263. Is the claim on the interest-on-interest sustainable?
Chapter XII-A gives my NRI client a flat twenty per cent with no deductions, but on his numbers the ordinary slab rates with Chapter VI-A relief come out cheaper. Can he simply not use the chapter, and does he have to commit for good?
My client has returned to India for good and is now assessable as a resident. He holds shares and public-company debentures bought in foreign exchange while he was abroad. Can he keep the twenty per cent rate, and on what?
My NRI client sold shares of an Indian company that he had subscribed to in foreign exchange. The transfer was in September 2024. My software has computed the tax at ten per cent under section 115E. Which rate applies, and from when did it change?
