Section 115JH Income Tax Act: Foreign Company Resident in India and New Section 220
When a foreign company becomes resident in India for the first time, special transitional tax rules may apply. Section 115JH of the Income-tax Act, 1961 addressed this situation; Section 220 of the Income-tax Act, 2025 governs tax years beginning on or after 1 April 2026.
What is the purpose of these provisions?
The provisions address a foreign company that is regarded as resident in India for a tax year after not having been resident in earlier years. Moving into Indian tax residence can affect the computation of taxable income, treatment of earlier losses and depreciation, collection of tax, and anti-avoidance rules. Parliament therefore authorised the Central Government to prescribe specific exceptions, modifications and adaptations by notification, subject to conditions.
When is a foreign company resident in India?
Under the applicable residence provisions, a foreign company's place of effective management (POEM) can establish Indian tax residence. POEM generally refers to the place where key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made. The relevant statutory residence test, guidance and facts of each case must be examined separately. Section 115JH or Section 220 does not itself create a separate automatic POEM test.
For guidance, consult the Income Tax Department's residential-status guidance.
Section 115JH and Section 220: which law applies?
| Issue | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Provision | Section 115JH, Chapter XII-BC | Section 220 |
| Relevant period | Earlier previous years governed by the 1961 Act | Tax years beginning on or after 1 April 2026 |
| First-time residence | Foreign company first resident in a previous year | Foreign company first resident in a tax year |
| Failure to meet notification conditions | Recomputation and rectification under Section 154 | Recomputation and rectification under Section 287 |
| Notifications | Laid before both Houses of Parliament | Laid before both Houses of Parliament |
Section 115JH of the Income-tax Act, 1961 explained
Sub-section (1): first-time Indian residence and permitted adjustments
Where a foreign company is treated as resident in India for a previous year but was not resident in any earlier previous year, the Central Government may notify conditions and adaptations governing computation of total income, unabsorbed depreciation, set-off and carry-forward of losses, tax collection and recovery, and anti-avoidance provisions. The proviso extends the mechanism to qualifying subsequent previous years ending on or before completion of the relevant assessment proceedings where the company is resident in those years.
Sub-section (2): withdrawal of relief for non-compliance
If a company received a benefit, exemption or relief under the notified arrangement and later failed to satisfy a prescribed condition, that relief is deemed wrongly allowed. The Assessing Officer may recompute income and amend the assessment as if the modifications had not applied. Section 154 applies, as far as possible, with the specified four-year period counted from the end of the previous year of non-compliance.
Sub-section (3): parliamentary oversight
Every notification issued under Section 115JH must be laid before each House of Parliament.
Section 115JH was inserted by Section 56 of the Finance Act, 2016 with effect from 1 April 2017. Read the official text of Section 115JH.
Section 220 of the Income-tax Act, 2025 explained
Section 220(1) permits notified adaptations for a foreign company becoming resident for the first time, covering five subjects:
- Computation of total income.
- Treatment of unabsorbed depreciation.
- Set-off, carry-forward and subsequent set-off of losses.
- Collection and recovery of tax.
- Special provisions concerning avoidance of tax.
Section 220(2) extends sub-section (1) to qualifying later tax years ending on or before completion of assessment proceedings determining residence. Section 220(3) addresses failure to satisfy notification conditions, allowing withdrawal of relief and recomputation; the rectification framework is Section 287, with the four-year period reckoned as prescribed from the end of the tax year of non-compliance. Section 220(4) requires notifications to be laid before both Houses of Parliament.
See the official Income Tax Department text of Section 220.
Practical implications for foreign companies
- Establish residence first: analyse where effective management and key commercial decisions occur, with contemporaneous board and management records.
- Identify the correct tax year: apply the 1961 Act to earlier periods and the 2025 Act to tax years starting on or after 1 April 2026.
- Check notifications: a statutory power to grant modifications is not itself a blanket exemption. Confirm the notification applicable to the company and the year.
- Review losses and depreciation: do not assume that foreign losses or depreciation automatically carry over into Indian tax computation.
- Monitor conditions: non-compliance can cause relief to be withdrawn and earlier income to be recomputed.
- Review treaty and compliance issues: residence under domestic law, treaty residence and permanent-establishment questions may require separate examination.
Frequently asked questions
Does Section 115JH still apply in 2026?
It remains relevant to previous years governed by the 1961 Act, including saved assessments and proceedings. Section 220 of the 2025 Act applies to tax years beginning on or after 1 April 2026.
Does becoming resident automatically provide tax relief?
No. Any modification or relief under these special provisions depends on the terms and conditions of the applicable Central Government notification.
Can a tax benefit be withdrawn later?
Yes. Failure to comply with notification conditions can trigger recomputation and rectification under the relevant statutory provision.
Official legal references
- Income Tax Department: Section 220, Income-tax Act, 2025
- Income Tax Department: Section 115JH, Income-tax Act, 1961
- Income Tax Department: transition from the 1961 Act to the 2025 Act
- Income Tax Department: residential status
Legal information only. The application of residence rules, notifications, treaties and transitional provisions depends on the relevant tax year and the company's facts.