More and more Non-Resident Indians (NRIs) are finding themselves in an unexpected predicament: receiving income tax notices from Indian authorities, despite rarely setting foot in India. This surge in notices is a direct result of the Indian Income Tax Department’s sophisticated new arsenal, including AI, big data analytics, and global financial reporting tools, enabling unprecedented scrutiny of financial activities across borders.
Thank you for reading this post, don't forget to subscribe!“I’m an NRI, I barely visit India… How did I get an Income Tax notice now?” This common cry of surprise underscores a widespread misconception among NRIs that living abroad places them beyond the reach of Indian tax laws. As Chartered Accountant Nitin Kaushik recently highlighted with a client who owned property, held bank accounts, and conducted transactions in India, the notion of “staying off the radar” is no longer valid. “NRIs are being tracked like never before,” Kaushik warns.
While Kaushik’s client was able to achieve compliance with prompt action, many NRIs aren’t as fortunate, facing potential penalties, reassessments, or even prosecution due to oversight or lack of awareness.
To help NRIs avoid such pitfalls, here’s a crucial guide to staying out of tax trouble:
Common Triggers for Income Tax Notices:
- Rental Income Exceeding ₹2.5 Lakh: If you earn rent from Indian property above the basic exemption limit, it must be declared. A tenant’s TDS deduction does not exempt you from filing.
- Using a Regular Savings Account in India: NRIs are legally required to convert domestic savings accounts to NRO/NRE accounts. Continued use of a resident savings account is illegal and reported by banks.
- Property Sale in India: Even after TDS on sale proceeds, capital gains from selling Indian property must be reported in your tax return. TDS alone is insufficient.
- High-Value Transactions: Large deposits, investments, or foreign remittances are automatically flagged by the system.
- Exceeding Basic Income Exemption Limit: Passive income like dividends or interest can push your total income over the ₹2.5 lakh threshold, triggering a mandatory filing requirement.
- Incorrect DTAA Claims: Claiming Double Taxation Avoidance Agreement (DTAA) benefits without proper tax residency proof can lead to claim denial and scrutiny.
- Old Transactions: Under Section 148, reassessments can go back six years, meaning past non-compliance can still lead to notices.
- Confused Residential Status: Misreporting your residential status, especially with complex travel patterns, can result in dual taxation or penalties.
Understanding Your Indian Tax Obligations as an NRI:
Your tax liabilities as an NRI are primarily determined by your residential status for a given financial year, as defined by Indian income tax regulations:
- ‘Resident’ Status: If classified as a ‘resident,’ your worldwide income becomes taxable in India.
- ‘Non-Resident Indian (NRI)’ Status: If you maintain ‘Non-Resident Indian (NRI)’ status, only income earned or accrued within India is subject to Indian taxation.
Examples of Taxable Income for an NRI (Income Earned/Accrued in India):
- Salary received in India or for services rendered in India.
- Income generated from house property located in India.
- Capital gains realized from the transfer of assets situated in India.
- Interest income from fixed deposits or savings bank accounts held in India.
Conversely, any income earned outside of India is exempt from Indian taxation for an NRI.
Important Note on NRI Bank Accounts:
- Interest accrued on NRE (Non-Resident External) accounts and FCNR (Foreign Currency Non-Resident) accounts is entirely tax-free in India.
- However, interest earned on NRO (Non-Resident Ordinary) accounts is taxable for an NRI.
To ensure compliance and avoid unexpected tax troubles, NRIs must familiarize themselves with these regulations and, when in doubt, seek professional tax advice.
