NRIs - know your tax liabilities on your Indian income

As per recent media reports, a large number of non-resident Indians are in receipt of unexpected income tax notices. The Income Tax (IT) department has served these notices seeking to correlate the funds in their bank accounts or investments made by them with their return of income filed during the previous years. Many notices are issued under section 148A of the Income Tax Act, 1961, which primarily deals with conducting a preliminary inquiry and providing an opportunity for the taxpayer to explain before issuance of the ‘main notice’ intended for assessment of the escaped income under section 148 or wider assessment or re-assessment or recomputation under Section 147 of the said act. In other words, the initial notice can be termed as a precursor to a larger picture that will haunt them eventually.

Let us have a look at NRIs’ Indian income, its taxability, availability of tax-related deductions, filing of return of income, avoiding double taxation, and other issues.

Who is an NRI?

For the purpose of income tax law, there are two types of individual taxpayers - resident and non-resident. If a taxpayer satisfies none of the basic conditions - presence of at least 182 days or more in India during the previous year 2022-23 and 365 days or more in India during the 4 years immediately preceding the previous year i.e. April 1, 2018 to March 31, 2022, then he/she will be treated as a ‘non-resident’.

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As anti-measure, certain exceptions were introduced to the residency rules from the financial year 2020-21 and assessment year 2021-22 onwards. Accordingly, for those who leave India for employment purposes and Indian citizens or person of Indian origins ‘visit’ India, ‘60-days’ has been extended to 182 days.

What income is taxable in India?

To put it simply, in the case of resident and ordinarily resident, his/her Indian income, as well as foreign income, is taxable. In the case of resident but not ordinarily resident, Indian income and only two foreign incomes are taxable i.e. business income if the business is controlled wholly or partly from India and professional income from a profession which is set up in India. In the case of non-residents, Indian income is taxable but foreign income is not taxable.

What deductions are allowable?

Like ordinary residents, non-residents are also eligible to avail most exemptions under section 80C up to Rs 1.5 lakhs, deductions pertaining to interest received from SB account up to Rs 10,000 held with an Indian bank, post office, or cooperative society and they are eligible to tax exemption from notified bonds and foreign currency non-resident bank deposits. Since they are not allowed to invest their money in Senior Citizens Savings Certificates, National Savings Certificates, Post Office Deposit Schemes, and Public Provident Funds, the question of due deductions does not arise.

Who is required to file a return of income?

Germany, Switzerland and UAE are following January to December, Australia, Mauritius from July to June, and the US from October to September as their financial year whereas for India, it is from April to March of the following year.

Interestingly, non-residents residing in these countries and other countries are under obligation to file their Indian return of income and are required to file it within the due date of the relevant assessment year at par with resident taxpayers. Since there are two different financial years, NRIs should be extra cautious in complying not only in their home country but also with Indian income tax laws. Accordingly, if an NRI’s total income exceeds Rs. 2,50,000/- in India, he/she should file his/her return of income opting for either the old regime or new regime by on or before July 31, 2023. However, if the total income is only in the form of royalty, fees for technical services, dividends, and interest or investment income on which due TDS has been deducted, it is not mandatory to file their returns as provided under sections 115A/139.

When & how to avail of DTAA benefits?

Double Taxation Avoidance Agreement (DTAA) is an agreement entered between two countries to avoid paying taxes twice on the same income. India has entered such arrangements with 88 countries. Subject to DTAAs, a non-resident assessee must furnish a Tax Residency Certificate (TRC) or form 10F obtained from the tax authorities of the country where he/she resides. Accordingly, the income will be exempted or taxed at a lower rate. If it is taxable, the non-resident assessee has to pay the applicable taxes in India and claim the due tax credit against the tax liability in his/her home country. An NRI can invoke DTAA provisions to services provided, salary received in India, interest earned on savings banks and fixed deposits from accounts held in India, income from residential property including capital gains earned in India.

Concluding remarks

The author has accessed a couple of notices just before penning this piece. A word of caution- recent notices issued to those NRIs are elaborative and comprehensive in nature ranging from seeking detailed explanations for their source of funds, valuation of investments, regulatory compliances i.e. filing and non-filing of return of income, RBI and foreign exchange law, TRC, bank statements, property deeds in the case of immovable properties purchased among others.

Since the department is using data analytics and automatic exchange of information arrangements with other countries extensively, it is highly impossible to evade taxes and remain non-tax compliant for a longer period. Hence it is advisable to comply with the prevailing Indian tax laws wherever you reside, if applicable, which will ensure a lifetime peace of mind. Since income tax law is becoming more and more stringent day by day, it will be better to avail of a tax professional’s advice on a regular basis and remain tax compliant.

(The writer is the founder and chief executive officer of Shree Tax Chambers)