Most NRIs Looking To File ITR By July 31: What Challenges Do They Face?

The income tax deadline for the financial year 2023-24 nears (July 31) and the non-resident Indians (NRIs) from all across the world are revealing a strong commitment to tax compliance. While there are over 73 per cent of NRIs proactively looking to file ITR by July, around 19 per cent have already filed, and eight per cent do not intend to file, according to recent data by SBNRI, an NRI-focused fintech platform.

The geographic breakdown of the survey reveals NRIs in the United Kingdom (UK) show the highest level of tax compliance among all the regions surveyed, according to the report.

United States: 22 per cent of NRIs plan to file by July, with four per cent having already filed and three per cent not intending to file.

United Kingdom: 31 per cent plan to file by the deadline, five per cent have already filed, and four per cent do not plan to file.

United Arab Emirates: 14 per cent plan to file by July, two per cent have already filed, and six per cent do not plan to file.

Canada: Eight per cent intend to file by the deadline, four per cent have already filed, and four per cent do not plan to file.

Other countries: 25 per cent plan to file by July, five per cent have already filed, and two per cent do not plan to file.

NRIs, Is Your Income Earned Abroad Taxable?

Your global income is taxable in India if your status is ‘resident.’ If you only have a ‘NRI’ status, your income earned or accrued in India is taxable in India.

Says Manikandan S, tax expert, ClearTax: “Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on a savings bank account are all examples of income earned or accrued in India.”

These Income Are Taxable For NRIs

• When you earn income in India, it is not taxable in India.

• Interest earned on a Non-Resident External (NRE) account and a Foreign Currency Non-Resident (FCNR) account is tax-free. When you earn interest on non-resident ordinary (NRO) accounts it is not taxable in the hands of an NRI.

“Most NRIs are high-income professionals, the most important question is do they know they have to file ITR if they are not earning in India?” says Alok Dubey, certified financial planner (CFP) and an expert on NRI taxation.

Many don't know when they have to file an ITR, even if they are not earning in India. For instance, in case you are investing in a mutual fund or buying a property in India, you need to inform all details to the IT department.

What Are The Most Common Challenges NRIs Face When Filing Their ITRs?

Understanding Tax Laws

NRIs may have income from various sources, such as income earned from their service (salary), property rentals, investments/capital gains, and business activities, each subject to different tax treatments.

In one instance, an NRI faced a huge penalty owing to a lack of information, according to Dubey. In 2018-19, an NRI sent money from the UAE to India to buy a property but did not file any ITR for this. In 2023, the person received a notice from the IT department for a Rs 7 crore tax demand because, even though the person was an NRI, no proof or source was provided for this income; therefore, the authorities treated it as resident income.

“It is important for NRIs to know that they have to file an ITR for their active accounts,” Dubey states.

Selecting The Right Form: Based on different types of income, NRIs filing ITR may face challenges in choosing the correct ITR.

Residency Status: In determining tax liability in India, an individual’s residency status is an important factor in India. NRIs are individuals who do not meet the required number of days of residence in India as per the Income Tax Act. To explain this Manikandan quotes a case study:

For example, Shrishti is an Indian citizen who has gone to the US for her job. She will be considered a resident if she spends 182 days or more in India. She left India on 3rd July 2023 and returned on 15th March 2024. Hence, Shrishti has spent less than 182 days in India, in the financial year that begins on 1st April 2023 and ends on 31st March 2024.

Since she is an Indian citizen working abroad, she must spend 182 days or more in India to qualify as a resident. Therefore, Shrishti is an NRI for income tax purposes in India.

Double Taxation: According to a survey released by SBNRI earlier this year, double taxation is the primary concern for 14.11 per cent of NRIs from Australia, followed by 13.10 per cent from the UK, and 8.06 per cent from the US.

Most NRIs don’t know how to take maximum advantage of Double Taxation Avoidance Agreements (DTAA). “I have mainly seen NRIs living in the US face this problem,” Dubey says, explaining that they often fail to declare many assets in India to the US, miss out on TDS refunds, etc.

Income Classification: NRIs face another challenge which is the computation of the type of income which ranges from rental or business.

Tax Deducted at Source (TDS) Calculations: NRIs need to understand how much tax is deducted at which source when filing for ITRs. For example, when an NRI sells property in India, the buyer is liable to deduct TDS at 20 per cent if the property is sold within two years of the date of purchase, and at 30 per cent if sold after two years.

Currency Conversion: NRIs must understand the tax implications in both their country of residence and India to prevent double taxation. Income earned abroad must be converted to Indian Rupees (INR) for tax purposes, using the appropriate exchange rates for accurate reporting. “Fluctuating exchange rates and the timing of conversion can impact the taxable amount and create discrepancies,” says Sandeep Agrawal, co-founder & director, Teamlease RegTech.

Has The Compliance Landscape For NRIs Changed Over Recent Years?

“Compliance for NRIs in managing their finances in India has become increasingly stringent and detailed in recent years. The rise in notices from the Income Tax Department (ITD) to NRIs for non-compliance underscores the importance of understanding and following these regulations,” says Agrawal.

Agrawal lists the following key changes and current requirements that NRIs should be aware of before filing their ITRs:

• NRIs must convert their regular Indian savings accounts into NRO or NRE accounts, as non-compliance can result in substantial fines and penalties.

• NRIs who earn through fixed deposits or property in India need to file tax returns in India and declare their NRI status.

• The NRIs must invest through NRO or NRE accounts. If the NRIs are using a resident savings account for investments, it could lead to severe penalties, which include permanent disqualification from future investments. Asset Management Companies (AMCs) in India do not accept investments in foreign currencies and only rupees.

• There is a significant increase in non-compliance penalties under the Foreign Exchange Management Act (FEMA). If the balance is indeterminate, the fines can reach up to three times the account balance or Rs 2 lakh. Moreover, there will be a fine of Rs 5000 until the issue is resolved.

Things To Do To Avoid Mistakes Related To ITR Filing

“There’s one basic finance hygiene NRIs should maintain to not commit common mistakes, which is to check the Income Tax website regularly,” says Dubey.

In addition to this, NRIs should be vigilant about any possible demands or notices they may have received. To ensure you receive notifications from the IT department, make sure your contact information, such as your official email address and phone number, is up to date.

Experts suggest consulting financial advisors and/or CAs to avoid erroneously filing ITRs. Moreover, before choosing an advisor, individuals should check their track records and ask for existing or previous client contacts to get direct feedback on the advisor/CA.