Most NRIs Looking To File ITR by July 31: What Are The Challenges They Face?

As the ITR filing deadline for the financial year 2023-24 approaches (July 31), the Non-Resident Indians (NRIs) across the globe are showing a strong commitment to tax compliance. Over 73 per cent of NRIs are proactively looking to file ITR by July wherein 19 per cent have already filed and 8 per cent are not intending to file, according to recent data by SBNRI, an NRI-focused fintech platform.

Also Read: Income Tax Return Filing: New Changes Brought By The New Tax Regime

The geographic breakdown of the survey reveals NRIs in the United Kingdom (UK) showing the highest intended compliance rate:

United States: 22 per cent of NRIs plan to file by July, with 4 per cent having already filed and 3 per cent not intending to file.

United Kingdom: 31 per cent plan to file by the deadline, 5 per cent have already filed, and 4 percent do not plan to file.

United Arab Emirates: 14 per cent plan to file by July, 2 per cent have already filed, and 6 per cent do not plan to file.

Canada: 8 per cent intend to file by the deadline, 4 per cent have already filed, and 4 per cent do not plan to file.

Other countries: 25 per cent plan to file by July, 5 per cent have already filed, and 2 per cent do not plan to file.

As the deadline approaches, the data suggests that most NRIs are well-prepared and proactive in managing their tax responsibilities, which bodes well for the financial integration of this significant demographic. However, there are some challenges and common mistakes that NRIs face while self-filing their ITRs.

NRIs, is your income earned abroad taxable?

If your status is ‘resident’, your global income is taxable in India. If your status is ‘NRI,’ only your income earned or accrued in India is taxable in India.

“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,” informs Manikandan S, Tax expert, ClearTax.

These incomes are taxable for an NRI:

● Income which is earned outside India is not taxable in India.

● Interest earned on a Non-Residential External (NRE) account and Foreign Currency Non-Resident Account (FCNR) account is tax-free. Interest on Non- Resident Ordinary (NRO) accounts is 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 (CFP), NRI taxation Expert at PrimeWealth. Many don’t know when they have to file an ITR even if they are not earning in India. For example, if you are buying a property in India or investing in mutual funds in India - all such details have to be informed 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 on their service (salary), property rentals, investments/capital gains, and business activities, each subject to different tax treatments.

Dubey narrates a case where an NRI faced a huge penalty due to a lack of information. An NRI in 2018-19 sent money from UAE to India to buy a property. The person did not file any ITR for this. In 2023 the person got a notice from the ITR department for a Rs 7 crore tax demand on the ground that even if the person was an NRI, no proof or source was shown for this income, therefore the authorities treated it as a resident income.

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

Choosing the Right Form: NRIs filing ITR themselves may face the challenge of selecting the correct ITR form based on different types of income.

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

For example, Shrishti is an Indian citizen and has gone to the US for her job – she will be a resident if she spends 182 days or more in India. She left India on 3rd July 2023 and came back to India on 15th March 2024. Therefore in the financial year that begins on 1st April 2023 and ends on 31st March 2024, Srishti has spent less than 182 days in India. Since she is an Indian citizen on employment abroad, she must spend 182 days or more in India to qualify as a resident. Therefore, Srishti is an NRI for income tax 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 the maximum benefit of Double Taxation Avoidance Agreements (DTAA). “I have majorly seen NRIs living in the US face this problem,” Dubey says wherein they fail to declare many assets in India to the US, miss out on TDS refunds, etc.

Income Classification: Computation of type of income is another challenge for NRIs which ranges from rental or business.

Tax Deducted at Source (TDS) Calculations: When self-filing for ITRs, NRIs need to understand how much tax is deducted at what source. 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 before completion of 2 years from the date of purchase, the buyer is liable to deduct TDS at 30 per cent.

Currency Conversion: NRIs must grasp 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. “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 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 NRIs should be aware of before filing their ITRs:

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

• NRIs earning income through fixed deposits or property in India are required to file tax returns in India and declare their NRI status.

• Investments must be conducted through NRO or NRE accounts. Using a resident savings account for investments can lead to severe penalties, including permanent disqualification from future investments. Asset Management Companies (AMCs) in India only accept investments in Indian Rupees, not foreign currencies.

• Non-compliance penalties under the Foreign Exchange Management Act (FEMA) have increased significantly. Fines can reach up to three times the account balance or Rs 2 lakhs if the balance is indeterminate, plus a daily fine of Rs 5,000 until the issue is resolved.

What Should You 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 you may or might have received. For this, make sure your contacts are updated such as your official email and number to receive notifications from the IT department.

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.