Non-Resident Indians (NRIs) are increasingly receiving notices from the Indian Income Tax Department regarding undisclosed foreign assets. These notices, while concerning, are often triggered by administrative issues rather than actual tax evasion. The core problem stems from discrepancies between an NRI’s tax residency status as filed with the department and information received through international data-sharing agreements, particularly the Common Reporting Standard (CRS). Understanding why you received a notice and knowing how to rectify the situation is crucial for avoiding potential penalties.
Why are NRIs Receiving Foreign Asset Notices?
India is part of a global network of countries participating in the Common Reporting Standard (CRS), an initiative by the Organisation for Economic Co-operation and Development (OECD). The CRS facilitates the automatic exchange of financial account information between participating jurisdictions to combat tax evasion and promote transparency. As a result, the Indian tax authorities now receive detailed data from over 100 countries about financial accounts, investments, and property held by individuals and entities residing in those nations.
The issues arise when an NRI mistakenly files their income tax return (ITR) declaring themselves a resident of India. If the CRS data shows foreign assets linked to someone declared a resident, a mismatch is flagged and results in a notice to the taxpayer. According to tax professionals, this is a prevalent issue and typically does not indicate intentional wrongdoing.
Common Filing Mistakes Leading to Notices
Several factors contribute to NRIs incorrectly filing as residents. A frequent oversight is a failure to update their Permanent Account Number (PAN) to reflect their non-resident status. Additionally, many NRIs continue to utilize resident savings accounts in India long after establishing non-resident status, which automatically triggers the resident classification in the tax system. Finally, some individuals rely on Chartered Accountants (CAs) in India who lack specialized knowledge of NRI taxation rules.
It’s important to remember that those classified as resident Indians are required to report all foreign assets and income earned abroad on Schedule FA and Schedule FSI of their ITR. NRIs, however, have different reporting requirements and are generally not obligated to fill out these schedules.
Determining Your NRI Status
Indian tax law defines an NRI based on the number of days physically spent within the country. An individual is considered an NRI if they meet either of the following criteria: they have been in India for less than 182 days during the financial year (April 1st to March 31st), or they have been in India for less than 60 days during the financial year and less than 365 days during the four preceding financial years.
The Indian Income Tax Department clarifies that nationality, as indicated by a passport, visa, or Emirates ID, is not the determining factor for residency; it’s the duration of stay. This day-count rule is fundamental for accurate tax filing.
The Problem with Resident Savings Accounts
Foreign Exchange Management Act (FEMA) regulations stipulate that NRIs cannot maintain resident savings accounts. To correct this, NRIs should convert their existing accounts into Non-Resident Ordinary (NRO) or Non-Resident External (NRE) accounts. Maintaining a resident account perpetuates the assumption of residency within the tax system and is a key trigger for notices related to foreign assets and proactive tax compliance.
Understanding Schedule FA and FSI
Schedule FA is used to report details of foreign assets owned by a taxpayer, including bank accounts, property, and shares held abroad. Schedule FSI requires reporting of foreign income earned, such as salaries, interest, or rental income. As mentioned previously, these schedules are only applicable to individuals classified as resident taxpayers, not to NRIs. Receiving a notice requesting information for these schedules indicates an error in your reported tax residency.
How to Resolve a Foreign Asset Notice as an NRI
Resolving a notice regarding foreign assets often involves straightforward corrective actions. First, confirm your NRI status based on the day-count rule for the relevant financial year. Then, ensure you are filing your ITR using the appropriate form for NRIs – typically ITR-2. Crucially, do not complete Schedule FA or Schedule FSI if you are genuinely an NRI.
Additionally, update your PAN card and bank Know Your Customer (KYC) documentation to accurately reflect your NRI status. Further, convert any remaining resident savings accounts to NRO or NRE accounts. Seeking guidance from a tax advisor specializing in NRI taxation is highly recommended to navigate these complexities and ensure accurate compliance.
Potential Penalties for Incorrect Filing
Incorrectly filing as a resident and failing to report foreign assets can lead to significant penalties. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act can impose a fine of ₹1 million (approximately Dh41,000) per unreported foreign asset. Furthermore, violations of FEMA regulations and potential tax scrutiny or reassessment can occur. Addressing the misclassification promptly can prevent these costly consequences.
The disclosure of foreign bank accounts is not always mandatory for NRIs. The Income Tax Department clarified in 2017 that they are only required if the individual doesn’t have an Indian bank account for receiving a tax refund or if Indian income is directly credited into their foreign bank account. Otherwise, NRIs are typically not required to report overseas accounts.
Going forward, NRIs should carefully review their filed ITRs for any discrepancies and proactively update their information with the Income Tax Department. The ongoing emphasis on international tax compliance and data-sharing means that these notices are likely to continue, making accurate filing and maintaining correct records essential. Taxpayers should watch for further clarifications from the Central Board of Direct Taxes (CBDT) regarding the implementation of CRS and its impact on NRI taxation.
