Why NRIs should continue filing tax returns even if no taxable income

The general mindset for an NRI is that once you move out of India, you have escaped the tax net of Indian tax authorities. Unfortunately, this is not correct.And following are some of the reasons for this:

• You may still have financial ties in India, for example, money in NRO, NRE accounts, mutual funds, PPF account etc.
• After moving India, you may be remitting funds to India to invest in Indian financial markets. Also, you may hold Indian credit cards and using them to make international purchases etc.
• Given the applicable standards on exchange of financial information between countries, the Indian tax department may be getting information on your investments and financial transactions from tax authorities of other countries.

Compliance requirement for tax return filing for NRI

First, let us revisit the tax return filing requirement for a person who qualifies as a “non-resident”.

As per Section 139(1) of Income Tax Act, a person (that includes all – resident/non-resident/resident & NOR) is required to file an income tax return if income taxable under the Act exceeds the maximum limit not chargeable to tax (this limit presently stands at INR 3 lacs in the new tax regime which is the default tax regime from FY 2024-25 onwards.

Section 115 G of the Act gives an exemption from above requirement by saying the following:

Return of income not to be filed in certain cases.

115G. It shall not be necessary for a non-resident Indian to furnish under sub-section (1) of section 139 a return of his income if—

(a) his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and

(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

Section 115C defines certain terms above as follows:

(c) “investment income” means any income derived ⁴³[other than dividends referred to in section 115-O] from a foreign exchange asset;

(d) “long-term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;

(e) “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident” .

f) “specified asset” means any of the following assets, namely :—

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company⁴⁴ as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private com-pany⁴⁴ as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2⁴⁵ of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

It may also be noted that effective April 1, 2019, Section 139 has been amended to include the fact that if you do certain high value transactions then even if your income for the Financial Year is below the exemption limit (FY 3 lacs for FY 2024-25 onwards) still you need to file the return. The high value transactions mentioned are as follows –

Some other general points to note as regards income tax return filing are as follows:

• If taxable income exceeds INR 5 lacs, return has to be mandatorily e-filed.
• Match the TDS details in return with the tax credit as per your Form 26AS
• While filing tax return, scan all credit entries in the statement to check if it is in the nature of income & you’ve offered it for tax.
• If you’ve missed out on declaring any income in tax return, don’t ignore it. You can file a revised return.

Annual Information Return (AIR): A potent tool to track your financial transactions

Annual Information Return (AIR) of ‘high value financial transactions’ is required to be furnished under section 285BA of the Income-tax Act, 1961 by ‘specified persons’ in respect of ‘specified transactions’ registered or recorded by them during the financial year. Note that this list is different from the list given in Section 139. The due date of filing of the return is the 31st of August of the following year. The ‘specified persons’ and the ‘specified transactions’ are listed in Rule 114E of the Income-tax Rules, 1962. Briefly, these are as under:

• Cash deposits aggregating to ten lakh rupees or more in a year in any savings account of a person maintained in that bank
• Payments made by any person against bills raised in respect of a credit card issued to that person, aggregating to two lakh rupees or more in the year.
• Acquiring units of mutual fund for rupees two lakh rupees or more.
• Acquiring bonds or debentures issued by a company or institution for an amount of five lakh rupees or more.
• Acquiring shares issued by a company under an initial public offer (IPO) for an amount of one lakh rupees or more.
• Purchase or sale by any person of immoveable property valued at thirty lakh rupees or more.
• Purchase of RBI bonds aggregating to five lakh rupees or more in a year

(Note: these limits are on an aggregate basis for all financial transactions in a particular category in a given financial year)

Tax law changes focussed on curbing tax evasion

The biggest change we’re seeing with the successive Union Budgets is that on one hand, while sweeping tax reforms are being carried out to reduce the burden of unnecessary litigation (for example: simplifying Form 15CA CB, NRI without PAN not subject to higher TDS, simplifying the process of appeals, introducing presumptive taxation for professionals, clarity on penalty provisions), at the same time the government is investing heavily in creating the right infrastructure to track tax evaders, entering into information exchange protocols with various countries and cracking down on possible tax evaders. Some of the steps taken in this direction is introduction of TDS on cash withdrawal, upgraded Form 26AS

A big side effect of these efforts to widen the tax net and curb tax evasion is that more and more people are receiving tax notices. So, if you are an NRI and have NRO deposits in place, from which a TDS is deducted @30.90%, or you’ve invested a good sum in equity mutual funds, if your gross taxable income does not cross INR 3 lacs, on a normal day you don’t need to file a tax return. However, since ITD would have got your details from banks (interest income) and AMC (investment in mutual fund units) & against your PAN they will find that you have not yet filed a tax return, you may get an automatic notice to explain reasons for non-filing of income tax return.

Why I recommend NRIs to keep filing tax returns in India, regardless of taxable income

In my view, this supervision is only going to increase and there’s no point cribbing about it. So, coming to the point, I strongly feel that for an NRI who holds a PAN in India (and almost everyone do), whether or not he/she has plan to return back to India must continue to file returns in India even if income is below the exemption limit. This has certain benefits as follows:

• The very fact of disclosing your income, TDS, bank account details etc. creates a sense of transparency and the feeling that you have nothing to hide from the department.
• You are able to easily claim refund of the credit of TDS deducted from your income at applicable NR rate of 30.90% – in my professional work, I see so many clients who’ve missed out claiming huge refunds just because they did not file their tax returns
• You save yourself from the slightly complicated process of filling forms & getting a no-TDS certificate from the ITD & then submitting them to the bank
• You don’t give a chance to the ITD to send you an automated notice for non-filing of tax returns. Consequently, in return for a small effort (& fee) for filing of tax return, you save yourself from so much effort and heartburn in compiling the response to the tax notice.
• Filing tax returns on a continued basis helps maintain continuity in your tax assessment every year
• It helps you to meet the documentation requirements for certain transactions like taking a loan etc. where the bank may ask for your IT returns. 
• The whole exercise of filing a tax return will help you keep your tax affairs organised: check your bank statement, TDS details in Form 26AS, interest certificates, preparing a personal balance sheet etc. which can actually help you detect any errors/mistakes well in time so that you can rectify it.

If you’ve received a tax notice for non-filing of income tax return, don’t panic!

If you receive a tax notice, first thing to understand here is that it may be an automated notice and sent to hundred other people like you, so do not panic. Open the notice and read the contents – read twice, thrice…Note the date of receipt of notice on the envelope and the last date for replying to it. The notice may require you to visit the Compliance portal of the Income Tax e-filing website and update your response e.g. return was filed/need more time etc. Also, you may be asked to give line wise response to each of the items in the ITD notice. In such a case, you can either ask for more info or mention that income was below taxable limit. You are also required to file a signed hard copy of response to the concerned Assessing Officer’s office. If you have a tax adviser in India, you can send the notice to him for further examination and action.

Back up documentation you should maintain

You must have a separate hard copy income tax file in addition to online folders (remember: income tax data is critical enough to warrant some extra effort). Documents for each assessment year may be separated using paper separators or markers. After you file your return, following is a minimum list of documents you must maintain in the file:

• Acknowledgement of return filed
• Form 26AS
• Form 16 & salary slips for services rendered in India (if applicable)
• Form 16A & Interest certificate for interest income
• Bank statement for the year for all your bank accounts
• Full set of sale/purchase documents for any property transaction
• Premium paid certificate for insurance premium paid in India
• Mutual fund statements for evidencing ELSS investment entries
• PPF receipt (or else, get the PPF passbook updated and maintain it separately in investments file)
• Interest and principal repayment certificate for home loan (if you have a running home loan)
• Copies of any notice received for that year & your response thereto

Some proactive steps Returning NRIs should take to avoid income tax issues

In a lot of cases, I’ve seen NRI getting stuck in tax tangles with the income tax department which is mostly their own fault of not being proactive with keeping their tax affairs organised, keeping proper documentation or getting the right tax adviser to guide them on the tax implications which are very different as one becomes an NRI. Following are some steps which in my view

#1: File your tax returns, even if not required and spend time on your tax return:

I’ve discussed it already at length above, and I feel that it can be a good way to get a good sleep and also detect and nip any tax issues in the bud. If you can’t do it, check online tax portals or take help of a CA in India who can take care of your tax paperwork.

#2: Don’t be very “creative” in tax planning:

I sometimes get pained to see some NRIs structure their finances in such complex way to escape the tax net in India, that it becomes very very difficult to sort out things later on. And this is done by reading random articles on blogs and websites without any consultation with a tax expert on the implications. Examples are buying property in name of wife, or transferring assets to parents to reduce own income, creating bogus HUF or trusts etc. Please understand this: all these things you do may be technically ok TILL your case gets picked up in a scrutiny assessment. And once it happens, the onus to prove legality of these measures is on YOU, not on the income tax department. So, a good idea is to play is very safe with income tax department and reserve your creativity for something else. Also, if you foresee something which is not clear in the Act, get the tax adviser to check if there is any favourable judgement you can rely on and that can strengthen your case later on if there is an income tax query. For big transactions, there is also a fantastic mechanism to seek an advance ruling (I will discuss it in a separate article)

#3: Have a tax adviser in India:

You might think I am writing this because I am a tax adviser myself. NO. When you are out of India, you are not only dealing with tax compliances of India but that other country as well. To further aggravate matters, the tax laws are very dynamic and keep on changing with time. So, by paying a small fee, you are basically leveraging the expertise of a tax expert who is full time into this work and save you from certain mistakes that can cost you a big sum. Further, you cannot do certain tax compliances (like filing response to notice in hard copy to AO or personally representing you to the AO) sitting outside India, so having a relationship with a tax adviser in India can help a great deal.

Also read:

Returning NRIs: Know how to apply online for PAN in India

Does a Non Resident Indian (NRI) need to obtain PAN & file Income Tax Return in India?

Hope the post is useful to you. Please share your feedback/questions in “comments” section below.