Under Indian income tax law, any individual earning an income exceeding the basic threshold of Rs 250,000 is required to file an income tax return for the Assessment Year (AY) 2024-25. This applies to both resident taxpayers and non-resident Indians (NRIs).NRIs are also subject to the basic threshold of Rs 250,000. Therefore, an NRI earning income from India exceeding this amount must file an income tax return for the AY 2024-25.
In some instances, we have encountered practical cases where NRIs received notices from the tax authorities, seeking clarification on transactions reflected in their bank statements and reasons for not reporting these transactions in their income tax returns or for not filing the returns altogether.
In this article, we will cover some practical scenarios where filing an income tax return may not be mandatory according to the law, but doing so can help avoid future tax notices and potential harassment. Let’s explore some real-life examples to understand this better.
1. ITR filing for NRIs in case of saving bank interest
Most NRIs maintain an NRO account with an Indian bank to cover their incidental expenses. The balance in the NRO account earns interest, which the bank typically credits at the end of each quarter. This interest is taxable in India as per the income tax law, since it is earned within India.
According to income tax laws, the bank is responsible for deducting tax on such interest income at a specified rate. Currently, the bank deducts a 30% Tax Deducted at Source (TDS) on the interest and an additional 4% cess on this TDS, making the total deduction 31.20%. This means that NRIs are subject to a 31.20% TDS on the interest earned.
While NRIs earning income below the basic slab threshold are not required to file an income tax return, there are instances where filing becomes necessary. This is because the TDS deducted by the bank is reported to the income tax authorities. Consequently, the tax authorities may issue a notice inquiring about the reasons for not filing an income tax return, despite the interest being earned in India.
To avoid such potential hassles, NRIs should file their income tax returns. Filing an income tax return can also have benefits. For instance, NRIs can claim a refund for the TDS deducted by the bank if their income is below the taxable limit. Therefore, if you are an NRI with a savings bank account earning interest income, it is better to file an income tax return voluntarily.
2. ITR filing for NRIs in case of Fixed deposit interest
Similarly, many NRIs invest in fixed deposits (FDs) with Indian banks to earn interest on fixed deposits. The interest accrued on these FDs is taxable in India since it is earned within the country.
According to income tax regulations, banks are also obligated to deduct tax at source (TDS) on the interest earned from FDs at specified rates. Presently, banks deduct TDS at a rate of 30% on such interest, along with an additional 4% cess on the TDS amount, resulting in a total deduction of 31.20%.
While NRIs whose income falls below the basic slab threshold are not obligated to file an income tax return, situations may arise where filing becomes necessary. This is because the TDS deducted by the bank is also reported to the income tax authorities, potentially prompting them to issue notices seeking explanations for the non-filing of returns despite interest income being earned in India.
To avoid such scenarios and avoid potential inconvenience, NRIs should file their income tax returns. Additionally, filing returns may offer benefits as NRIs can claim a refund for the TDS deducted by the bank if their income falls below the taxable threshold.
Therefore, if you are an NRI with fixed deposits earning interest income, it is better to consider filing an income tax return voluntarily to ensure compliance and potentially avail of tax refunds.
3. ITR filing for NRIs in case of Rental income From House Property
When people from other countries (NRIs) buy property in India to invest or save on taxes, they can rent it out and earn money. This rental income is taxable in India, and NRIs need to pay tax on it.
When tenants pay rent, they deduct TDS (Tax Deducted at Source) from the NRI’s income and deposit it with the government. NRIs can claim credit for this TDS amount. According to Indian tax laws, NRIs can deduct 30% from their rental income before calculating the taxable amount. For instance, if an NRI earns Rs 25,000 per month or Rs 3,00,000 annually from rent, after the 30% deduction, the taxable income is Rs 2,10,000.
Even if the rental income is below Rs 2,50,000, NRIs should file an income tax return because TDS was deducted. Filing the return helps them claim a refund for the TDS amount and not filing the return can lead to legal issues, like receiving notices for not reporting income even if TDS was deducted.
4. ITR filing for NRIs in case of Property Selling
Many NRIs are selling properties in India to either reinvest and benefit from rising property values or to take advantage of location growth. As discussed before, any income earned in India is subject to Indian taxes. When an NRI sells property, the buyer is required to deduct TDS at a rate of 20%, plus surcharge based on the property’s sale value, and cess.
It’s essential to understand that TDS is deducted from the sale price, not the profit made from the sale. This means the TDS rate can seem high. If an NRI faces a loss or earns less than the tax deducted from the sale price, they can file an income tax return to claim a refund after adjusting for capital gains tax.
For instance, if an NRI bought a property for Rs. 48 lakhs and sells it for Rs. 45 lakhs, the buyer deducts TDS at a rate of 20.80%. Here, the NRI faces a loss of Rs. 3 lakhs. The TDS deducted, Rs. 9.36 lakhs, can be claimed as a tax refund by filing an income tax return.
It’s important to note that indexation for long-term purchases isn’t considered when calculating losses. Filing an income tax return is mandatory in such cases to claim refunds and avoid potential queries or notices from the tax department regarding the sale and purchase transactions.
5. ITR filing for NRIs in case of Selling Mutual funds or Shares
Filing Income Tax Returns (ITR) by NRIs after selling mutual funds or shares in India is essential for tax compliance, as any income earned in India is subject to taxation. It enables NRIs to claim refunds for excess Tax Deducted at Source (TDS) deducted by buyers, ensuring they pay the correct amount of tax. Additionally, ITR serves as vital documentation for income records, aiding in financial transparency and facilitating various financial processes like loan applications and visa procedures. Proactive ITR filing helps NRIs avoid potential notices or legal complications from tax authorities and allows for effective tax planning and optimization of tax liabilities by leveraging deductions and exemptions. Maintaining a consistent ITR filing history supports efficient financial management and planning for future investments.
6. ITR filing for NRIs in case of Selling cryptocurrency
Many NRIs are actively involved in cryptocurrency trading, dealing with assets like Ethereum and Bitcoin. They either buy and sell these digital assets through Indian crypto exchanges or purchase from exchanges outside India and sell on Indian platforms. When selling these assets in India, any gains realized are taxable in India.
Lately, there’s been cases where NRIs buying crypto from overseas exchanges and transferring them to Indian exchanges for selling. Any sale made in India results in taxable gains. In some cases, NRIs have incurred losses but failed to file their income tax returns. Consequently, the income tax department has issued notices to clarify the nature of these transactions and the source of funds.
Despite suffering losses, NRIs have had to navigate legal challenges, responding to these notices. They’ve faced issues such as illogical tax demands, disallowing NRI claims, and receiving high-pitched assessment demands.
To avoid such complications, it’s better for NRIs to file their income tax returns diligently.
