Lack of clarity on TDS, reduced ITR verification window among tax-related woes for NRIs

For IT professionals,  marine workers, etc,  who earn abroad, say, for 10 months, and in India for two months, there is no clarity whether only the amount earned abroad is subject to TDS, or the entire 12 months' earnings. As a result, employers apply TDS on the entire earnings.

Alok Agarwal, Partner, Deloitte India, says, “Due to lack of clarity on the income to be charged to TDS, a higher amount is deducted by way of TDS for non-resident Indians.”

The taxpayers can claim a refund on the additional tax deducted only after they file their returns, and as a result, they aren't able to avail of the entire income that was due in their hands.

Increase in tax return verification timeline

The timeline to verify ITR-V has been reduced to 30 days from 120 days earlier. The problem is that many NRIs do not possess Aadhar cards or an Indian phone number on which they can receive their OTP (one-time password). Some do not have an Indian bank account linked to their mobile number and Aadhar, which will allow them  to e-verify their return using netbanking.

Homi Mistry, Partner, Deloitte India, says, “NRIs face challenges in e-verification of tax returns. Last year there was a provision that we could apply for condonation of delay in case of late submission of ITR-V. However, starting AY 2024-25, the return is not just considered invalid, but interest penalty is levied. Additionally, the consequences of a belated return would be applicable.”

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Reduction in re-assessment timeline

Remittances to India have reached an all-time high, as per the World Bank. But sending money to India is still a challenge for NRIs.

Paras Savla, partner at KPB & Associates, points out, “NRIs are sending tax-exempt income, which is not liable to be taxed in India. But when the money sent is saved in a fixed deposit and shows up in the AIS (annual information statement), they are sent scrutiny notices. A high amount is charged to tax when there is a scrutiny.''

Since many NRIs don’t maintain documentation dating back 8-10 years, they have trouble proving the source of their income during assessments  — whether faceless or otherwise. Also, a re-assessment can be opened up for up to 16 years in  case of foreign income (eight years for Indian earnings), so documents need to be well preserved, which is often not the case.

Documentation delay and technical glitches

Several chartered accountants told Moneycontrol that while filing form 67, which is critical for getting foreign tax credit, the one-time password is not getting generated.

Many other minor issues plague the tax compliance procedure for NRIs. "Under foreign income, the  Tax Identification Number (TIN) is to be mentioned. This is not available with all assessees with foreign income. There needs to be clarity on whether the passport number can be given instead," says chartered accountant Shweta Ajmera.

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Clubbing of income from minors

Apart from the employees, businesspersons, and professionals who actually earn a foreign income, there are minors, such as students, who earn while studying abroad. This income earned by minors is added to the guardian or parents’ income. "Minors have to club information regarding their foreign assets in their parents' income tax return, if the minor is staying abroad and has purchased assets there,” Ajmera explains.

This puts the parents in a higher tax slab and forces them to come under the 16 year re-assessment window, instead of eight years for only Indian income. They are subject to additional scrutiny and notices are also sent to them, like they are to those with foreign income.

“Filing the Foreign Asset schedule has been made more onerous. Also, instead of suspecting every person and adding many fields in the schedule, appropriate time needs to be given for filing accurate returns. Often, taxpayers aren't able to reconcile their tax liabilities due to the different financial year-end in India,” says Agarwal.