Top 7 Non-Resident Indian (NRI) Income Tax pitfalls
It’s a bright, sunny morning. The aroma of your favorite breakfast is wafting through the kitchen. You’re sipping your morning coffee, feeling content and carefree. Life is good. You are missing your home back
in India. So, you just take out your phone to see what’s happening in your home country. And then you see the headline- “Today is the last day to file ITRs. Tax payers, hurry!” Panic sets in as you quickly start rummaging through your documents and it creates a whole new frenzy as to figure out your residential status, income sources, and the baffling world of international tax treaties.
Dear NRI, you’re not alone. It’s the story of many like you. So, in this article, we’ll unravel the top 7 NRI tax pitfalls and guide you through this confusing world of income tax for Non-Resident Indians.
In this article, we will cover the following income tax mistakes commonly made by NRIs
- Failure to Determine Residential Status
- Misreporting of Income by Non-Resident Indians (NRIs)
- Ignoring Double Taxation Avoidance Agreements (DTAAs)
- Non-Resident Indians (NRIs) Not Utilizing Tax Exemptions and Deductions
- Failing to File Timely NRI Income Tax Returns (ITRs)
- Inadequate Record-Keeping by Non-Resident Indians (NRIs)
- Not Seeking Professional Advice for NRI ITR
1. Failure to Determine Residential Status
One of the most common NRI income tax mistakes that is that they fail to accurately determine their residential status for tax purposes. Misclassification of your residential status can result in miscalculated income tax liabilities and will lead to potential legal hassles. So, accurately determine your residential status to ensure compliance with Indian tax laws.
2. Misreporting of Income by Non-Resident Indians (NRIs)
Misreporting of income can take various forms, including under-reporting, over-reporting, or failing to disclose certain income sources. Rental income, capital gains, foreign income are some of the income sources that are more prone to misreporting by NRIs. Income misreporting can lead to legal hassles including NRI income tax assessments, penalties, and even prosecution for tax evasion. To avoid such issues, accurately report your income sources.
3. Ignoring Double Taxation Avoidance Agreements (DTAAs)
One of the gravest NRI income tax mistakes is overlooking the existence and significance of Double Taxation Avoidance Agreements (DTAs) between their host country and India. India has signed DTAAs with 85 other nations. To benefit from DTAAs, NRIs have to specifically obtain a Tax Residency Certificate. Ignoring DTAAs can lead to overpaying of income tax and complex legal hassles. So be sure to leverage these agreements to your advantage and reduce your tax liabilities as an NRI.
4. Non-Resident Indians (NRIs) Not Utilizing Tax Exemptions and Deductions
Another crucial NRI income tax pitfall is that they fail to take advantage of income tax exemptions and deductions that can significantly reduce their tax liability. NRIs have to stay informed, plan their investments strategically and file accurate ITRs to avoid paying extra income tax while still complying with the laws.
5. Failing to File Timely NRI Income Tax Returns (ITRs)
NRIs are often caught off guard by the various deadlines for filing income tax returns in India. Missing these deadlines can result in penalties and legal hassles. The Indian Income Tax Department may impose late filing fees and interest on unpaid taxes. It could result in a notice from the tax authorities, investigations, and potential legal actions. To avoid these issues, be aware of the specific ITR filing deadlines and timely file your returns. Also, make sure to choose the right ITR forms that apply to you.
6. Inadequate Record-Keeping by Non-Resident Indians (NRIs)
Many NRIs fail to maintain accurate financial records. To prevent legal hassles and ensure smooth tax filings, consider maintaining a record of all your income sources and expenses. Keep copies of all relevant financial documents. Organize digital and physical records securely and accessibly.
Clear and organized records will not only make it easier for you to prepare your income tax returns but also serve as essential documents in case of tax audits or disputes.
7. Not Seeking Professional Advice for NRI ITR
And last but not the least, many NRIs fail to recognize the role of tax experts and financial advisors. They can provide guidance on tax planning, investment strategies, and help you make informed financial decisions. While it’s true that many NRIs can handle basic income tax matters on their own, there are certain complex tax situations, for example, when tax laws change or during planning real estate investments, etc., when it becomes essential to consult a professional.
Above are the major mistakes made by many NRIs while calculating their income tax and filing paperwork. Apart from these, many overlook NRI income tax implications property transactions in India, ignore the importance of tax planning, select wrong ITR forms, forget to claim tax credits, fail to do e-verification, etc. Many times, even the smallest NRI income tax mistakes like providing wrong information or spelling mistakes, filing wrong assessment year etc. can create a lot of legal hassles.
So NRIs, keep your eyes open and stay aware. Don’t fall into these common NRI income tax pitfalls and seek professional advice whenever necessary.
