Common Tax Mistakes Made by NRIs/OCIs

Filing taxes in India can be a complicated process, especially for Non-Resident Indians (NRIs). As these NRIs live in a foreign country, it can be quite challenging for them to manage their taxes. There are many rules applied in the process of ITR filing that make mistakes become such a common thing. But these common mistakes can cost you a lot, as they can be an action of non-compliance. It is crucial for all the NRIs to file their taxes on time and claim all the benefits mentioned in deductions and exemptions. 

In this blog, we have discussed the common income tax filing mistakes for NRIs and how they can avoid making them. You will also get an insight into Indian tax laws from reading this blog. This article will help you gain a better understanding of Incoem tax filing and can save you from the potential pitfalls. 

Ignoring Residency Rules for Taxation

It is one of the most common mistakes that NRIs make. They fail to determine their residential status accurately and mention the wrong one while filing their taxes. There can be significant effects of this mistake on their tax liability. It is important for the NRIs to carefully evaluate the number of days they have stayed in India. They should make sure to follow the compliance along with the tax residency rules so that it is easy to avoid the unnecessary tax burdens or penalties. 

To avoid such mistakes and to check the residential status of NRIs, these factors can be considered:

1. Residential Status: The residential status of such individuals can be found out by determining the number of days they have spent in India in the previous and preceding years. The criteria for evaluating the residential status can vary, as it depends on many factors such as employment, citizenship, and their intention to stay in India. Each NRI should determine their status of residency according to these factors.
2. Physical Presence: The physical presence of an individual or the number of days they have spent in India plays a major role in determining their tax residency. Based on the physical presence, the individuals are classified into three categories as per the Income Tax laws: resident, non-resident, and resident but not ordinarily resident (RNOR). The NRIs should definitely assess their physical presence in order to find out their tax residency status. 
3. Business and Employment Activities: For all the NRIs who are going the employment or business activities in India, it is important to consider their impact on declaring their residential status. The factors like duration and nature of the business and employment can change the decision of determining the residential status. 
4. Tie Breaker Regulations: There are some cases in which the NRIs are considered as the residents of more than one country, then the tax treaties have to apply the tie breaker rules. Various factors are considered to determine the tax residency in such cases, including habitual abode, permanent home, centre of vital interests, and nationality. It is recommended that NRIs examine the tie-breaker rules to determine their residency status for taxation. 

Failing to Claim Benefits from Taxation

The NRIs are provided with many tax benefits and exemptions to claim by the government of India. There are many NRIs who are not aware of such benefits and hence overlook them. If the NRIs fail to claim all these benefits, then they might end up paying more taxes. To optimise your tax savings, it is important to stay updated about all the available exemptions and deductions. 

All the NRIs have the opportunity to claim their benefits from the exemptions under certain sections of the Income Tax Act, especially for the long-term capital gains. You can claim exemptions on capital gains under sections 54, 54EC, and 54F and get the refunds for the deducted TDS (Tax Deducted at Source). 

Section 54 of the Income Tax Act allows the exemption on long-term capital gains, which includes the sale of a house property. While Section 54F gives the exemption on the sale of any other asset apart from house properties. 

NRIs can easily decrease their tax liability on the capital gains, and they can claim refunds for all the TDS deducted. The NRIs get many opportunities to fix their tax position, and they can easily retain the maximum capital gains while filing their Income Tax Returns. 

There are some additional deductions that NRIs commonly miss, such as healthcare, expenses, housing loans, etc. NRIs should make them understand the available deductions and exemptions, so that they can use them in reducing their tax liabilities. 

Failing to Report Foreign Assets

The NRIs having the financial interest or assets outside India, then it is mandatory for them to comply with the requirements of foreign assets. If they fail to disclose their foreign assets or provide the wrong information about them, then it can lead to major penalties and legal consequences. NRIs should have the information about these reporting obligations and fulfil them correctly.

The NRIs should disclose the details mentioned below about their foreign assets and incomes: 

1. Details about all the foreign bank accounts and the interest earned on them. NRIs should also mention the investment or ownership in the foreign entities, such as trusts, partnerships, companies, etc. 
2. Details of the immovable properties they own in the foreign country, such as buildings, lands, etc.
3. Details of all the financial interests in the foreign entities. It includes bonds, shares, debentures, mutual funds, etc. 
4. Details about all other assets or income earned in a foreign country.

Forms Required for reporting: NRIs should use the appropriate income tax return forms to report all of their foreign income and assets. The selection of forms depends on the nature of foreign income and assets. The most common forms that are used include: 

• Form FA: This form is used for reporting the details of foreign assets if their total income is more than INR 50 lakhs.
• Form ITR-2: This form is used for reporting the income that comes from foreign assets and foreign income sources. 

Non-Compliance Penalties: If the NRIs fail to comply with the reporting requirements of foreign assets, then it can lead to major consequences and penalties under the Income Tax Act. These penalties can go from monetary fines to even prosecution for the charges of tax evasion.

Failing to Follow the Tax Processes 

This section contains the various compliance avoidance measures for the NRI filing taxes in India.

Not maintaining proper documents.

The NRIs need to maintain proper documentation for the income tax filing. There could be many NRI tax problems in the process if they fail to keep the records of expenses, income, investments, and other financial transactions. These maintained records can be used by NRIs to support their claims and prove their deductions or exemptions.

Not Filing Income Tax Returns

Most of the NRIs think that there is no need to file the Income Tax return because they do not have any taxable income in India. Under some circumstances, the NRIs need to file ITRs even if they don't have any taxable income in India. These situations arise when the NRIs hold any assets or financial assets in India. If they fail to file ITRs in the necessary situations, it can lead to legal consequences and penalties.

Wrong Classification of Income

It is crucial in tax filing that the NRIs properly classify their income. It is difficult for most of the NRIs to classify their income correctly, as they are not able to understand the difference between taxable and non-taxable income. If you make an error while classifying your income, then it can lead to wrong tax calculations and legal issues. It is recommended for the NRIs who are not aware of the tax guidelines to seek professional advice to ensure the correct classification of their income.

Not doing Tax Planning

To optimise the tax liability of NRIs, it is important to properly plan your taxes. Many NRIs do not focus much on tax planning activities, which eventually costs them the opportunities for tax savings. If the NRIs plan their investments strategically, stay informed with all the tax law changes, and use the tax-efficient instruments, then they can reduce their tax burden and increase their financial returns. 

Neglecting DTAA

Double Taxation Avoidance Agreements (DTAA) are the agreements signed between India and other foreign countries to save the NRIs from double taxation on the same income. If NRIs ignore the provisions of DTAA, then they might have to pay double taxes on the same income they have earned, once in India and then in their country of residence. It is important for the NRIs to understand the benefits of DTAA and how much it can reduce their tax liability. 

Avoiding Tax Deadlines

NRIs are liable to pay the penalties and interest charges if they miss the tax deadlines. It is also one of the common NRI tax mistakes because most NRIs overlook the tax filing due dates, especially when they are living in a foreign country. It's important to stay aware of the tax filing deadlines to ensure compliance with the tax authorities and to avoid unnecessary penalties. 

Neglecting Electronic Filing

In this modern world of technology, it has become very convenient and easy to use the electronic method for tax filing. You can easily use the Income Tax Portal and file the ITRs. However, some NRIs find the traditional method of filling ITRs on paper more preferable, and they overlook the electronic option. E-filing not only saves your time and effort, but it also reduces the chances of income tax filing mistakes. NRIs should consider this method more often for a smooth and streamlined experience of tax filing. 

Not Getting Expert Assistance

Intricate details of the tax filing process can be a little complicated for the NRIs, and they might face many challenges. Most NRIs try to file their taxes without getting any guidance from the experts, but looking at the complexities of the process, it is advisable to consult the professionals. The professional guidance can help the NRIs in getting the maximum savings and more deductions. It enables the accurate and compliant filing of ITR. 

Filing Indian taxes as an NRI requires a detailed understanding of the Indian laws and their regulations on taxes. Avoiding the common income tax filing mistakes, such as failing to report their global income, ignoring residency rules, providing inaccurate tax status, and neglecting the tax exemptions and deductions, can cause major penalties and legal complications for NRIs. With the help of the experts, NRIs can ensure a smooth ITR-filing process and stay compliant with the Indian tax laws. 

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