For most individuals, tax compliances begin and end with filing a tax return. The India Income-Tax law requires a return to be filed by every individual whose total income during the financial year exceeds the specified threshold limit.
It is not very different for NRIs, although certain beneficial rules do exist.
It is better to begin by explaining what the term ‘NRI’ means in tax parlance.
Tax concepts, NRI, residency and income taxable in India
an ‘NRI’ is a citizen of India or a person of Indian origin* who is not a resident in India. Residency for tax purposes is decided based on a person’s physical stay in India. There are three conditions that could trigger non residency for tax purposes. First, when an individual’s stay in India is less than 60 days in a particular tax year. Second when the stay exceeds 60 days but is less than 182 days and the cumulative stay in the four years preceding the year in question is less than 365. Finally, when an individual leaves India for taking up an employment outside India and his/her stay is less than182 days in the year of departure.
A ‘resident and ordinarily resident’ (ROR) person’s global income is taxable in India, while a ‘nonresident’ (NR) is taxed on income earned or received (or deemed to be so earned or received in India).
Let us say XYZ qualifies as an ROR in the year of departure, her sources of income being remuneration from employment in India as well as Australia, and interest from her savings bank account. If her total income after claiming a deduction for any tax saving investments in India either exceeds to tax limit or not. It is always better to file the return. If income is below the tax limit than to claim the TDS refund. It is quite likely that her Australian salary may also be put to tax in Australia, thereby resulting in ‘double taxation’. The Indian Income-Tax law allows XYZ to take recourse under the India-Australia Double Taxation Avoidance Agreement, also called a ‘treaty’. If XYZ qualifies as a treaty resident of India in the financial year 2014-15, taxes paid in Australia will be permitted as a credit (or deduction) while computing the balance tax payable in India.
That brings us back to the necessity for filing a return of income in India. Among other factors, the Indian revenue authorities place reliance on the disclosures in the return of income in assessing whether a tax payer has accurately offered his income for tax.
Why file a return of income in India
The answer being law demands it. Additionally, there are certain benefits that are possible to claim only on the basis of filing a valid return of income, such as:
Losses of a particular financial year are permitted to be carried forward for being set-off against income of future financial years only when the return of income for the year of loss has been duly filed.
If XYZ is a NR in India and her Indian income is also taxable in Australia then relief under the treaty may be claimed in Australia for the taxes paid in India. Such relief may be claimed in respect of doubly taxed income, by offering the return filed in India as proof of income subject to tax in India and taxes paid thereon.
If XYZ is an ROR in India and her Australian income is taxable in India, then for the purpose of claiming treaty relief in India, she would have to file a return of income in India providing the details of the doubly taxed income and the taxes paid in Australia.
Refund of excess tax deducted at source may be claimed only by filing a return of income. Delayed filing of return attracts a penal interest at the rate of 1% per month on the balance tax payable. Additionally, a penalty of Rs 5,000 may be levied if the return is not filed within one year from the end of the relevant financial year.
The return must be filed on or before 31 July succeeding the financial year by an individual (due date being September 30 if the individual is a working partner of a firm whose accounts are required to be audited). If one has missed the bus, one does not need worry, as a belated return for financial year 2014-15 may be filed after the due date (being 31 July 2015) but before 31 March 2017 (or completion of assessment whichever is earlier).
XYZ will be glad to note, however, that no return needs to be filed if as an NRI, her income taxable in India comprises only of investment income or income by way of long term capital gains or both, and tax has been deducted at source from such income (by the payer).
Having said this, XYZ will need to understand the procedural nuances involved in filing her return in India while she remains outside India
Procedural aspects of filing an NRI’s return
The primary exercise for XYZ would be to put together a file containing details of incomes, exemptions and taxes paid. Easier said than done, as these details may need to be collated from different sources. For instance, receipts to be obtained as proof of investments in insurance policies and proof of income and tax deducted at source to be obtained from the employer for salaries, from the bank for interest on savings account and from the buyer of the family house property in respect of the capital gains arising on sale.
Forms have been prescribed for different categories of income. XYZ will have to file her return in Form ITR 2. Persons earning salary, interest, pension and income form agricultural activities would have to file a return in Form ITR 1 etc. XYZ may even authorize any person to sign the return on her behalf as authorized representative.
A useful development in the recent years is the facility of online/e-filing of returns which helps timely filing. However, if XYZ does not have a digital signature, she will have to adopt a combination of e-filing and physical submission of the return filed online within 15 days of e-filing.
Hopefully that answers most, if not all, of XYZ’s queries.
(* Person of Indian Origin means a person who was born in undivided India or a person either of whose parents or either of whose grandparents was born in undivided India.)
Before making any decisions do consult the experts. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.
Abhishek Ranjan Singh
Managing Director and Founder of ARS Solutions
Certified and Authorized Tax Return Preparer of Income Tax Department, India
Registered Mutual Fund Advisor of Association of Mutual Funds in India
Registered Return Preparer of Election Commission of India