“Synopsis”
Filing taxes in India as a Non-Resident Indian (NRI) comes with its own complexities. Many NRIs unknowingly make common mistakes—like misidentifying their residential status, failing to report foreign income, or not claiming eligible deductions—which can lead to penalties, delayed refunds, or tax notices. This blog outlines the most frequent NRI tax filing mistakes and how to avoid them using the latest Income Tax rules for AY 2025–26.
1. Incorrect Determination of Residential Status
The residential status defines your tax liability. Many NRIs fail to apply the correct 182-day rule or the 120-day rule for high earners introduced recently. Filing as a resident when you’re actually non-resident (or vice versa) can lead to tax notices and interest on unpaid taxes.
How to avoid:
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Carefully calculate your stay in India during the financial year.
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Use provisions under Section 6 of the Income Tax Act to classify your status.
2. Not Reporting Global Income
NRIs are not taxed on global income in India—but residents and RORs (Residents Ordinarily Resident) are. Mistakes happen when someone incorrectly files as a resident and omits global income, violating tax laws.
How to avoid:
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Ensure your residential status is correct.
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Disclose foreign income only if your status requires it.
3. Missing Indian Income Sources
Even if you’re living abroad, your Indian income—like rental income, capital gains, or bank interest—must be reported. Ignoring this can cause underreporting and trigger scrutiny.
How to avoid:
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Declare all income from India in your ITR.
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Use Form 26AS to track TDS and income credited to your PAN.
4. Filing the Wrong ITR Form
NRIs often file ITR-1 (Sahaj), which is only for resident individuals. NRIs should file ITR-2 or ITR-3 based on their income types.
How to avoid:
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Use ITR-2 for salary, capital gains, and rental income.
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Use ITR-3 if you have business/professional income in India.
5. Not Claiming DTAA Benefits
NRIs paying tax abroad may end up being taxed twice if they don’t utilize Double Taxation Avoidance Agreement (DTAA) provisions.
How to avoid:
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Claim foreign tax credit using Form 67.
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Use applicable DTAA treaty clauses between India and your country.
6. Overlooking Section 80C Deductions
NRIs can claim Section 80C deductions but only for eligible investments like life insurance, PPF, or ELSS mutual funds—not for all tax-saving options available to residents.
How to avoid:
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Invest in allowed instruments and claim deductions correctly.
7. Not Disclosing Foreign Assets When Required
If you’re a resident, failing to disclose foreign bank accounts, shares, or property can attract heavy penalties under the Black Money Act.
How to avoid:
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Disclose details in Schedule FA if your status is resident.
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NRIs are exempt from this if they maintain non-resident status.
8. Incorrect TDS Claims
NRIs often face TDS deduction at higher rates (20% or more). But many don’t file ITRs to claim refunds, leaving money on the table.
How to avoid:
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File your return if TDS is deducted even if not mandatory.
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Use Form 10F or apply for Lower Deduction Certificate (LDC) when possible.
9. Not Filing Return When Required
Even if your income is below ₹2.5 lakh, you may need to file an ITR if TDS was deducted, or to claim a refund, or if you want to carry forward capital losses.
How to avoid:
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File a return even if your net tax is zero—if any income or TDS exists.
10. Not Updating NRI Status with Banks and PAN
If your NRO/NRE accounts or PAN records show you as a resident, TDS will be wrongly calculated and PAN-Aadhaar linkage issues may arise.
How to avoid:
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Update your residency status with banks, mutual funds, and the income tax portal.
Conclusion
Tax filing for NRIs may seem straightforward, but it’s easy to make costly mistakes if you’re not careful. Understanding your residential status, reporting all income sources accurately, and using DTAA benefits can help you file correctly and avoid penalties. Take the help of a qualified tax advisor if your finances are complex.
