5 Common Mistakes every NRI makes in Complying with Indian Tax & FEMA Laws

blog, Documentation, General, Taxation

NRIs are in general very tax compliant in their host countries but due to lack of knowledge or sheer inertia at times they tend to overlook the taxation aspect in India. Some of the common mistakes that they should avoid are:
Correct Bank Account: As per the existing FEMA laws the Resident Indians on becoming Non-Resident should convert their existing resident bank account into a NRO account. NRO account is for transactions in Rupee. Further if NRIs wish to maintain bank account in foreign currency they can open NRE account. If NRIs/PIOs/OCI fails to convert their existing rupee account into a NRO account they are in breach of the FEMA laws and there can be penalties for doing so.
Ignorance about what constitutes Income: NRIs tend to think that they are liable to pay tax in India only if they are earning in India either through business or through way of salary. They tend to ignore income from investments or rental income. For NRIs, Income will include income from salary (if any in India), Interest income, rental income or income from professional service.
Capital Gains Tax: Capital Gains arise when any person sells any asset (like Mutual fund, Property, Shares etc) and the sale price of the asset is higher than the buying price of the asset. In case the selling price of the asset is lower than the buying price of the asset than one can book Capital Loss in their personal book of accounts and carry forward it for next 7 years. One can adjust capital gains against capital loss in previous years or within same year provided one has filed Income Tax Returns.
Treatment of TDS: TDS is “Tax Deducted at Source” and for NRIs TDS rates are higher than for resident Indians. Many NRIs think that since TDS has been deducted, they have paid taxes and there is no need to file Taxes. In fact in many cases NRIs/PIO/OCI are eligible for refunds as the TDS is normally higher than actual tax payable. The law states that one should file an Income Tax Return even if it is a Nil Tax Return.
Rental Income: Many NRIs have the misconception that the rental income does not constitute an Income in India. As per CBDT rules for Income Tax the tenant is supposed to deduct a TDS before paying the rent to the owner in case the owner is a NRI/PIO/OCI. But, due to ignorance many tenants do not deduct TDS and further the NRI/PIO/OCI fail to file tax.