NRIs face scrutiny from Indian tax authorities over foreign assets and residency status

To mitigate risks, tax professionals suggest that NRIs provide clear and comprehensive replies to any inquiries and ensure that all financial records are up to date and easily accessible. This proactive approach could prevent unnecessary complications and safeguard their financial interests

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The Indian Income Tax Department has intensified its scrutiny of Non-Resident Indians (NRIs) by issuing summons to individuals associated with foreign financial entities. The investigation unit of the department is actively seeking details from assessees about foreign accounts, including the year of opening and their residency status from that time. Additionally, NRIs are required to provide copies of their passports dating back to when the foreign account was first opened. These accounts could involve investments in overseas funds, foreign banks, or beneficial interests in trusts.

The tax authorities are particularly focused on understanding the duration of an individual’s stay in India versus their time abroad, requiring them to submit detailed calculations and supporting documents. The onus falls on the NRIs to prove their non-residency status for the relevant periods. According to tax experts, the department’s requests for information can span up to 40 years, and there is no assumption of residency; rather, the burden of proof is on the assessee to demonstrate their non-resident status.

Understanding Residency Status

Under the Income Tax Act, an individual is considered a resident if they have stayed in India for 182 days or more during the previous year, or for 60 days in the previous year and 365 days in the preceding four years. For NRIs, who often maintain financial assets abroad, proving non-residency can be complex, especially if detailed records are not maintained.

• Failure to comply with the investigation can lead to severe consequences

• The Income Tax Department might refer cases to an assessing officer under the Black Money Act (BMA), triggering separate legal proceedings

• Although the BMA primarily targets undisclosed foreign income and assets of Indian residents, NRIs could still face ex-parte assessments or additions under various provisions like Section 69, which deals with unexplained investments

Obligations Regarding Foreign Assets

NRIs are not legally required to disclose assets held abroad unless their status changes to that of a resident. Recent changes under the Finance Act 2024 have reduced the maximum time frame for issuing summons or orders under Section 149 of the IT Act from ten years to five years, significantly shortening the period for which the authorities can demand records. Before this amendment, if an assessee had income from foreign assets, the department could go back as far as 16 years.

Tax experts point out that information received from foreign jurisdictions often lacks specificity, making it challenging for NRIs to comply. In some instances, references to foreign accounts are vague, lacking clarity on whether they pertain to a customer ID, account number, or other financial identifiers.

Preparing for Compliance

To avoid complications, NRIs are advised to maintain comprehensive records of their foreign investments, including old passports and proof of investments abroad. Proper documentation can help establish non-resident status and minimize the risk of penalties or additional tax liabilities. If the required details are not provided, the tax department may impose fines or add the amounts to the assessee’s taxable income. However, there is recourse available; NRIs can appeal to the Commissioner of Income Tax, the Income Tax Tribunal, or the High Court.

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