What Should NRIs Do If They Receive Tax Notice From Income Tax Department?

Receiving a tax notice from the income tax department (I-T dept.) can be a nerve-wracking experience, especially for Non-resident Indians (NRIs) who may not be in a constant loop of complex tax laws. In recent years, many NRIs have received tax notices from the I-T department concerning their financial transactions and records in India.

NRIs who do not update their contact details in the income tax portal are often at risk of missing out on important tax notices. They may also make the mistake of ignoring the notice or delaying their response. Subsequently, non-compliance with a tax notice can have serious repercussions for NRIs ranging from financial penalties to legal action.

Take Sushmita’s case (name changed) for example, she sold her property in India in 2015 for around Rs 80 Lakhs. Since the buyer had deducted TDS (at 1 per cent) Sushmita did not file ITR for the respective financial year thinking that necessary taxes had been collected out of the sale of the property.

However, the income tax office sent notice after notice to her registered email ID which had been inactive for a while. Upon no responses to the notices, the income tax officer after a year noted the sale amount (Rs. 80 Lakh) as her taxable income and levied tax and interest on the same for the last seven or eight years.

Says CA Prakash Hegde, “In my experience over the years I have come across one huge issue with NRIs which is them not updating their email ID and contact number in the Income Tax portal. For example, in the case of Sushmita, though the property was sold some 7-8 years ago, she had not filed the income tax return. She received many notices but wasn’t aware and was unable to check the same because of an inactive ID.”

I-T department in many cases issues notices to NRIs asking the details of the sale or purchase of the property, seeking responses on the non-compliance of ITR filing or any mistakes/errors in the same.

Understanding the Nature of the Tax Notice

The first step in handling any tax notice is to understand why it was issued. Typically, a notice can be triggered by discrepancies in income declarations, tax returns, or non-compliance with regulatory requirements. For NRIs, common reasons include:

Mismatch in Financial Reporting: NRIs often have financial transactions in both India and abroad. If income earned in India is not accurately reported in your tax returns, it could result in a notice.

Non-Reporting of Assets: Failing to declare certain assets, especially if they are located in India, can lead to inquiries from the tax authorities. However, CA Prakash Hegde notes that he has not seen such cases. "Reporting of details of assets in India is required only when an NRI’s total taxable income in India for that year exceeds Rs 50 Lakh,” he says.

Failure to File Returns: If you are an NRI with taxable income in India and fail to file your income tax return, this could result in a notice.

High-Value Transactions: Large transactions, especially those involving property, stocks, or significant bank deposits, can attract scrutiny if not properly documented.

Since the I-T department treated the money received by Sushmita on the property sale as her taxable income, she got a demand notice of around Rs 70 lakhs (including interest of about Rs 55 Lakh for not filing the ITR and non-payment of tax due). Further, the income tax officer is also in the process of levying a penalty of around Rs 25 Lakh for the concealment of income.

Since it is already eight years, she cannot file that return now and has to prefer an appeal before the commissioner. And at that stage, even when the appeal is pending. Sushmita would have to pay at least 20 per cent of the amount of demand to get a stay. If she can convince the commissioner that the transaction is genuine and that she hasn’t made any profit through the sale of the property, she can get a refund of that at 20 per cent. If she has made a profit, she will also have to bear the tax and interest proportionate to the profit,” CA Prakash Hegde states.

“But it's a very difficult and time-consuming process,” he further notes.

To avoid the possibility of receiving notices timely, NRIs should update their contact information in the income tax portal. However, in case you have received a tax notice you should not delay in responding to the department with required information and queries.

Here’s what you should do if you have received a tax notice from the I-T department:

Immediate Steps to Take

1. Assess the Notice: Once you receive a notice, it is crucial to carefully read and understand its contents. Determine the section under which the notice has been issued, the reason for the notice, and the deadline for response. Consulting with a tax professional, especially one experienced in NRI taxation, is advisable at this stage.

2. Gather Relevant Documents: Depending on the nature of the notice, you may need to gather various documents, such as your previous tax returns, bank statements, property records, and details of any financial transactions both in India and abroad.

3. Respond Promptly: Time is of the essence when dealing with tax notices. “NRIs should have a very close watch on the due date within which the income tax department is expecting a response. Because every notice will have a due date within which the income tax department is expecting a response. Sometimes they will say within 7 days from this notice or sometimes they will specifically mention by this particular date you need to file a response etc.,” CA Prakash Hegde suggests.

Ensure that you respond within the stipulated time frame, as delays can lead to penalties and further complications. The response should be factual and supported by relevant documentation.

For severe cases, especially those involving large sums, there could be ramifications in your country of residence as well. Therefore the most prudent approach for NRIs to avoid getting notices would be:

Regularly File Tax Returns: Even if your income in India is below the taxable limit, there is no harm in filing a return, particularly if you have significant assets or financial interests in the country.

Declare All Income and Assets: Ensure that all income earned in India, including interest on NRE accounts, rental income, or capital gains, is accurately reported in your tax returns.

However, CA Prakash Hegde notes that there is no hard and fast rule that every non-resident has to file a return. “Of course, if they want to be extra cautious, better to file, but at least they should take professional advice to decide whether filing is necessary or any other action is necessary or not. And even before that, they must update their profile in the income tax portal with the correct email ID, postal address, and contact number. That is the biggest challenge that I see,” he concludes.