Summary of this article
NRIs face confusion over residential status affecting tax liability and compliance risks.
Misunderstanding DTAA and capital gains tax leads to unexpected inheritance tax burdens.
Nominee rights differ from legal heirs; proper wills and compliance crucial.
By Nishant Kohli
In relation to managing wealth and legacy back home, many NRIs seriously underestimate the challenges the Indian taxation and inheritance laws bring, and, often, these challenges rest dormant until a family event, inheritance, or sudden notice from the income tax or regulator surfaces. Let's take a deeper scan of the top 5 real challenges NRIs are facing and why proactive planning is not only prudent but necessary.
1. Confusion About Residential Status – NRI, RNOR or Resident?
Your residential status in India can significantly influence your tax liability. Most NRIs do not realise that residential status is defined differently in two important Indian laws, the Income Tax Act and FEMA. You can be considered as an NRI in one act and a resident in another and therefore have very different tax obligations. As an example, a returning NRI may qualify as an RNOR (Resident but Not Ordinarily Resident) and have tax exemptions for a few years, but not filing there returns properly can land then in tax and compliance issues and can lead to penalties, notices and mismatched tax obligations. A clear understanding of this subject can help to plan tax efficient returns and investments in a much better manner.
2. Fear of Double Taxation & understanding DTAA
There is a concern from a lot of NRIs about taxation from both India and your country of residence. In general, you do not have to deal with double taxation as Double Taxation Avoidance Agreements (DTAA) exist to protect you from these burdens, but you must provide a Tax Residency Certificate (TRC) and follow the correct procedures to comply. Many times, in regard to a major income stream like interest income, capital gains or dividends, non-utilization of DTAA would result in paying more taxes for the NRI’s. If you misused the exemption or did not provide enough information, they could trigger scrutiny or disallow the exemption altogether. The very basic understanding of DTAA as a regulatory tool can help you file your taxes in a way so that you can get exemptions and save taxes legitimately.
3. Misunderstanding capital gains tax on inherited assets
Contrary to what many people believe, while in India when you inherit an asset it is not taxable, selling it is. This is where most NRIs were taken by surprise. When an inherited property, shares, or mutual funds are sold, capital gains tax is triggered, which is often based on an historical cost and indexed to inflation. A non-resident Indian (NRI) also has to contend with TDS deducts at the time of sale - usually at a higher TDS rate than necessary if their paperwork isn't in order. There is a lot of confusion in this space and many of NRI’s will find themselves with unexpected tax liabilities - especially if you haven't consulted and planned for it well with right experts.
4. The Nomination versus Will Myth - "I have named a Nominee, that's enough"
A nominee is not a legal heir. This is probably the greatest misconception among NRIs. When you name a nominee in a mutual fund, bank account, or insurance policy - you are only giving that person custodial rights - not ownership. Without a valid Indian Will - the nominee may still have to face succession law and legal dispute with other legal heirs. A properly drafted India-specific will (ideally registered) is critical to avoiding confusion, conflict, and delay for your heirs, and following your foreign estate plan.
5. No Basic Compliance Infrastructure in India for your Indian Identity
Many NRIs inherit property, cash, or investments in India, but do not have the compliance infrastructure in place to manage those assets efficiently. They may not have an Indian PAN card, a nro/nre bank account, a record of income tax returns filed (ITRs), or even a KYC. This lack of framework becomes a significant impediment when they finally decide to sell inheritance assets, usually resulting in large TDS deductions, subsequent delays in transferring funds, and often unwelcome income tax notices. So, it becomes important for NRIs to create that compliance ecosystem at the outset even if there isn't any active income in India, smooth management of future inheritances, timely tax refunds, and smooth repatriation.
Concluding Thoughts
Inheritance is not only an emotional transition it is also a legal and financial event. So, understanding NRI taxation is very important to help better execute the transition. For NRIs, the complications increase across jurisdictions, family relationships, and compliance regimes. But good strategic planning and understanding of the subject can help you avoid pitfalls, protect your legacy, and ensure tax efficient proceeds.
The author is Founder, NRI Nivesh
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
