NRI Income Tax Notices in India: Complete Response Guide for Chartered Accountants

Handling income tax notices for Non-Resident Indians (NRIs) is among the more demanding work that falls on a Chartered Accountant's desk. The complexity is not just technical — it is logistical. Your client may be in the US, UAE, UK, or Singapore, may not have a functioning Indian mobile number, may have granted a Power of Attorney that expired three years ago, and may have sold a property in 2021 that the Income Tax Department has only now flagged through the Annual Information Statement (AIS).

This guide is written for practising CAs who regularly handle NRI matters. It covers why these notices arise, which sections are most commonly invoked, how to apply Double Taxation Avoidance Agreements (DTAAs), and how to structure a defensible response.

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Why NRIs Receive Income Tax Notices

The Income Tax Department's data infrastructure has improved significantly. The AIS and Tax Information Summary (TIS) now aggregate data from multiple sources: property registrars, banks, mutual fund registrars, foreign remittance reports under Form 15CA/15CB, and TDS returns filed by buyers of NRI property. When this data does not reconcile with what an NRI has filed — or when the NRI has not filed at all — a notice follows.

The most common triggers include:

1. AIS/TIS mismatches with filed returns

An NRI who earned rental income from Indian property, received dividends from Indian equity holdings, or redeemed mutual fund units may have an AIS entry that does not match what was declared. Even where tax was deducted at source, non-disclosure in the return creates a mismatch that the Centralised Processing Centre (CPC) flags automatically.

2. Property sale transactions

Under Section 194-IA, any buyer of immovable property above Rs 50 lakh must deduct TDS at 1% if the seller is a resident, but at 20% (plus surcharge and cess) if the seller is an NRI under Section 195. Buyers frequently under-deduct or apply the wrong rate. This results in demands raised against the NRI seller.

3. Non-filing despite Indian-sourced income

Many NRIs assume that because TDS was deducted on their Indian income, they have no filing obligation. This is incorrect. Where the total Indian income exceeds the basic exemption limit, a return must be filed regardless of TDS. The department identifies these non-filers through Form 26AS data and now issues notices under Section 142(1) or 148.

4. DTAA mismatches

An NRI may have claimed DTAA relief at a reduced rate on interest, royalties, or dividends without filing Form 10F or without the Assessing Officer having visibility into the Tax Residency Certificate (TRC). The department then disallows the concessional rate and raises a demand.

5. Foreign asset or income discrepancies

Under Schedule FA of the ITR, NRIs are required to disclose foreign assets only if they are residents under FEMA and the Income Tax Act. However, return of income India (RNOR or NR status determination) errors frequently lead to incorrect schedule disclosures, triggering scrutiny.

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Common Notice Types for NRIs

Section 143(1) — Intimation from CPC

This is an automated intimation, not a scrutiny notice. It arises when the CPC's processing of the filed return results in a tax demand or a disallowance. For NRIs, common reasons include:

• TDS credit mismatch between Form 26AS and the return
• Failure to claim DTAA relief in the correct field
• Arithmetic differences in capital gains computation

A 143(1) intimation can be responded to online through the e-proceedings portal. The response window is 30 days from the date of intimation.

Section 142(1) — Inquiry Before Assessment

The Assessing Officer uses Section 142(1) to call for returns (where none was filed), accounts, documents, or information. For NRIs, this notice typically accompanies a request for:

• Proof of residential status (passport copies, travel records, Form 67)
• Source of funds used for Indian investments
• Details of offshore bank accounts (if RNOR or transitioning to resident status)

Failure to comply with a 142(1) notice can result in a best-judgment assessment under Section 144.

Section 148 — Reassessment Notice

Section 148 notices are issued when the Assessing Officer believes income has escaped assessment. After the Finance Act 2021 amendments, the procedure now requires prior approval and issuance of a Section 148A notice — giving the taxpayer an opportunity to respond before the actual reassessment notice is issued.

For NRIs, escaped income allegations commonly involve:

• Undisclosed property sale proceeds
• Unexplained credits in NRO accounts
• Offshore income incorrectly treated as non-taxable in India
• Capital gains from unlisted shares sold to foreign buyers

The time limits for reassessment are three years from the end of the relevant assessment year (for amounts below Rs 50 lakh) and ten years (for amounts of Rs 50 lakh or more where the department has evidence of concealment).

Section 156 — Notice of Demand

A demand notice under Section 156 is issued after assessment. For NRIs, this typically follows:

• A 143(3) scrutiny assessment
• An ex-parte assessment under Section 144 (where the NRI did not respond)
• A penalty order under Section 271(1)(c)

Demand notices must be responded to within 30 days. Failure to pay or appeal results in coercive recovery proceedings, which can include attachment of Indian bank accounts and properties.

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DTAA Considerations

India has DTAAs with over 90 countries. For NRIs, the most frequently invoked treaties are with the UAE, USA, UK, Canada, Singapore, Australia, and Germany. CAs must be comfortable applying these treaties and must know which articles are relevant to the income streams in question.

Residency under DTAA vs. Income Tax Act

Residential status under the Income Tax Act (Section 6) and under a DTAA can differ. The treaty's tiebreaker rules (permanent home, centre of vital interests, habitual abode, nationality) determine treaty residency. An individual may be a "resident" under the Income Tax Act's 182-day rule but still be a treaty non-resident if their centre of vital interests is in the other country. This is a powerful defense in reassessment cases.

Common DTAA articles invoked in NRI notices

Income Type	Relevant DTAA Article
Salary (employer in foreign country)	Dependent Personal Services
Rental income from Indian property	Income from Immovable Property
Interest on NRO/FD accounts	Interest
Dividends	Dividends
Capital gains on property	Capital Gains
Fees for Technical Services	Fees for Technical Services / Business Profits

Note that capital gains on immovable property are generally taxable in the country where the property is situated, so DTAA relief on Indian property gains is limited unless the specific treaty provides otherwise.

Article on Elimination of Double Taxation

Where Indian tax is legitimately due, the NRI can claim credit in their country of residence for taxes paid in India, under the elimination of double taxation article. Ensure the client's foreign tax credit claim is documented — this is often required as evidence that DTAA benefit is not being abused.

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The Importance of the Tax Residency Certificate

A Tax Residency Certificate (TRC) is mandatory for claiming DTAA benefits under Section 90(4). Without a valid TRC, the Assessing Officer is entitled to deny treaty relief entirely and tax the income at domestic rates.

Key points for CAs:

• The TRC must be issued by the tax authority of the country where the NRI is resident
• It must cover the relevant financial year
• Form 10F must be filed on the income tax portal if the TRC does not contain all the particulars specified in Rule 21AB
• TRC validity: the certificate must be in force during the relevant period. A TRC issued in March 2025 for the FY 2024-25 period is valid; a 2022 TRC is not

Always collect the TRC and Form 10F at the start of the engagement, not after the notice arrives. Retrospective collection is possible but requires explaining the gap to the Assessing Officer.

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Response Challenges Specific to NRI Cases

Client is not physically in India

E-proceedings have made the procedural aspects easier — responses can be filed online. However, the NRI's Digital Signature Certificate (DSC) or Aadhaar-linked OTP may not be available. Most NRIs will need to:

• Link their mobile number (even a foreign number via OTP update)
• Use their CA's submission on their behalf via authorised representative login
• Alternatively, execute a valid Power of Attorney in favour of the CA

Power of Attorney issues

A POA executed abroad must be notarized and, in most countries, apostilled under the Hague Convention. Many NRIs send informal email authorizations, which are not legally sufficient for Income Tax proceedings. Ensure the POA is:

• Duly stamped (if used in India) or apostilled (if executed abroad)
• Covering the specific proceedings (a general POA is acceptable but a specific one is cleaner)
• Registered with the income tax portal under the Authorised Representative section

E-proceedings and portal compliance

All scrutiny notices post-2019 are conducted through the e-proceedings portal. Ensure you submit responses in the correct format — PDF attachments where required, structured responses matching the questionnaire, within the prescribed deadline. Request extensions early if the client needs time to gather foreign documents.

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Key Defenses in NRI Income Tax Notices

1. Residential status determination

This is the first line of defense in almost every NRI case. Document the number of days of physical presence in India using passport pages. The income tax portal now allows you to upload travel records. Where residential status is RNOR or NR, scope of Indian taxability is limited to Indian-sourced income only — foreign income is not taxable.

2. TDS already deducted

Where the notice relates to income on which TDS has already been deducted (bank interest, property sale proceeds, dividends), point to Form 26AS and the TDS certificates. If TDS was over-deducted (as frequently happens on property sales), the appropriate remedy is a refund claim in the return, not additional demand.

3. DTAA relief

Present the TRC, Form 10F, and the specific treaty article. Compute the income taxable under the treaty rate and show that the tax paid (or TDS deducted) corresponds to that rate. Where the department has applied a domestic rate ignoring the treaty, the response should include a legal note citing Azadi Bachao Andolan v. Union of India and the relevant treaty article.

4. Capital gains computation disputes

For property sales, disputes often arise over:

• Indexed cost of acquisition (Section 48)
• Deductions under Section 54 or 54EC
• Determination of fair market value (Section 50C issues)

Where Section 50C has been applied (stamp duty value substituted for actual sale consideration), the NRI can request a reference to the Valuation Officer under Section 50C(2). This stays the demand until valuation is completed.

5. Non-taxability of specific income

DTAA articles on specific income types may exempt the income from Indian tax altogether (e.g., salary earned and received outside India by an NRI is generally not taxable in India under Section 5(2)). Clearly document the source and receipt of each income item.

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Practical Response Tips for CAs

1. Start with a complete AIS/TIS review. Download the client's AIS and TIS before drafting any response. Map every line item to what was declared (or not declared) in the return.

2. Establish residential status first. Do not engage on the merits of the notice until residential status is settled. File a preliminary response asserting NR/RNOR status with supporting documents if the notice presumes resident status.

3. Request extension proactively. If the client is overseas and documents need to be collected, request an extension via the e-proceedings portal before the deadline lapses. Most Assessing Officers grant 15-30 day extensions on first request.

4. Use Form 35 for CIT(A) appeals. Where a 143(1) demand cannot be resolved through rectification, or where a scrutiny assessment results in an adverse order, file an appeal under Form 35 within 30 days of the order. The first appeal is now filed online.

5. Document the DTAA claim explicitly. Do not assume the Assessing Officer will apply the treaty. State the treaty, the article, the applicable rate, and attach the TRC and Form 10F as part of every initial response.

6. Advise on future compliance. NRI cases often arise from years of non-filing. After resolving the current notice, help the client regularize past filings under the Updated Return provisions (Section 139(8A)) where applicable, and set up future compliance including Form 15CA/15CB for remittances.

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How TaxNoticeAI Can Help

Drafting responses to NRI income tax notices involves reviewing multiple documents, identifying the applicable DTAA provisions, cross-referencing AIS data, and producing a structured reply — all under time pressure.

TaxNoticeAI is built specifically for Indian Chartered Accountants handling exactly these scenarios. Upload the notice PDF, and the platform uses AI to:

• Classify the notice type and identify the applicable sections
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This article is intended as a professional reference for Chartered Accountants and does not constitute legal advice for individual cases. Tax positions should be confirmed against applicable law and treaty provisions for each specific situation.