What Indians living in UAE need to know about income tax returns

If you are an Indian living in the UAE, and have a PAN card you may be wondering whether you need to submit income tax returns or not?

Deepak Bansal, associated with Ask Pankaj Tax Advisors, UAE explains the process in detail and what can and cannot be done.

Are NRIs holding PAN cards required to submit income tax returns?

There is a general misunderstanding that an income tax return need not be submitted if there is no taxable income in India. A non-resident Indian (NRI) could be required to submit an income tax return in certain scenarios even if there is no tax payable to the government (Ref: income tax rule 12AB).

>Scenario I

For example, where the total deposits during a financial year in the NRI’s savings bank account (including NRE/NRO account) exceeds Rs 5 million, he/she is required to submit an income tax return. The deposits could be from any source such as remittance from UAE or a sale of property in India etc.

>Scenario II

Another scenario covers a situation where the tax deducted as source (TDS) during the financial year is Rs 25,000 or more. It is important to note that the TDS on a NRO account is deducted at 30 per cent. NRIs believe that they are paying extra to the government by not submitting a tax return and by not claiming a tax refund. However, the ‘no harm, no foul philosophy’ may not work here.

>Scenario III

In another scenario, a NRI may have sold a property for a value exceeding Rs 250,000. He/she can save tax by reinvesting the sale proceeds into another immovable property or selected funds. Even if there is no income tax payable in such cases, it is mandatory to submit an income tax return as the total income before tax deductions has crossed the Rs 250,000 threshold.

>Scenario IV

Similarly, in certain cases of foreign travel expenditures also, an income tax return could be mandatory.

When are NRIs exempt from submitting income tax return?

If an NRI’s India-sourced income is NIL or less than Rs 250,000, an income tax return need not be submitted.

Further, a tax return is not mandatory if an NRI’s India-sourced income, even if more than Rs 250,000, consists of only certain prescribed items and adequate withholding taxes/TDS has been deducted on it. The prescribed items cover dividends, interest income from specified bonds and/or debt funds, mutual funds bought in foreign currency etc.

However, if there are other incomes in addition to the prescribed items such as interest on savings account or fixed deposits, a tax return may be required.

What are the penalties for non-submission of the income tax return?

If the total taxable income is above Rs 500,000, the penalty for non-submission of income tax return is Rs 5,000. Otherwise, the penalty would be Rs 1,000.

What are the typical errors/misunderstandings relating to income tax returns?

Not having a Permanent Account Number (PAN) is not determinative of the requirement to submit a tax return. The requirement to obtain PAN is a consequence of a person’s obligation to submit a tax return, not the other way round.

Similarly, the threshold of Rs 250,000 for India-sourced income is to be calculated before any tax deductions. To illustrate, an NRI may earn Rs 300,000 of income and be eligible for tax deduction of Rs 75,000 on account of housing loans, life insurance or medical insurance premium. When the gross income exceeds Rs 250,000, an income tax return is mandatory even though the taxable income after deductions is less than Rs250,000. The most common mistake is to believe that a tax return is not required if no tax is payable.

Special provisions apply to NRIs engaged in business or profession in India which they should evaluate in detail.