Common mistakes by NRIs in Tax and FEMA compliance and how to avoid them

The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of February 15, 2026.  

As an NRI, managing finances in India often means following two sets of rules – the Income-Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA). While the Income-Tax Act determines your tax liability, FEMA regulates how you manage your bank accounts, investments, and foreign exchange transactions in India.

For NRIs, even a small oversight in tax or FEMA compliance—like using the wrong bank account or missing a filing requirement—can lead to penalties, higher taxes, or even legal consequences.

Here are some common mistakes NRIs make and how you can avoid them.

1. Not converting bank accounts and updating financial assets after a change in residency
    

Mistake:

Many NRIs continue using their resident savings account even after moving abroad. Similarly, those who return to India sometimes forget to convert their NRE/NRO accounts back to resident accounts. In addition, NRIs often overlook the need to inform financial institutions such as mutual fund houses, brokers, or depositories about the change in their residency status.

Consequence:

• Breach of FEMA regulations
• Possible penalties and restrictions by banks
• Difficulty in redeeming mutual funds, or operating a demat account
   

How to avoid:

• Inform your bank immediately after your residential status changes
• Submit the required documents
• Ensure your resident savings account is re-designated as NRO (if you move abroad) or Your NRO/NRE account is re-designated as Resident account (if you return) Along with your bank, notify all relevant financial institutions where you hold assets – such as mutual funds, shares in demat accounts, bonds, or insurance policies – so that they can update your status to ‘Non-Resident’ (if you move abroad) or Resident (if you return)

Note: While you can continue to hold assets such as mutual funds, shares, fixed deposits, and bonds acquired when resident (or inherited), you must ensure that the correct residential status is recorded in the respective institution’s systems.

For more details, read ‘A must do for NRIs – convert your saving account into NRO Account’ and ‘NRIs returning to India: An essential financial guide’

2. Not availing DTAA benefits properly (TRC and Form 10F requirements)

Mistake:

A common misconception among NRIs is that DTAA benefits apply automatically.

This often leads to situations where:

• They do not obtain or submit a Tax Residency Certificate (TRC) and Form 10F; or
• They do not claim DTAA benefits at all, resulting in higher taxes

Consequence:

• Higher tax deducted at source (TDS) on income such as interest, dividends, or royalties due to loss of DTAA benefits and concessional tax rates
• Risk of penalties and notices from the Income-Tax Department for under-reporting or incorrect claims

How to avoid:

• Determine your residential status under DTAA
• Obtain a Tax Residency Certificate (TRC) from your country of residence
• File Form 10F online
• Submit TRC, Form 10F, along with other required details and information, to your income payer/deductor so that the correct (lower)/NIL rate of tax is applied at source
• Retain these documents and also use them when filing your Income-Tax return in India
• If you missed claiming DTAA benefits earlier, explore options such as filing a revised return or, where allowed, applying for condonation of delay

For detail understanding, read ‘How does a Double Taxation Avoidance Agreement (DTAA) help NRIs/OCIs/PIOs’ and ‘How a Tax Residency Certificate (TRC) can benefit NRIs’

3. Not updating contact details on the Income-Tax portal

Mistake:

NRIs sometimes forget to update their latest email ID, mobile number, and address on the Income-Tax portal.

Consequence:

• Missed notices or communication from the Income-Tax Department
• Tax demand and penalty exposure due to delayed responses

How to avoid:

• Always keep your contact information updated on the portal
• If required, seek professional help to complete the update smoothly

4. Missing advance tax payments

Mistake:

Many NRIs assume that once tax is deducted at source (TDS), no further action is needed. However, in practice, payer sometimes fails to deduct TDS or deduct it at a wrong rate on certain types of income—such as rental income, capital gains on sale of immovable property, or interest received from private parties. On such income, the NRI is personally responsible for paying advance tax as per the prescribed slabs and due dates.

Consequence:

• Interest liability for delayed or non-payment of advance tax
• Notices from the Income-Tax Department for any shortfall in payment

How to avoid:

• Estimate your total taxable income from all Indian sources, especially those where TDS is not deducted or deducted incorrectly
• Pay advance tax in instalments if your total tax liability exceeds ₹10,000 in a financial year (April-March)
• Take professional assistance to ensure accurate computation and timely compliance

5. Using only an NRE account

Mistake:

Some NRIs maintain only an NRE account in India. However, refunds are credited only to NRO accounts, not NRE accounts.

Consequence:

• Delays or inability to receive tax refunds

How to avoid:

• Open and maintain an NRO account in India
• Ensure NRO account details are correctly provided in your Income-Tax return to avoid refund-related hassles.

To understand more in detail permissible credits and debits in NRO and NRE Account, read ‘Decoding NRE, NRO and FCNR (B) accounts for NRIs’, ‘A-Z of an NRE account’ and ‘NRO accounts: Explained’

6. Not updating NRI status on the Income-Tax portal

Mistake:

Many NRIs do not update their residential status on the Income-Tax Department portal. If the status is not updated as ‘Non-Resident’, the Income tax portal will still treat you as a resident and require Aadhar-PAN linkage. Since NRIs are generally not eligible for Aadhar, failure to link results in Permanent Account Number (PAN) Card becoming inoperative.

Consequence:

• Higher TDS deducted at 20%
• An inoperative PAN can halt almost all financial transactions in India, including, processing of income tax refunds, interest paid on refunds, investments and property dealings

How to avoid:

• Review your residential status regularly
• Coordinate with the Income-Tax Department and provide the required details and information to update your NRI status on the portal
• Ensure your PAN remains operative to avoid compliance hassles

7. Selecting incorrect residential status in the return form

Mistake:

Incorrectly selecting your residential status in the Income-Tax return is a serious error. Since your residential status determines what part of your income is taxable in India, a wrong selection can lead to severe tax and legal consequences.

Consequence:

• Higher tax liability and penalties for misreporting
• For example, if you have returned to India and qualify as Resident and Ordinary Resident (ROR), you must disclose overseas assets such as a UK bank account or US rental income
• Failure to disclose such assets can attract penalties, along with prosecution proceedings

How to avoid:

• Carefully assess your residential status before filing your return
• If you have recently returned to India, ensure that all foreign assets and income are disclosed as required
• When in doubt, seek professional assistance to ensure correct reporting

8. Not filing a tax return when TDS has already been deducted

Mistake:

Many NRIs assume that once tax has been deducted at source (TDS), their obligations are complete and no return needs to be filed. This is incorrect. Your final tax liability may be higher or lower than the TDS already deducted. In addition, you must file a return if:

• Your income exceeds the basic exemption limit
• You want to claim a refund
• You want to carry forward the capital or business losses
• You meet certain prescribed conditions under the Income-Tax Act

Consequence:

• Loss of Income-Tax refunds that you may be entitled to
• Penalties, interest, and late filing fees for missing the return filing deadline
• Notices from the Income-Tax Department and possible scrutiny assessments
• “Best judgment assessment” by the tax officer, which can result in a higher tax demand than actually due
• Inability to carry forward losses if the return is not filed

How to avoid:

• Always file your Income-Tax return, even if TDS has already been deducted
• File within the prescribed due dates to avoid penalties and interest
• Seek professional help to correctly compute your final tax liability and to claim eligible refunds or carry forward of losses

For more details, you may refer to our article – ‘When is it mandatory for an NRI to file an ITR in India’

9. Not reporting bank accounts, assets, and liabilities in the tax return

Mistake:

Some NRIs report only the refund-linked bank account in their tax return and omit other accounts held in India. Similarly, those with income exceeding ₹1 crore often miss reporting their Indian assets and liabilities in Schedule AL. Both are mandatory disclosure requirements.

Consequence:

• Non-compliance with return filing rules
• Risk of scrutiny, notices, and penalties from the Income-Tax Department

How to avoid:

• Disclose all bank accounts held in India when filing your return
• If your income in India exceeds ₹1 crore, ensure that all assets and liabilities in India are correctly reported in Schedule AL

10. Not disclosing notional rent on deemed let-out properties

Mistake:

NRIs sometimes fail to disclose notional rent on properties that are deemed to be let out under Indian tax laws. This typically arises in cases where:

• You own more than two residential properties (even if they are self-occupied, the additional ones are treated as deemed let out). For instance, if you own three flats in India and occupy two, the third is treated as deemed let out, and you must report notional rent
• You own commercial property that remains vacant for the entire year

In such cases, the Income-Tax Act requires you to declare notional rental income, calculated as per the prescribed method, even if you are not actually receiving any rent.

Consequence:

• Under-reporting of income
• Possible tax demands, interest, and penalties

How to avoid:

• Check if any of your properties are treated as deemed let out
• Report the notional rent as per the prescribed method in your Income-Tax return
• Take professional help where necessary to avoid errors

Disclaimer:

The contents of this article/infographic are meant solely for informational purposes. The contents are generic in nature and are not intended to serve as a substitute for specific advice on any matter whatsoever. The information is subject to updation, completion and verification and the applicable norms may keep changing materially from time to time. This information is also not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to applicable laws or would subject ICICI Bank Limited/its affiliates to any licensing or registration requirements. ICICI Bank Limited/its affiliates and their representatives shall not be liable for any direct or indirect losses or liability incurred arising in connection with any decision taken by any person on the basis of this content. Please conduct your own due diligence and consult your financial advisor before making any decision. Terms and conditions of ICICI Bank and third parties apply. ICICI Bank is not responsible for third party services. Nothing contained herein shall constitute or be deemed to constitute an advice, invitation or solicitation to avail any products/ services of third parties.