With the Income-tax Department notifying Income Tax Return (ITR) forms for FY 2024–25 (AY 2025–26), Non-Resident Individuals (NRIs) must take note of significant changes impacting compliance, disclosure obligations, and return filing strategy.
While the ITR-1 and ITR-4 utilities have been released, the ITR-2 utility—relevant for most NRIs—remains awaited. However, the underlying legal framework and reporting expectations are now clear. This post outlines the four key changes and legal interpretations that NRIs must understand while filing returns for AY 2025–26.
1. Threshold for Reporting Indian Assets & Liabilities Increased to ₹1 Crore
As per the amended ITR-2 schema, Schedule AL (Assets and Liabilities) is now applicable only if the taxpayer’s gross total income exceeds ₹1 crore in FY 2024–25.
This marks a departure from the earlier threshold of ₹50 lakh.
Applicability for NRIs:
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Reporting is limited to Indian assets and liabilities (immovable property, deposits, securities, loans, etc.).
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Foreign assets and liabilities are not required to be disclosed by an NRI in ITR-2. Schedule FA is applicable only to residents.
Failure to report Indian assets when required under Schedule AL may lead to notices, penalty under Section 271FA, or rejection of refund claims due to “incomplete disclosure.”
2. Detailed Capital Gains Reporting & Indexation Compliance
Legal Background:
Under Section 45 read with Section 48, capital gains arising from the sale of capital assets in India are taxable for NRIs. Where applicable, indexation benefit is allowed, and DTAA relief can reduce the tax rate on capital gains.
For AY 2025–26, the Cost Inflation Index (CII) for FY 2024–25 is 363.
What’s New:
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The ITR-2 format requires:
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ISIN-wise reporting for shares
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Date-wise details of acquisition and transfer
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Segregation between Section 112A, 111A, and 115E gains
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Caution:
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If the NRI claims treaty benefit (e.g., 10% flat rate on listed shares), ensure:
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Valid TRC (Tax Residency Certificate) is obtained
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Form 10F is furnished (manually, if utility unavailable)
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The appropriate article of the DTAA is selected in the return
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Incorrect or incomplete treaty claims can render the DTAA benefit inadmissible, and the capital gains may be taxed at standard rates.
3. Clarification on Foreign Asset Reporting — Not Applicable to NRIs
Statutory Interpretation:
Schedule FA is mandatory under Rule 114H and Section 139(1) for residents and RNORs holding foreign assets.
Position for NRIs:
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NRIs are not required to report foreign bank accounts, shares, or properties under ITR-2.
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This position remains unchanged for AY 2025–26.
The distinction between NRI, RNOR, and Resident status is critical. If the residential status is misclassified (e.g., due to exceeding 120 or 182 days in India), Schedule FA will become applicable, along with consequences for misreporting.
4. Applicability of Special Provisions: Section 115E and Section 115AC
Legal Options:
NRIs are eligible to opt for special tax provisions under:
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Section 115E: Flat rate of 10%/20% on investment income or LTCG on specified foreign-currency assets.
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Section 115AC: Applicable to GDRs, bonds, and dividend income, with concessional tax treatment.
These provisions operate outside the normal slab regime and are often more tax-efficient.
Planning Implication:
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Many NRIs choose the old regime to claim deductions or to retain eligibility for these flat-rate provisions.
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The new regime under Section 115BAC, though default for residents, is not mandatory for NRIs.
Caution:
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To claim Section 115E, a conscious selection must be made in the return.
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If no selection is made, regular slab-based taxation may apply, potentially resulting in higher tax outgo.
Summary Table: NRI Tax Filing Key Parameters – AY 2025–26
| Parameter | Status for NRIs – AY 2025–26 |
|---|---|
| ITR Form | ITR-2 (primarily) |
| Asset Reporting Threshold | Increased to ₹1 crore (Indian assets only) |
| Foreign Asset Reporting (Schedule FA) | Not applicable to NRIs |
| Capital Gains Reporting | Detailed disclosures with ISIN, indexed cost (CII = 363) |
| DTAA Claim | Form 10F, TRC, and correct treaty article |
| Tax Regime | Opt between old regime and Section 115E/115AC; 115BAC not compulsory |
Advisory Notes for NRIs
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Residential status must be determined first based on days of stay and past years’ history — the implications on disclosures are significant.
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Capital gains must be computed after indexation (if eligible), with due care on acquisition cost, FMV (as on 01.04.2001 if applicable), and CII.
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NRIs must maintain a paper trail of TRC, Form 10F, and property documents, especially when claiming DTAA relief or exemption under Section 54/54F.
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Where reinvestment is claimed for capital gains exemption, ensure correct deposit under CGAS (if property not yet acquired), and maintain records of usage within statutory timelines.
Strategic Compliance, Not Mere Filing
The ITR landscape for NRIs in AY 2025–26 reflects a broader policy of data-led, risk-sensitive tax enforcement. While certain thresholds have been liberalized, the expectation from NRIs in terms of:
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Accurate classification of residential status
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Proper capital gains and treaty disclosures
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Careful selection of special tax provisions
...has only increased.
Filing must be approached not just as a procedural task, but as a compliance strategy aligned with international tax standards and the Indian regulatory framework.
