1. Introduction
In an increasingly globalised economy, many Indians pursue employment abroad, thereby attaining the status of Non-Resident Indian (NRI) under Indian tax and foreign exchange laws. One of the key privileges for NRIs is the facility to maintain Non-Resident External (NRE) bank accounts in India, which allows them to remit and hold their foreign earnings in India on a repatriable basis, with tax-exempt interest income.
However, recent trends show that the Indian Income Tax Department (ITD) has intensified scrutiny over high-value foreign remittances and NRE account credits. Several NRIs have received notices under various provisions of the Income-tax Act, 1961 (hereinafter referred to as the Act) asking them to explain the source of credits in their NRE accounts. This article discusses the legal position, the powers of the ITD, the rights and obligations of NRIs, and practical considerations in responding to such queries.
2. Legal Framework Governing NRE Accounts
2.1 Relevant FEMA Provisions
- Foreign Exchange Management Act (FEMA), 1999 governs foreign exchange transactions in India.
- As per RBI’s Master Directions on Deposits:
- An NRE account may be opened by an individual resident outside India (other than Nepal and Bhutan) to park his foreign income.
- The source of funds must be remittance from outside India or transfer from another NRE/FCNR account.
- Local credits are generally not permitted, except for permissible credits like interest earned, refund of Indian income tax, etc.
Thus, the FEMA framework allows foreign earned income to be freely repatriated and maintained in India through the NRE channel.
2.2 Income Tax Act, 1961
- Section 5(2): In case of a ‘non-resident’, only income received or deemed to be received in India, or accruing or arising or deemed to accrue or arise in India, is taxable.
- Foreign salary earned and received outside India by an NRI is not taxable in India.
- Section 10(4)(ii) provides that interest on an NRE account is exempt from tax for an individual who is a ‘person resident outside India’ under FEMA.
3. Why Does the IT Department Seek Source Information?
3.1 Powers of the Department
- The Income Tax Department has wide powers under Sections 131, 133(6), and 142(1) to call for information for verifying the correctness of income declared and the source of funds.
- In recent years, due to money laundering concerns, black money control (Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015) and global information exchange under FATCA & CRS, the Department routinely examines high-value deposits, foreign remittances, and cross-border transactions.
3.2 Financial Intelligence and Compliance
- Indian banks report foreign inward remittances and large credits to the Financial Intelligence Unit (FIU-IND) under the Prevention of Money Laundering Act, 2002.
- Banks are mandated to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines.
- When an account shows credits not in line with declared income or profile, the Department may seek clarifications to ensure the funds are legitimate.
4. Is It Lawful to Ask for Salary Details of NRIs?
4.1 Legal Validity
While an NRI’s foreign salary is not taxable in India, the ITD can still seek source of funds details if:
- There is a large unexplained credit in an NRE account.
- There is suspicion of misuse of the NRE facility (e.g., local funds parked illegally).
- There is property purchase using unexplained NRE funds.
- The taxpayer has other taxable income that may not be correctly declared.
Hence, the request is valid under Sections 133(6) & 142(1) which empower the Department to seek information relevant for inquiry, assessment or verification of claims.
However, the Department cannot tax foreign salary itself if it is genuinely earned and received outside India while being an NRI.
4.2 Judicial Precedents
Courts have upheld that:
- Merely because funds are credited to an Indian account does not make them taxable, provided the source is genuine and not Indian income routed through the NRE account (refer: CIT v. S. G. Pgnatathaswamy [Madras HC]).
- Onus is on the assessee to prove the source if the Department raises a doubt (CIT v. P. Mohanakala [SC]).
5. Key Scenarios
5.1 Genuine NRI Remitting Salary
✅ Situation: NRI employed abroad, remits salary to NRE account.
- Salary not taxable in India.
- ITD can seek source proof — salary slips, employment contract, bank statements abroad.
- Burden on taxpayer to prove the source to close the query.
5.2 Indian Income Routed Abroad
❌ Situation: Resident earns in India, routes money abroad, and remits back to NRE.
- Misuse of facility, can attract penalty under FEMA and taxation under Income Tax Act.
- Funds can be treated as unexplained income under Section 68.
5.3 Local Credits into NRE
❌ Situation: Local income (rent, sale of property, dividend) deposited in NRE.
- Violation of FEMA & RBI guidelines.
- Such credits can be taxed and penalties can be levied.
5.4 Large Remittances without Documentation
✅/❌ Situation: Lump-sum remittances with inadequate supporting evidence.
- Even genuine income may be questioned if no documents.
- Best practice: keep pay slips, work contract, tax residency certificate from host country.
6. Rights & Best Practices for NRIs
- Always maintain copies of:
- Employment contracts, pay slips, salary bank statements abroad.
- Tax residency certificate (if available).
- Bank remittance advice & purpose code.
- Do not deposit local income into NRE.
- File returns in India if taxable income (e.g., rent, capital gains) exceeds the basic exemption limit.
- Report global income only if you become resident under Indian tax law in any year.
- Respond politely to ITD notices with full facts and documents.
7. Possible Consequences for Non-Compliance
| Particulars | Consequence |
|---|---|
| Non-disclosure of Indian taxable income | Assessment, penalty under Section 271(1)(c) |
| Unexplained credits | Taxed as unexplained income under Section 68, penalty u/s 270A |
| FEMA violation | Compounding or penal action by RBI |
| AML violation | Possible PMLA proceedings for layering/parking funds |
8. Recent Developments
- Faceless Enquiries: Notices are issued digitally under Section 142(1) or 133(6).
- High-Value Transactions: Banks and financial institutions report via Statement of Financial Transactions (SFT) under Section 285BA.
- AIS & TIS: New Annual Information Statement includes foreign remittances.
- Black Money Act: Undisclosed foreign assets/income can attract hefty penalty and prosecution.
9. Conclusion
To summarise:
✅ The IT Department is within its rights to seek information on large credits even in NRE accounts.
✅ Your foreign salary remains non-taxable in India, but you must prove the source.
✅ Always maintain clear records for peace of mind and compliance.
✅ If you receive such a notice, respond truthfully with employment proofs and overseas bank statements.
✅ If required, seek professional help to draft a suitable reply citing the relevant legal provisions.
10. Final Takeaway
NRE accounts are a lawful facility to help NRIs manage and repatriate foreign income. However, it is vital to respect both FEMA and Income Tax compliance norms to avoid unnecessary scrutiny. Proper documentation and proactive disclosure are key pillars of effective tax risk management for global Indians.
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