An NRI in Singapore receives an email from the Income Tax Department: "Dear Taxpayer, as part of ongoing global efforts to ensure compliance, India receives information concerning foreign assets and income. If you hold any foreign assets or have income from foreign sources during FY 2024-25, please choose the appropriate return form and fill Schedule FA/FSI."
Simultaneously, a US-based software company with Indian clients receives a notice: the department has determined that the company's India-based support staff constitutes a Permanent Establishment, making its Indian revenue taxable.
These scenarios are increasingly common in 2026. India's participation in the OECD's Common Reporting Standard (CRS), combined with the Income Tax Act 2025's expanded enforcement framework, means the department now has more data about overseas financial activity than ever before. For NRIs and foreign companies, understanding which notices you might receive, why you receive them, and how to respond is no longer optional - it is essential compliance knowledge.
What Triggers Income Tax Notices for NRIs?
NRIs receive income tax notices primarily because of data mismatches between what the department knows (through CRS, FATCA, TDS records, and property registration data) and what the NRI has reported (or not reported) in their Indian ITR. The most common triggers:
Trigger 1: CRS/FATCA Data Exchange. India exchanges financial account information with 100+ countries under CRS and separately under FATCA (with the US). If an NRI has overseas bank accounts, investment accounts, or insurance policies, the financial data flows to the Indian tax department. If the NRI has not filed an ITR or has filed without disclosing foreign income, the system generates an automated notice.
Trigger 2: TDS Not Matched with ITR. Banks deduct TDS on NRO account interest at 30% (or treaty rate with TRC). Property buyers deduct TDS at 20% (or 12.5% under Section 194-IA) on property purchase from NRI. If the NRI does not file an ITR to claim refund of excess TDS, the department sends a non-filing notice - because TDS credits in 26AS/AIS show income but no corresponding return.
Trigger 3: Property Sale Capital Gains. When an NRI sells property in India, the buyer deducts TDS at 20% (LTCG) or 30% (STCG) on the sale amount. If the NRI claims reinvestment exemption (Section 54/54F) or DTAA benefit but the ITR does not properly reflect these, the department sends a scrutiny notice.
Trigger 4: Residency Status Mismatch. NRIs who file ITR as 'Resident' (due to incorrect form selection or CA error) but have foreign income reported through CRS create a mismatch - the department expects Schedule FA (foreign assets) which the NRI did not fill. This triggers the foreign asset disclosure notice.
Trigger 5: High-Value Transactions. Property purchases above Rs 30 lakh, foreign remittances above Rs 7 lakh under LRS, mutual fund investments, and cash deposits above Rs 10 lakh in savings accounts trigger SFT (Statement of Financial Transactions) reporting - which the department cross-checks against ITR.
NRIs using income tax notice services (know more) get professional response preparation that addresses the specific trigger.
What Triggers Income Tax Notices for Foreign Companies?
Foreign companies operating in India - through subsidiaries, branch offices, liaison offices, or remote employees - face a different set of notice triggers:
Trigger 1: Permanent Establishment (PE) Risk. The department argues that the foreign company has a PE in India - typically through: (a) a fixed place of business (office, branch, factory), (b) a dependent agent who habitually concludes contracts in India, (c) employees providing services in India for more than a specified number of days, or (d) significant economic presence (SEP) through digital transactions exceeding Rs 2 crore or a specified user base. PE determination makes Indian-source income taxable at 40% (plus surcharge and cess).
Trigger 2: Transfer Pricing Adjustment. When the foreign company has transactions with its Indian subsidiary (service fees, royalty, management charges, cost allocations), the department can challenge the pricing under transfer pricing rules. If the arm's length price differs from the actual price, the department imputes additional income to the Indian entity and issues a notice.
Trigger 3: Withholding Tax Non-Compliance. Indian companies paying royalty, fees for technical services, or interest to the foreign company must deduct TDS. If TDS was not deducted or was deducted at a lower rate without valid TRC and Form 10F, the department issues a notice to the Indian payer - but the foreign company also faces consequences (denial of DTAA benefit).
Trigger 4: Non-Filing of ITR-6. Foreign companies earning income in India (through PE or otherwise) must file ITR-6. Non-filing triggers automated notices under Section 142(1). For NRI taxation services (know more) that cover both individual NRI and foreign company compliance, professional support is essential.
Key Terms You Should Know
Residential Status (Section 6): An individual is NRI if they were in India for less than 182 days during the financial year. The 120-day rule (for Indian citizens with Indian income above Rs 15 lakh) means staying 120+ days makes you 'deemed resident' - subject to tax on Indian income.
DTAA (Double Taxation Avoidance Agreement): India has treaties with 90+ countries providing: reduced TDS rates, PE definition, and mechanisms to avoid being taxed on the same income in both countries. Treaty benefits require TRC (Tax Residency Certificate) from the home country and Form 10F filed in India.
TRC (Tax Residency Certificate): Issued by the home country's tax authority proving that the NRI/foreign company is a tax resident there. Required to claim DTAA benefits in India.
Form 10F: Filed on the Indian e-filing portal to claim DTAA benefits. Contains: name, status, nationality, TIN, period of residency, and address. Must be filed before claiming concessional TDS or treaty benefit.
Permanent Establishment (PE): A fixed place of business through which a foreign enterprise carries on business in India. PE triggers taxation of Indian-attributable profit at 40% + surcharge + cess.
Significant Economic Presence (SEP): A digital-era PE concept - if a foreign company has transactions exceeding Rs 2 crore or a user base exceeding a specified number in India, it may be deemed to have a business connection. Under the Income Tax Act 2025, this concept is retained and strengthened.
Black Money Act: The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Penalty of Rs 10 lakh per undisclosed foreign asset. This is the Act under which NRIs face the highest penalty risk for non-disclosure.
Types of Income Tax Notices: NRI vs Foreign Company
| # | Notice Type | NRI (Individual) | Foreign Company |
|---|---|---|---|
| 1 | Section 142(1) - Non-filing / Information request | Sent when ITR not filed despite TDS credits in 26AS; or information requested for assessment | Sent when ITR-6 not filed; or PE-related information requested |
| 2 | Section 148 - Reassessment (Income escaped assessment) | Sent when department believes Indian income was not assessed (property sale, capital gains, NRO interest) | Sent when PE income or transfer pricing adjustment income was not assessed |
| 3 | CRS/FATCA - Foreign asset disclosure | Automated notice asking NRI to disclose foreign assets in Schedule FA/FSI of ITR | Generally not applicable to companies (CRS targets individuals) |
| 4 | Section 143(2) - Scrutiny assessment | Detailed scrutiny of filed ITR - questioning deductions, capital gains, DTAA claims | PE determination scrutiny, transfer pricing review, treaty benefit verification |
| 5 | TDS default notice (Section 201) | Rare for NRI directly; more common against the Indian payer (buyer of NRI property, bank) | Notice to Indian subsidiary/payer for non-deduction or short-deduction of TDS on payments to foreign company |
| 6 | Demand notice (Section 156) | After assessment: demand for additional tax + interest. Common after property sale reassessment | After PE determination: demand for Indian-attributable profit tax + interest + penalty |
| 7 | Penalty notice (Section 270A/271) | Under-reporting: 50% of tax. Misreporting: 200% of tax. Black Money Act: Rs 10 lakh per foreign asset | Under-reporting: 50%. Transfer pricing penalty: 2% of value per transaction. PE-related penalty: 200% if fraud |
Step-by-Step: How to Respond to an Income Tax Notice
Step 1: Verify the Notice Is Genuine. Log in to incometax.gov.in. Check Pending Actions → e-Proceedings. If the notice appears on the portal with a DIN (Document Identification Number), it is genuine. Notices without DIN or received only via email (not on portal) may be fraudulent.
Step 2: Identify the Section and Deadline. The notice states the section under which it is issued (142(1), 143(2), 148, etc.) and the response deadline. Typical deadlines: 15-30 days. Section 148 gives 30 days from notice date. Section 142(1) typically gives 15 days. Mark the deadline and work backwards.
Step 3: Gather Documents. For NRIs: passport (entry/exit stamps for residency proof), TRC and Form 10F (for DTAA claims), Form 26AS/AIS (for TDS verification), bank statements (NRO/NRE), property documents (for capital gains), and overseas income details (if required). For foreign companies: PE analysis (contracts, employee deployment records), transfer pricing documentation, TDS certificates (Form 16A), and DTAA documentation.
Step 4: Prepare the Response. Address each point in the notice specifically. For CRS/FATCA notices: clarify residency status (NRI vs Resident), explain that NRIs are not required to disclose foreign assets in Schedule FA (only residents must). For assessment notices: provide computation of income, supporting documents, and legal arguments. Use tax planning (know more) services for comprehensive response preparation.
Step 5: File Response on the Portal. Navigate to e-Proceedings on incometax.gov.in. Upload the response with supporting documents. Submit within the deadline. Keep the acknowledgement.
Step 6: Follow Up and Attend Hearing (If Required). If the notice leads to assessment proceedings, attend virtual hearings (faceless assessment system). Provide additional documents if requested. For the complete tax planning framework, see our tax planning framework (know more).
Documents Required for Notice Response
For NRIs:
- Passport copy with entry/exit stamps (residency proof)
- Tax Residency Certificate (TRC) from home country
- Form 10F filed on Indian e-filing portal
- Form 26AS / AIS / TIS (TDS and income data from IT portal)
- NRO/NRE bank statements for the relevant period
- ITR filed (all years in question)
- Property sale agreement (if capital gains notice)
- Reinvestment proof for Section 54/54F exemption
- DTAA article reference and computation showing treaty benefit
- Foreign bank account details (if CRS notice - only to clarify NRI status, not to disclose assets)
For Foreign Companies:
- TRC from home country jurisdiction
- Form 10F filed on Indian portal
- PE analysis report (contracts, employee records, office lease - proving no PE exists)
- Transfer pricing documentation (master file, local file, CbCR if applicable)
- Agreements with Indian subsidiary/customers
- TDS certificates (Form 16A) for Indian-source payments
- ITR-6 filed copies (if applicable)
- Board resolutions and corporate governance documents
- Employee deployment records (days spent in India per employee)
- DTAA article reference with PE threshold analysis
DTAA: How Treaty Benefits Reduce NRI and Foreign Company Tax
| Income Type | Domestic Rate (Without DTAA) | Treaty Rate (With DTAA - Varies by Country) | Documents Needed |
|---|---|---|---|
| Interest (NRO account) | 30% TDS | 10-15% (e.g. US: 15%, Singapore: 15%, UK: 15%) | TRC + Form 10F + PAN |
| Dividend | 20% TDS | 10-15% (e.g. US: 25%, Singapore: 15%, Mauritius: 15%) | TRC + Form 10F + PAN |
| Royalty | 10% TDS (or 20% without PAN) | 10-15% (most treaties) | TRC + Form 10F + Agreement |
| Fees for Technical Services (FTS) | 10% TDS (or 20% without PAN) | 10-15% (varies; some treaties do not cover FTS separately) | TRC + Form 10F + Service agreement |
| Capital gains (property) | 20% LTCG / 30% STCG | Usually taxable in India per DTAA (no reduction) | ITR filing claiming exemption if reinvested |
| Salary (for services in India) | Slab rates | Exempt if stay < 183 days + paid by non-Indian employer + no PE bears cost (most DTAAs) | TRC + employment contract + days-in-India record |
Critical: Treaty benefits are not automatic. The NRI or foreign company must: (1) obtain TRC from the home country, (2) file Form 10F on the Indian e-filing portal, (3) provide both to the Indian payer before TDS deduction. Without TRC and Form 10F, the payer must deduct TDS at the domestic rate - and the NRI/company can claim the difference only through ITR filing and refund.
Permanent Establishment Risk: The Foreign Company's Biggest Exposure
PE determination is the most significant tax risk for foreign companies operating in India. If the department establishes PE, the Indian-attributable profit is taxed at 40% (plus surcharge and cess - effective rate approximately 43-44%).
PE can be created through:
- Fixed Place PE: Office, branch, factory, or any fixed place of business in India (even a dedicated desk in a co-working space)
- Agency PE: An Indian agent who habitually concludes contracts on behalf of the foreign company
- Service PE: Employees providing services in India for more than 90-183 days (varies by DTAA) in any 12-month period
- Construction PE: A building site or construction project that continues for more than specified months (usually 6-12 months per DTAA)
- SEP (Significant Economic Presence): Digital transactions exceeding Rs 2 crore or specified user base in India - a newer concept under Indian domestic law
Our recommendation: Foreign companies with any Indian operations - even remote employees, sales agents, or service teams - should conduct a PE risk assessment annually. The cost of assessment (Rs 50,000-2,00,000) is a fraction of the tax exposure if PE is established (40% of Indian-attributable profit). Use statutory audit (know more) services for Indian subsidiary compliance that prevents PE arguments.
Income Tax Act 2025: What Changed for NRIs and Foreign Companies (April 2026)
| Change | Impact on NRIs | Impact on Foreign Companies |
|---|---|---|
| 120-Day Residency Rule Formalised | Indian citizens with Rs 15 lakh+ Indian income; 120+ days in India = deemed resident (taxed on Indian income, not global) | Not directly applicable to companies; but employee presence affects PE risk calculation |
| TDS Correction Window Reduced (6 years → 2 years) | TDS errors on NRO interest or property must be corrected within 2 years - shorter window increases notice risk | TDS on royalty/FTS payments to foreign company must be corrected within 2 years |
| Digital-First Compliance | All ITR filing, notice response, and assessment through e-filing portal. E-verification requires Indian mobile or DSC. | ITR-6 filing mandatory on portal; faceless assessment applies to PE and transfer pricing cases |
| Voluntary Disclosure Window | Opportunity to disclose previously undisclosed overseas assets by paying tax on fair market value. Typically for assets above Rs 1 crore. | Limited applicability; relevant for corporate investments through layered structures |
| GAAR Fully Operational | Artificial arrangements to reduce Indian tax can be disregarded. NRIs using complex structures for tax benefit face scrutiny. | Layered holding structures and treaty shopping face GAAR challenge. BEPS-aligned MLI provisions apply. |
| 'Tax Year' Concept | Simplifies compliance - single Tax Year instead of PY/AY. NRIs track days by Tax Year. | Filing deadlines aligned with Tax Year. No practical tax planning change. |
Common Mistakes NRIs and Foreign Companies Make
Mistake 1: NRI filing ITR as 'Resident' instead of 'Non-Resident'. This is the most dangerous mistake. If you file as Resident, the department expects Schedule FA (foreign assets). If you have overseas bank accounts (which every NRI does), the department sends a foreign asset disclosure notice. Rs 10 lakh penalty per asset under the Black Money Act applies to undisclosed foreign assets of Residents - not NRIs. Filing as NRI correctly avoids this entirely.
Mistake 2: Not filing Form 10F before TDS deduction. Without Form 10F (filed on the e-filing portal), the payer cannot apply DTAA concessional rates. The payer deducts TDS at the domestic rate (30% for interest instead of 15% treaty rate). The NRI then must file ITR and claim refund - locking cash for 12-18 months.
Mistake 3: Foreign company not assessing PE risk annually. A foreign company that sends employees to India for client projects, has a sales agent in India, or runs a support desk from India may have unknowingly created a PE. The department can assess PE for prior years - creating multi-year tax exposure.
Mistake 4: Ignoring AIS (Annual Information Statement). The AIS on the e-filing portal shows all financial transactions reported by banks, registrars, and mutual funds. NRIs should check AIS before filing ITR - any transaction listed in AIS but not reflected in ITR will trigger a notice.
Mistake 5: Not responding to notices within the deadline. Non-response to Section 142(1) or 143(2) notices results in best judgment assessment - where the department estimates income (usually inflated) and issues a demand. Responding - even with preliminary documents - preserves your right to be heard. For GST-specific compliance when operating in India, see our GST filing guide (know more).
Penalties for Non-Compliance: NRI and Foreign Company
| Non-Compliance | Penalty for NRI | Penalty for Foreign Company |
|---|---|---|
| Non-filing of ITR | Rs 5,000 late fee (Rs 1,000 if income < Rs 5 lakh); interest under Section 234A (1%/month) | Same - Rs 5,000 late fee + interest; plus PE-related demand if non-filing concealed PE income |
| Under-reporting of income | 50% of tax on under-reported income (Section 270A) | 50% of tax; for transfer pricing adjustments: additional 2% per transaction |
| Misreporting of income | 200% of tax on misreported income | 200% of tax; GAAR-related: entire tax benefit disallowed + 200% |
| Undisclosed foreign assets (NRI filing as Resident) | Rs 10 lakh per asset under Black Money Act; 30% tax + 90% penalty on asset value | Generally not applicable to companies |
| TDS non-deduction by Indian payer | Payer liable: TDS amount + interest (1%/month) + penalty | Same - Indian subsidiary/payer bears the liability; may disallow expense |
| Non-filing of Form 10F / no TRC | DTAA benefit denied; TDS at domestic rate (higher); refund must be claimed via ITR | Same - treaty rate not applied; higher TDS; cash flow impact |
| PE income not declared | N/A (PE applies to companies) | 40% tax on Indian-attributable profit + interest + penalty (200% if misreporting) |
How This Connects with GST for NRIs and Foreign Companies
NRIs and foreign companies operating in India may also face GST obligations: (a) NRIs selling property may trigger GST on under-construction property, (b) foreign companies providing services to Indian clients may need GST registration (if providing OIDAR services or if SEP applies), (c) foreign companies with Indian subsidiaries must ensure transfer pricing consistency between income tax and GST (the arm's length price for income tax should align with the GST valuation for related-party transactions).
For foreign companies, GST registration as a non-resident taxable person (NRTP) may be required if providing taxable services in India without a fixed place of business. The GST NRTP registration is valid for 90 days (extendable once). For GST refund on Indian operations, see our GST refund guide (know more).
NRI vs Foreign Company: Notice Response Comparison
| Parameter | NRI (Individual) | Foreign Company |
|---|---|---|
| Most common notice | CRS/FATCA foreign asset disclosure; TDS mismatch | PE determination; transfer pricing adjustment |
| ITR form | ITR-2 (no business income); ITR-3 (with business income). Never ITR-1. | ITR-6 (mandatory for companies) |
| Key defence document | Passport (residency proof) + TRC + Form 10F | PE analysis report + DTAA article reference + Transfer pricing documentation |
| Biggest penalty risk | Black Money Act: Rs 10 lakh per undisclosed foreign asset (if incorrectly filed as Resident) | PE income taxed at 40% + penalty up to 200% for misreporting |
| Resolution approach | Correct residency status; file/revise ITR; claim DTAA benefits; respond to notices within deadline | PE risk assessment; transfer pricing documentation; DTAA PE threshold argument; timely ITR-6 filing |
| Professional support needed | CA with NRI taxation expertise (FEMA + DTAA + Black Money Act) | CA + international tax advisor (PE analysis + TP documentation + DTAA) |
Key Takeaways
NRIs and foreign companies face increasingly sophisticated income tax notices driven by CRS data exchange, digital enforcement, and the Income Tax Act 2025's expanded framework. The most common NRI triggers are CRS foreign asset disclosure, TDS mismatch, and residency status errors. The most common foreign company triggers are PE determination and transfer pricing.
The single most important NRI compliance action: file ITR with the correct residency status (Non-Resident) and correct form (ITR-2 or ITR-3, never ITR-1). Filing as Resident creates Black Money Act exposure (Rs 10 lakh per foreign asset) that NRIs do not actually face when correctly classified.
DTAA benefits require proactive documentation: TRC from the home country and Form 10F filed on the Indian portal before TDS deduction. Without these, TDS is at the domestic rate - locking cash until refund.
Foreign companies must conduct annual PE risk assessments. The cost (Rs 50,000-2,00,000) is minimal compared to the exposure (40% tax + penalty on Indian-attributable profit for multiple years).
The Income Tax Act 2025 (effective April 2026) tightens enforcement: TDS correction window reduced to 2 years, digital-first compliance, GAAR fully operational, and a voluntary disclosure window for undisclosed overseas assets.
Need Help Responding to an Income Tax Notice?
Whether you are an NRI who received a CRS notice, a foreign company facing PE assessment, or a returning Indian navigating dual-country compliance - our team handles income tax notices, DTAA analysis, and cross-border tax advisory.
Explore our income tax notice services (know more) and NRI taxation services (know more) for professional notice response, DTAA compliance, and PE risk assessment.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
