As India's economic influence grows globally, its tax system is facing calls for modernization from the millions of non-resident Indians (NRIs) and foreign nationals with financial ties to the country. With the Union Budget 2026 on the horizon, industry bodies and tax professionals are pushing the government to rationalize what they see as a disproportionately heavy compliance burden for those classified as non-residents under tax law.
The Archaic Return Filing Mandate
Currently, a major pain point is the mandatory filing of an Indian income tax return for any non-resident individual whose total income exceeds Rs. 2.5 lakh. This rule applies even when the entire income has already been subject to Tax Deducted at Source (TDS) and no additional tax liability exists in India. This often captures small, passive incomes like bank interest or dividends.
Tax experts argue that this results in a flood of returns with zero tax payable, clogging the system and imposing unnecessary cost and effort on taxpayers who may have minimal other connections to India. The key recommendation for Budget 2026 is to introduce an exemption from filing a tax return for non-residents who have no business income in India and no additional tax to pay, thereby simplifying compliance significantly.
Hurdles with the Tax Residency Certificate (TRC)
To claim benefits under India's double taxation avoidance agreements (DTAAs), which often provide lower tax rates, a non-resident must furnish a Tax Residency Certificate (TRC) from their country of residence. This is mandated under Section 90(4) of the Income-tax Act, regardless of the income's size or nature.
For small income amounts, obtaining a TRC can be a costly and time-consuming process for both the recipient and the Indian payer. Mahesh Nayak, a tax partner at CNK & Associates, highlights several practical issues. Many foreign tax authorities do not issue TRCs certifying future residency, and in some jurisdictions, obtaining one involves significant cost. For recurring payments, requiring multiple TRCs becomes an expensive affair.
Nayak suggests that the objective is simply to prove tax residency. Therefore, submitting alternative documents, like a passport copy for a U.S. citizen, should be permitted, as some tribunals have held. Recommendations include setting a threshold limit for TRC requirements, allowing TRCs from previous years, or accepting other documents to substantiate residency.
Practical Challenges with Form 10F and E-verification
Further complications arise with Form 10F, a declaration required electronically if the TRC lacks certain details. Non-residents without an Indian PAN often face hurdles, as the one-time password (OTP) for the e-filing portal may not be sent to foreign mobile numbers. Nayak points out that this creates an unnecessary hassle for a simple declaration.
The final step of e-verification for ITR filing is also problematic, as it is linked to Indian bank accounts, Aadhaar-linked mobile numbers, or specific digital signatures. Non-residents without Indian mobile numbers frequently struggle to complete filings on time. Additionally, they are required to maintain an Indian bank account solely for tax payments or refunds, even if they hold no other assets in the country.
The upcoming Budget 2026 is seen as a pivotal opportunity for the government to modernize its approach and truly deliver "ease of compliance" for the global Indian diaspora and foreign investors, whose contributions are vital to the nation's economy.
