Income tax refund scam: How citizens faked NRI status to cheat system
A major income tax refund scam has come to light, where Indian residents allegedly posed as non-resident Indians (NRIs) to fraudulently claim tax refunds from the I-T Department. The Central Board of Direct Taxes (CBDT) has launched an investigation after detecting suspicious refund claims and portal misuse.
This is not just a case of individual fraud—it exposes loopholes in the self-declaration system used by the income tax portal and raises concerns about systemic risk.
What exactly happened?
According to CBDT sources (via official press briefings), a group of taxpayers:
- Logged into the I-T portal and manually updated their residential status as “non-resident”
- Claimed that TDS deducted on income was wrongly withheld, since NRIs are taxed differently
- Sought full refunds of these TDS amounts
- In some cases, even revised previous returns to show NRI status and raise refund claims retroactively
CBDT has now withheld several such refunds, and is coordinating with investigation units, including the Directorate of Intelligence & Criminal Investigation (DI&CI).
Legal Framework: What makes this illegal?
Under Section 6 of the Income-tax Act, 1961, residential status is determined based on:
- Number of days stayed in India
- Prior year residential history
- Additional conditions for citizens/PIOs visiting India
Any false declaration amounts to misrepresentation and may trigger prosecution under:
- Section 277 – False statement in verification
- Section 278 – Abetment of false return
- Section 276C – Wilful attempt to evade tax
- Section 279 – Prosecution with prior sanction of the Principal Commissioner
Expert View:
“Residential status is a fact-based legal determination—not a toggle in your profile,” says CA Nikhil Jain, a tax litigation specialist. “Deliberately misclassifying it to game refunds invites not just demand but criminal penalties.”
How does residential status impact refund eligibility?
| Criteria | Resident Indian | Non-Resident Indian (NRI) |
|---|---|---|
| Global income taxable? | Yes | No |
| TDS applicability | Full TDS on Indian income | Depends on DTAA or specific rules |
| Refund eligibility | As per total income and tax paid | Limited to India-sourced income |
| Return filing | Mandatory above basic exemption | Only if Indian income > limit |
If someone falsely claims to be an NRI:
- They might escape tax on global income
- Claim TDS refunds they’re not entitled to
- But leave a digital trail that’s easily auditable
CBDT’s likely action plan
From past cases and SOPs, here’s what to expect:
- Scrutiny notices under Section 143(2)
- Re-opening of returns under Section 147 if refunds were already issued
- Attachment of refunds under Section 245
- Prosecution proceedings in wilful misreporting cases
In fact, after the 2023 TDS refund fraud by consultants in Mumbai, CBDT had already warned about such misuses. This time, it’s individuals—not intermediaries—gaming the system directly.
What honest taxpayers should know
- Don’t rely blindly on CA portals or agents who promise “extra refund” tricks
- Never modify residential status without proper calculation (based on Sec 6)
- Use Form 10F and Tax Residency Certificate (TRC) only when lawfully eligible
- Filing fake revised returns can backfire badly—with interest and penalties
Practical Tip for NRIs
If you’re genuinely an NRI:
- File returns only if Indian income > ₹2.5 lakh (or rental/TDS-triggered)
- Avoid defaults by submitting Form 15CA/CB for foreign remittances
- Ensure your PAN is linked to NRE account and accurate email/mobile is updated
- Download the AIS (Annual Info Statement) and check if any tax was wrongly deducted
Efiletax Can Help You Stay Compliant
Whether you’re a resident or NRI, our expert filing team helps you:
- Determine correct residential status
- Claim eligible refunds without crossing legal lines
- Respond to notices or scrutiny
- Avoid common mistakes while filing Form 10F, TRC, or revised ITRs
Let Efiletax handle your compliance professionally. Get started now →
FAQ: Income Tax Refund Scam
Q1. Can I update residential status anytime on the I-T portal?
Only if your status has changed based on Section 6 of the Act. False updates invite scrutiny.
Q2. What happens if I wrongly claimed an NRI refund?
Refunds may be cancelled. You could face tax demand, penalty, and even prosecution.
Q3. Is it safe to file as NRI from India?
Yes, as long as your stay in India qualifies you as a non-resident legally.
Summary:
A new income tax refund scam exposed how residents faked NRI status to claim fake refunds. CBDT has flagged this misuse and launched an investigation. False declarations of residency can invite tax demands, penalties, and even prosecution under the Income-tax Act.