Increased Scrutiny on Offshore Investments by NRIs Amid New Tax Regulations

Tax authorities are ramping up their scrutiny of offshore investments made by non-resident Indians (NRIs), particularly in unlisted shares. With new regulations requiring dematerialisation of shares by June 2025, the Income Tax department is demanding detailed disclosures about the origins of funds and valuations. This increased oversight aims to prevent tax evasion and money laundering. Investors are advised to respond promptly to inquiries and provide comprehensive documentation. The focus on high valuations and the source of funds is reshaping the landscape for NRIs, as compliance becomes crucial in the evolving regulatory environment.

By Narendra Chaudhary Apr 22, 2026, 18:13 IST

Heightened Focus on Offshore Investments

Authorities are intensifying their examination of offshore entities and non-resident Indians (NRIs), particularly regarding their investments in unlisted shares. Investors are now required to provide detailed information about the origins of their funds and valuation reports to substantiate the prices at which these shares were acquired. A report from a leading financial publication indicates that this increased scrutiny is a result of a new directive mandating all private companies to transition their shares into dematerialised form by June 2025. This change has granted the Income Tax (I-T) department access to a more comprehensive data set, facilitating the tracking of transactions and ownership patterns.

Officials are paying close attention to transactions where shares were bought at prices below their fair value, as this could lead to tax implications under direct tax regulations and the Foreign Exchange Management Act (FEMA). Conversely, investments made at excessively high premiums are also under review, as they may suggest potential money laundering or round-tripping of funds, according to the report.

Recently, tax officials have requested extensive information from non-resident investors regarding transactions conducted between the financial years 2019-20 and 2022-23. Ashish Mehta, a partner at a prominent law firm, advised that individuals receiving such notices should respond promptly and thoroughly, providing documentation related to the source of funds, valuation methods, and reasons for any non-filing of tax returns.

Dematerialisation Rule Brings Non-Filers to Attention

Many non-resident investors who do not generate income in India often neglect to file income tax returns (ITRs). However, the new requirement for a permanent account number (PAN) to open demat accounts has brought these individuals into the tax system. Some have already faced inquiries regarding their failure to file returns.

Previously, reopening notices were issued directly, forcing taxpayers to navigate complex assessment proceedings or challenge the notices in court. Currently, the law mandates that tax officers first issue a precursor notice under Section 148A, allowing taxpayers to respond before a decision is made on whether to reopen the case.

Investigating Ownership and Funding Sources

Tax authorities are also delving into cases where inflated valuations may indicate that closely-held Indian companies are being used to funnel undisclosed funds back into the country through dubious practices like under-invoicing exports or over-invoicing imports. Rajesh Shah, a partner at another law firm, noted that the department is rigorously investigating the actual beneficial owners behind these investments, particularly from regions like the UAE and tax haven islands, where valuations significantly exceed the fair market value of Indian companies.

Shah emphasized that dematerialisation has greatly simplified the tracking of large transactions. Companies that do not comply with demat regulations may face restrictions on corporate actions such as bonus issues or buybacks. The department is also requesting detailed information, including profiles of directors, minutes from board meetings approving investments, bank statements to confirm financial capacity, and connections between NRIs and offshore entities.

While investors can typically provide identity and valuation details, demonstrating the source of funds remains a challenge, especially when it involves overseas pooling vehicles. The increasing focus on examining the 'source of source' can be impractical, given the diverse investor base of global funds. Established institutional investors may also face scrutiny, leading to undue hardship, tax additions, and litigation. Chartered accountant Ashish Karundia suggested that the department should tailor their inquiries based on the nature and category of overseas investors instead of applying a one-size-fits-all approach.