Foreign assets mean tax liabilities: Things to mind while filing returns

Penalties for non-disclosure or inaccurate disclosure of these details can be severe, say experts

Any resident Indian holding equity or debt interest in an entity abroad has to disclose the investment in their income tax return (ITR). Indian law requires the mandatory filing of ITR for resident individuals who hold specified foreign assets (FA) at any time during the relevant accounting period.

Rules and disclosures

A Schedule Foreign Asset (FA) is a section of the ITR where one must provide information about assets they own outside of India. "Non-resident or resident taxpayers who are not ordinarily residents are exempt from reporting their overseas assets in the ITR, nonetheless," says Sandeep Bajaj, managing partner, PSL Advocates & Solicitors. The details that must be provided include the name of the country where the asset is held, peak balance in the account during the reporting period, closing balance, the gross amount credited to the account, total investment or financial interest in any entity, and nature of income.

Foreign depository accounts, immovable property outside India, any other capital asset outside India and foreign bank accounts are among assets that have to be cited in tax returns. "In other words, all the foreign assets held by you either legally, as a beneficiary, or as a beneficial owner should be disclosed while filing the ITR-2, or ITR-3, as applicable," says Amit Bansal, partner, direct tax, Singhania & Co, a law firm.

A beneficial owner is an individual who has provided, directly or indirectly, the consideration for the asset from which the benefit has been derived. "Beneficiary in respect of an asset means an individual who derives an immediate or future benefit, directly or indirectly, in respect of the asset and where the consideration for such asset has been provided by any person other than such beneficiary," says Naveen Wadhwa, deputy general manager at Taxmann, an online resource on taxation.

The Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) allows Indian citizens to send up to $250,000 abroad for legal purposes. However, recent notices from the Income Tax Department to parents of minors have raised concerns about using bank accounts held in the name of minors for remittances. "The tax department discovered transactions from minors' bank accounts used to bypass the remittance limit. Although legal, this method is often used by wealthy Indians to establish overseas accounts and acquire properties," says Ankit Rajgarhia, principal associate, Karanjawala & Company, Advocates. 

"Parents having foreign assets in their minor’s name would be considered as beneficial owners and the details of all such foreign assets or accounts held by them as a beneficial owner needs to be mandatorily disclosed in Schedule FA in ITR-2 or 3, as applicable," says Suresh Surana, founder of RSM India, a network of tax and consulting experts.

ITR forms notified for Assessment Year 2023–24 have replaced the expression "accounting period" with "calendar year ending as of December 31, 2022". Wadhwa says, "This change implies that the assessee shall furnish the details of all foreign assets held between January 1, 2022, and December, 31, 2022, in return for being filed for the assessment year 2023–24." Irrespective of the fiscal year followed in the foreign country, the reporting is to be made if the specified foreign assets are held on December 31, 2022.

Penalties for non-disclosure

Penalties for non-disclosure or inaccurate disclosure of these details can be severe. "Failing to furnish information or providing inaccurate particulars about any foreign asset or income in their income tax return can result in a penalty of ten lakh rupees," says Ankit Jain, partner at Ved Jain & Associates, a chartered accountancy firm.

Additionally, if any extra tax is payable due to undisclosed foreign income, a penalty equal to three times the tax computed can be levied. Jain says, "Moreover, if the failure to disclose is found to be willful or deliberate, it can lead to imprisonment for a term ranging from six months to seven years, along with a fine."

Schedule FA requires the reporting of assets held outside India during the relevant accounting period, even if it is for a single day.

"Use the 'telegraphic transfer buying rate' as the exchange rate for converting foreign assets or income into Indian currency. Also, non-reporting or misreporting of foreign assets while filing the ITR is considered wilful tax evasion and may result in penalties or imprisonment," says Pallav Pradyumn Narang, partner at CNK, a chartered accountancy firm. 

Failure to declare or misrepresent foreign assets also revokes your right to claim relief under the Double Taxation Avoidance Agreement for your foreign income. Narang says, "It is crucial to stay informed and comply with the relevant regulations to ensure a seamless and compliant tax filing process.

Bansal says, "The resident individuals holding U.S. stocks during the financial year, i.e., as of March 31, 2023, are required to fill out the asset-liability schedule, i.e., Schedule AL (if applicable), in addition to Schedule FA." The taxpayer shall report assets and liabilities in Schedule AL, for immovable assets—land and buildings." financial assets, bank deposits, shares and securities, insurance policies, loans and advances, given, cash in hand." Even movable assets, like jewellery, bullion, vehicles, yachts, boats, aircraft, etc. a taxpayer’s interest in the assets of a firm or association of persons (AOP) as a partner or member, respectively.

Regardless of where they were obtained, shares of a foreign corporation or units of a foreign mutual fund are recognised as foreign assets. 

Another thing to keep in mind is that even though one may choose to pay tax in India as well on withdrawals in cases of foreign retirement accounts where the income is taxed in the foreign country upon retirement, the foreign retirement account balances, as well as income earned during the calendar year, must be disclosed in the Schedule FA.

What to do

A resident Indian is required to furnish the details of foreign assets or accounts of the following nature, held at any time during the relevant accounting period, in the following tables in ITR form. 

Table A1 – Foreign depository accounts

Table A2 ‐ Foreign custodial accounts

Table A3 ‐ Foreign equity and debt interest

Table A4 ‐ Foreign cash value insurance contract or annuity contract

Table B ‐ Financial interest in any entity outside India

Table C ‐ Any immovable property held outside India

Table D ‐ Any other capital assets held outside India

Table E – Any other account located outside India in which you are a signing authority (which is not reported in tables A1 to D)

Table F – Trust created outside India in which you are a trustee, a beneficiary, or a settlor

Table G – Any other income derived from any foreign source (which is not reported in tables A1 to F and which is not included in income under the head business or profession)

Source: Taxmann law firm

Tax rules for investment in US stocks

The dividend income received by an Indian resident from a US stock is considered taxable income

A flat tax of 25 per cent on the dividend is withheld by the US company

    

If the investor reinveststhe dividend, the dividend is added to the investor’s income and taxed at the standard income tax slab rates

Indian investors get the benefit of Double Tax Avoidance Agreement (DTAA); the tax withheld in the US is adjusted against the tax burden in India

Long-term and short-term capital gain tax rate apply on sale of US stocks, depending on the holding period (threshold period is two years)

LTCG is taxed at 20 per cent with indexation, STCG at slab rate