Tax law requires you to report income, assets abroad: What you must do

Not reporting foreign assets and income may also result in penalty and even jail sentence

Indian law mandates resident individuals who hold specified foreign assets (FAs) during the relevant accounting period to file an income tax return (ITR). They must disclose all their foreign assets and incomes therein. Failure to do so can lead to a heavy penalty or even imprisonment.

“The Income-Tax (I-T) Department can issue a notice for up to 17 years if you underreport or fail to report your foreign assets or income,” says Ankit Jain, partner, Ved Jain & Associates.
 

Who must report?
 

Individuals and Hindu Undivided Families (HUFs) classified as resident and ordinarily resident (RoRs) must report their foreign incomes, assets, and accounts in Schedule FA of ITR forms, regardless of whether the income is taxable in India or not.
 

“Section 139(1) mandates the filing of ITRs for residents holding overseas assets as beneficial owners or as signing authorities on accounts located abroad. It also applies to those who are beneficiaries of assets located outside India,” says Pallav Pradyumn Narang, partner, CNK. Non-resident Indians (NRIs) or taxpayers who are not ordinarily residents (RNOR) are exempt from reporting their overseas assets in the ITR.
 

Which assets must be disclosed?
 

In the ITR form, details of foreign assets and income must be provided for bank accounts (depository and custodial accounts), equity, and debt instruments. “Insurance and annuity contracts, financial interest in any foreign entity, immovable properties and other capital assets, assets and income held in trust, signing authority for any account, and any other income derived from such foreign assets must be disclosed,” says Rony Oommen John, advocate on record at the Supreme Court.
 

“The income earned from such assets or any other foreign source also needs to be furnished in Schedule FA, along with reference to the relevant schedule in the ITR where the taxable part of such income is declared,” says S R Patnaik, partner, Cyril Amarchand Mangaldas.

Details to be furnished include the name of the country where the asset is held; name of the foreign entity, its address, account number; date of investment or account opening; nature of interest; initial value, peak value, closing value of investment; and amount paid or received.

Key considerations

Different accounting period: Details of foreign assets must be furnished according to the calendar year, which most countries follow for tax assessments, unlike India which follows an April to March financial year.
 

“In Schedule FA in ITR for assessment year (A.Y.) 2024–25, details of foreign assets and income from foreign sources for the period January 1, 2023, to December 31, 2023, need to be furnished,” says Patnaik.
 

Report minor’s income, assets: Assessees are liable to disclose in their ITR the foreign assets held in the name of their minor children. “Non-disclosure penalties are applicable in cases where foreign assets are held by minor children as well,” says Alay Razvi, partner, Accord Juris.
 

A minor child’s income may be clubbed with that of the parents when they file tax returns. “If the minor has earned an income due to her own manual work or by applying her own skills, her ITR will be filed by her parents as a representative assessee,” says Patnaik.
 

Stringent punishments: Under the provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, failure to file ITR or providing inaccurate details of foreign assets or foreign income in Schedule FA can lead to a penalty of up to Rs 10 lakh. Furthermore, taxpayers may face imprisonment ranging from six months to seven years. “Monetary penalty is not levied for one or more foreign bank accounts if the aggregate balance does not exceed Rs 5 lakh at any time during the financial year,” says Patnaik.
 

Report in Schedule AL also: Even if foreign assets have been reported in Schedule FA, taxpayers may have to disclose them again in Schedule AL (assets-liabilities) in ITR Forms 2 and 3 of individuals or HUFs. “Even if details of foreign assets have been reported in Schedule FA, they must again be reported in Schedule AL if the taxpayer’s total income exceeds Rs 50 lakh,” says Suresh Surana, founder, RSM India.

Although there is an overlap in the reporting requirements of the two schedules, each serves a separate purpose, and hence the need for double reporting.

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Report the rupee value: Reporting in Schedule FA should be done after converting the investment  value and income into Indian currency. The foreign currency should be converted into Indian rupees using the telegraphic transfer buying rate, used by the State Bank of India.
 

“Salaried employees in Employee Stock Ownership Plans (ESOPs) of foreign companies are also required to fill out Schedule FA and provide details of the shares or stocks held by them,” says Surana.

International MFs need not be reported: While international mutual funds invest in foreign assets, they are located in India. They are structured in such a manner that Indian investors can invest in foreign securities without directly owning foreign assets. “The mutual fund units are held and managed within India, even though the underlying investments are in international markets. Hence for the purpose of Schedule FA, these assets do not qualify as a foreign asset and don’t need to be disclosed,” says Jain.
 

Report or lose DTAA benefit: Failure to declare foreign income revokes your right to claim relief under the Double Taxation Avoidance Agreement (DTAA). For a person resident in India, all his income, whether earned in India or abroad, is taxable in India. Income from US stocks, including dividends and capital gains, is taxable in India. “Dividends are taxed according to the applicable slab rates of the individual, whereas capital gains are taxed based on the holding period. If any taxes are deducted or payable in the US, credit for such taxes will be available in the tax return. One needs to file Form 67 before filing tax return to claim this credit,” says Jain.