ITR return: How to report foreign income in tax return?

Individuals with foreign assets and income are required to use either ITR 2 or ITR 3 forms to file their tax returns

Filing income tax returns becomes a bit tricky when you have to report foreign assets and income from offshore. Whether it’s through investments, employment abroad, or freelance work for international clients, foreign income needs to be properly reported to tax authorities. So how do you do it?

 

Residential status matters
 

The first step is to determine your residential status in India as per the Income Tax Act. This can be resident, non-resident, or resident but not ordinarily resident. Your residential status dictates how your foreign income will be taxed.
 

Taxability 
 

A tax resident (resident and ordinarily resident- ROR) of India is liable to report his global income in the tax return. Section 5 of the Income-tax Act, 1961 says a resident person who is earning income, whether domestic or foreign sourced, is required to report his income under all heads namely salary, house property, profits from business and profession, capital gains and other sources and pay applicable taxes on it.
 

 

The further process of reporting foreign income begins with maintaining detailed records of all overseas earnings. Taxpayers should collect documentation such as salary slips, bank statements, and investment reports from foreign institutions. These documents will be crucial for accurate reporting and potential scrutiny from tax authorities.
 

Furnishing the correct ITR form 
 

Use the appropriate ITR form based on your income sources and residential status. Non-resident individuals (NRIs) or not-ordinarily resident individuals (NOR) typically use ITR-2 or ITR-3, which include Schedule FA for reporting foreign assets and income.

 

“The tax return form allows for reporting both domestic and foreign income under the respective head of income. However, one must report such foreign sourced income separately under Schedule FA, ‘Details of Foreign Assets and Income from any source outside India’.

 

This schedule requires to report a) Income offered to tax and b) under which income head such foreign income is disclosed in the return form.
 

In addition, tax return form also having schedule TR-Summary of tax relief claimed for taxes paid outside India in which details such as Country Code, Taxpayer Identification Number, Total taxes paid outside India, Total tax relief available, Tax Relief Claimed under section 90/ 90A/91,” said Dheeraj Basantani, Associate Partner at Forvis Mazars 
 

Claiming foreign tax credit 

 

If you have paid taxes on foreign income in the country where it was earned, you may be eligible to claim a Foreign Tax Credit (FTC) in India under the Double Taxation Avoidance Agreements (DTAA) or unilateral relief provisions. This helps avoid double

taxation on the same income.
 

“In cases where foreign income is liable to tax in foreign country due to source rule as well as in India due to residency rule, resident tax payer can claim foreign tax credit (FTC) by application of Double Taxation Avoidance Agreement (DTAA). A resident who has paid taxes on foreign income can claim FTC at the time of filing tax return. As per Rule 128 of Income tax rules, FTC shall be allowed only if assessee furnishes Form 67 along with copy of the tax payment certificate or statement and proof of payment / deduction of tax in foreign jurisdiction,” said Dheeraj Basantani, Associate Partner at Forvis Mazars

 

What happens if foreign assets or income is not reported

 

The enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (commonly known as the 'Black Money Act') has emphasised the duty of Indian residents to declare their foreign assets and income.

 

Under this legislation, individuals with foreign assets or income must file their Income Tax Return (ITR) accurately and on time. Failure to provide correct information in Schedule FA can result in a penalty of Rs 10 lakh. Additionally, the individual could face imprisonment ranging from six months to seven years, along with fines.