Disclosure of Foreign Assets in ITR

Understanding the Black Money Act:

Objective: Curbs black money and tax evasion related to foreign assets.

Key Provisions: Covers undisclosed foreign income and assets held by Indian residents.

Penalties: Stringent penalties and prosecution for non-disclosure.

• Disclosing black money in income tax returns (ITR) is mandated by law to ensure that all income sources are properly taxed, and transparency in financial dealings is maintained.
• The Black Money Act targets illicit financial flows.
• The CBDT has launched a Compliance-Cum-Awareness Campaign from Assessment Year 2024-25 to support taxpayers in accurately completing Schedule Foreign Assets (Schedule FA) and reporting income from foreign sources (Schedule FSI) in their Income Tax Returns (ITR). Compliance with Schedule FA and FSI is compulsory under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Who Needs to Disclose?

1.Resident Indian:

• Resident of India and resident ordinarily resident (ROR).
• A Hindu Undivided Family (HUF), Firm, or Association of Persons (AOP) is resident in India, except where the control and management of its affairs is situated wholly outside India,
• A company, which is Indian company, or a company having its effective place of management in India.

2.Definition of ROR:

• An individual, who has stayed 182 days or more in India in any previous year, or
• An individual who has stayed 365 days or more in India in four preceding years, and 60 days or more in previous year.

3.NRIs:

Non-Residents generally don’t, unless income accrues in India.

Note: Understanding residency status is critical. It determines your disclosure obligations

Beneficial Ownership:

The requirement extends to those who hold beneficial ownership of foreign assets, even if they are not the legal owner. This includes situations where you derive benefit from assets held by someone else.

EXCEPTIONS:

Beneficiary with Included Income: If you are a beneficiary of foreign assets and the income from those assets is already taxed in the return of the legal or beneficial owner, you might be exempt from filing your own return. (Fifth Proviso to Section 139(1)).

Foreign Citizens with Specific Visas: Foreign citizens classified as R&OR but holding business, employment, or student visas may be exempt from disclosing foreign assets acquired during their non-resident period, provided no income is earned from them currently. (Foreign Citizens’ Disclosure Exemptions)

What Assets Need Disclosure?

1.Immovable Property: Land, buildings located outside India. E.g. Vacation home in France.

2.Financial Accounts: Foreign bank accounts, brokerage accounts. E.g. Savings in Swiss bank.

3.Investments: Shares, securities, mutual funds abroad. ( E.g. Stocks of Apple Inc.)

Including jewelry, art, and income from sources outside India.

Reporting in ITR Forms:

1. ITR Forms – Schedules in ITR 2, 3, 5, 6 require details.

2. Schedule FA – Mandatory reporting of all foreign assets.

3. Details Needed – Name, address, country, account number, peak balance, income etc.

Schedule TR – Summary of tax relief claimed for taxes paid outside India.

In this schedule, assesses provides a summary of tax relief which is being claimed in India for taxes paid outside India in respect of each country. This schedule captures a summary of detailed information furnished in the schedule FSI.

Note: ITR 1 and ITR 4 does not have Schedule FA, Schedule FSI, and Schedule TR.

How to Disclose foreign income and assets?

• Collate all relevant information about foreign assets (including type of asset, country, address, date of acquisition, current value of asset, cost of acquisition, income generated).
• Collate details of all foreign income (including type of income, amount earned, country, tax paid on foreign income)
• Fill the necessary details in the Schedules applicable, by referring to step by step guide available on incometax.gov.in
• Claim tax benefit under Double Tax Avoidance Agreement, if applicable by filling form 67, in addition to Schedule TR.

How to File Schedule FA in ITR 2?

Step 1: Categorize Your Asset

Step 2: Provide Basic Details

Step 3: Detail Investment Values

• Initial Investment Value: The value at the time of acquisition (if applicable).
• Opening Balance: The asset’s value at the beginning of the relevant financial year.
• Peak Balance: The highest value the asset reached during the financial year.
• Closing Balance: The asset’s value at the end of the financial year. It’s essential to report these values in the original foreign currency and its equivalent in Indian rupees (INR).

Step 4: Report Income and Proceeds
• Income Earned: Interest, dividends, or any other income derived from the asset.
• Sale/Redemption Proceeds: Any proceeds from selling or redeeming the asset. Like the investment values, report these figures in foreign currency and INR.

Step 5: Claim DTAA Relief (if applicable)
Double Taxation Avoidance Agreements (DTAAs) exist between India and many countries. You’ll need to report the details here if you have claimed any tax relief under a DTAA for income earned on your foreign assets.

When to Report?

For Instance:

The reporting of foreign income or assets in the ITR of FY 2023-24 will depend upon the accounting period of the foreign country as below:
1. 1st January 2023-31st December 2023: If the foreign assets, foreign accounts, etc. are acquired between 1st January 2023-31st December 2023 and the assets/accounts belong to the foreign country/jurisdiction where calendar year is considered for the closing of accounts and return filings.

2. 1st April 2023-31st March 2024: If the foreign assets, foreign accounts, etc. are acquired between 1st April 2023-31st March 2024 and the assets/accounts belong to the foreign country/jurisdiction where the financial year is considered for the closing of accounts and return filings.

3. That period of 12 months, ending on any day succeeding 1st April 2023 in respect of foreign assets, accounts held in the foreign country/jurisdictions where the other 12 months accounting or tax filing period is adopted.

Rate of exchange for conversion:

For the purpose of reporting in Schedule FA, FSI, the rate of exchange for conversion for the following:

• Peak balance – Exchange rate of the foreign currency as on the date of peak balance in the account,

• Value of investment – Exchange rate of the foreign currency as on the date of Investment,

• Foreign Income – Exchange rate of the foreign currency as on the closing date of the calendar year.

Consequences and Penalties for Non-Disclosure:

₹ 10 Lakh Penalty:
• Where person who has foreign assets and income fails to furnish the return of income, as per Section 42 of BMA, 2015.
• Where taxpayer fails to furnish an information or furnish inaccurate particulars about an asset (including financial interest in any entity) located outside India in return of income, as per Section 42 of BMA, 2015.

Prosecution:
Rigorous imprisonment of up to 7 years.

Concealment Penalty:
50% to 300% of tax evaded on foreign income.

Note:
• Severe penalties exist under both the Black Money Act and Income Tax Act.
• Assessment proceedings can be initiated under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Common Mistakes to Avoid:

• Incomplete Reporting: Report all assets, regardless of value.
• Incorrect Valuation: Use correct valuation methods. Seek help.
• Ignoring Income: Report all income from assets.

What are benefits of disclosing Foreign Assets and Income?

• Compliance with disclosure requirement under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
• Avoidance of any double taxation, in relation to income earned outside, where taxes are already paid.
• Prevention from penalties relating to non-disclosure and inaccurate particulars under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Best Practices for Compliance:

1.Detailed Records: Keep records of assets, transactions, and income.

2.Professional Advice: Consult a tax advisor specializing in international taxation.

3.Regular Review: Periodically review holdings and reporting.

Voluntary disclosure can mitigate penalties if errors are found.

Frequently Asked Questions:

1.Investment in the Indian Mutual fund that invests in US stocks, is it required to be reported in Schedule FA?
• No, it is not required to report it in Schedule FA. Only direct investment in foreign shares requires reporting.

2.I don’t hold the shares, but I have sold them during the FY. Do I need to report in the schedule FA?
• The shares or stocks or any interest in foreign assets sold during the FY need to be reported during the year of sale. In future it is not required to be reported.

3. What if NRI becomes Resident Indian?
• An NRI is not liable to pay tax on income earned outside India. However, an NRI returning to India gets a NOR status, eventually converted to a ROR status. A resident Indian is liable to pay tax on global income under the income tax laws. And file ITR 2 correspondingly.

4.ESOP reporting in ITR’s?
• An Indian resident taxpayer must mandatorily fill the Schedule FA and Schedule FSI provided in the Income Tax Return (ITR) in ITR 2 and ITR 3 for reporting the above foreign assets including Foreign ESOP held/income earned by them during the financial year.

Conclusion:

1. Compliance is vital for ROR individuals. Accurate disclosure helps avoid penalties.
2. Stay updated and seek advice to ensure compliance.
3. Timely reporting avoids legal issues. Foreign Assets should be reported accurately.