Dr. Suresh Surana

In addition to the domestic market, individuals have begun to make investments in global markets, as geographical diversification is one of the ways to reduce risk and maximize overall portfolio returns. Furthermore, such global investments also allow individuals to take advantage of different types of investments opportunities available abroad like foreign stocks, mutual funds, index funds, derivatives, bonds, and real estate, and also leverage through investment in growing and emerging markets including benefits of favourable foreign exchange fluctuations, if any.

Here’s a brief overview of the key considerations every individual taxpayer should undertake while disclosing such foreign assets and any income arising therefrom in the income tax return.

Requirement for filing of Income Tax return

Section 139(1) of the IT Act provides that individual taxpayers with taxable income (before claiming deduction under Chapter VI-A and capital gains exemption u/s 54, 54EC, 54F, etc.) up to the basic exemption limit of Rs. 2.5 lakhs (Rs 3,00,000 or Rs. 5,00,000 as applicable in the case of senior citizens and super senior citizens respectively under the old tax regime) would not be mandatorily required to file their tax returns.

From Financial Year 2022-23, the basic exemption limit is Rs 2.5 lakh for all individuals, irrespective of age, under the new tax regime. However, there are certain specified carved exceptions wherein the taxpayer would be required to furnish their return irrespective of meeting the above threshold requirement such as incurring expenses of more than Rs 1 lakh towards electricity consumption, or expenses of more than Rs 2 lakh incurred on foreign travel for himself or any other person in the relevant financial year, etc.

One such exception is where the taxpayer (being a resident and ordinarily resident) holds, as a beneficial owner any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India or is a beneficiary of any asset (including any financial interest in any entity) located outside India. Thus, such taxpayers holding foreign assets or foreign bank accounts or is a beneficiary would be mandatorily required to file their return irrespective of the income threshold.

Who is required to disclose Foreign assets?

In case a taxpayer is a resident and ordinarily resident in India, the details of all foreign assets or accounts in respect of such taxpayer is a beneficial owner, a beneficiary, or the legal owner, is required to be mandatorily disclosed in the Schedule FA – Details of Foreign Assets and Income from any source outside India.

Beneficial owner in respect of an asset would mean an individual who has provided, directly or indirectly, consideration for the asset and where such asset is held for the immediate or future benefit, direct or indirect, of the individual providing the consideration or any other person.

On the other hand, the beneficiary in respect of an asset would mean 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.

Who is required to disclose Foreign Sourced Income?

Every resident in India would be required to disclose their foreign-sourced income in Schedule FSI – Details of Income from outside India and tax relief. In this Schedule, the taxpayer would be required to report the details of income, which is already included in total income, accruing or arising from any source outside India. It is pertinent to note that such income should also be separately reported in the head‐wise computation of total income.

ITR Forms for disclosure of Foreign assets

In case a taxpayer has any asset (including financial interest in any entity) located outside India or has signing authority in any account located outside, such taxpayer would not be eligible to file their returns in ITR-1 and ITR-4 and as such would be required to furnish their returns either in ITR-2 or ITR-3, as applicable.

In the case of employees who are holding ESOPs of a foreign company, it becomes necessary for them to disclose the holding of such foreign ESOPs and also to ensure that they select the right ITR to file their tax return.

Non-disclosure of Foreign Assets and Foreign Sourced Income

Section 43 of the Black Money (Undisclosed Foreign Income & Assets) & Imposition of Tax Act 2015 has a provision for imposing a penalty of Rs. 10,00,000 on any person, being a resident and ordinary resident in India for failure to furnish the income tax return any information or for furnishing inaccurate relating to an asset (including financial interest in any entity) located outside India, held by him as a beneficial owner or otherwise, or in respect of which he was a beneficiary, or relating to any income from a source located outside India, at any time during such relevant year.

However, it is pertinent to note that penalty under this section shall not apply in respect of an asset, being one or more bank accounts having an aggregate balance that does not exceed a value equivalent to Rs. 5,00,000 at any time during the relevant year.

Further, the provisions of Section 276C(1) of the IT Act, may be attracted leading to prosecution (subject to rigorous imprisonment for a period of up to 7 years and/or fine) if the revenue is of the view that non-disclosure of foreign assets in Schedule FA and/or Schedule FSI will result in a willful attempt to evade tax, penalty or interest chargeable or imposable or under-reports his income, as per the prescribed monetary threshold.

Summing Up

It is prudent for taxpayers to disclose all foreign income/assets while filing their tax returns to ensure correct reporting and also considering that the income-tax data analytics processes are more robust with the government also having entered into Exchange of Information agreements with many countries. Non-disclosure or underreporting of such foreign investments or assets or earning income from foreign sources may lead to the receipt of income-tax notices for non-disclosures. There could be also exposure to a severe penalty of Rs. 10 lakhs and the prescribed prosecution, it is recommendable that every taxpayer ensures proper disclosure while filing their returns with utmost care.

(Author is Founder, RSM India)