Foreign stocks purchased in Jan-Mar 2022 must be declared this AY to avoid scrutiny by tax department

By Amit Gupta

As the deadline for filing Income Tax Returns (ITR) for the assessment year 2023-24 approaches, it is important for Indian residents who have invested in foreign stocks to be aware of the tax implications and reporting requirements. Whether earning dividend income, capital gains, or incurring capital losses, it is crucial to include these details while filing the ITR.

The last date for filing ITR for individual taxpayers without audit requirements is July 31, 2023. Filing the ITR before the deadline is advisable to avoid any late filing charges. However, when it comes to foreign investments, there are specific rules and regulations outlined in the Income Tax Act of 1961.

Choosing the Correct ITR Form

To report foreign investment details accurately and avoid any potential Income Tax notices, taxpayers must choose the appropriate ITR form. If an individual holds foreign investments, they need to disclose this information in the Schedule of Foreign Assets (FA) using either Form ITR-2 or ITR-3.

Mandatory Declaration of Foreign Assets

All taxpayers are required to declare their foreign assets in the ITR, including investments in US stocks or assets in any other country. Even if an individual’s taxable income falls below the basic exemption limit of Rs 3 lakh, they still need to file the ITR to disclose their stock holdings in foreign countries.

Foreign stocks must be declared annually in the ITR until the taxpayer no longer owns them. Failure to declare foreign stocks or any other foreign asset may result in scrutiny by the tax department. This is under the Black Money and Imposition of Tax Act, 2015. Additionally, taxpayers may face penalties of up to Rs 10 lakh.

Taxation on Foreign Investments and Stocks

In India, when a foreign stock is sold after a holding period of two years, the profit earned is considered long-term capital gains (LTCG) and taxed at a rate of 20 percent (with surcharge) with the benefit of indexation. Short-term capital gains (STCG) are taxed according to the individual’s income slab rates. However, foreign-born individuals are not liable for capital gains tax in India.

Dividend income earned from foreign investments is taxed at the applicable slab rates in India. In the United States, a flat 25 percent tax is withheld on dividends when paid. To avoid double taxation, India has a Double Taxation Avoidance Agreement (DTAA) with the US, allowing taxpayers to claim the tax paid in the US as a deduction while filing the ITR in India.

Reporting Foreign Investments in the ITR

When disclosing foreign investments and stocks purchased during the year, they should be reported in Table A3 under schedule FA. The values of these assets should be declared in Indian currency (rupees) after conversion and should not be shown in foreign currency.

However, reporting dividends in the ITR can be slightly more complex. Dividends should be declared as income from other sources in the year they are paid. Dividends are taxable in the year of accrual and are not necessarily dependent on their remittance to India. If tax is withheld in the country of origin, taxpayers can claim it as a deduction while filing the ITR in India to avoid double taxation.

For taxpayers with foreign assets, the ITR form requires disclosure of assets held at any time during the calendar year. For instance, when filing the ITR for the assessment year 2023-24, individuals must declare all foreign assets held from January 1, 2022, to December 31, 2022. This is because most countries follow the calendar year for assessment, unlike India, where the financial year runs from April 1 to March 31.

Therefore, even if someone purchased foreign stocks in March 2022, they would still need to be declared in Schedule FA, despite falling within the previous fiscal year (FY22) according to India’s fiscal calendar. Investments, stocks, or other assets acquired between January and March of the current year do not need to be declared in the current ITR filing.

As the tax deadline approaches, it is essential for Indian residents with foreign investments to understand and comply with the tax reporting requirements for these assets. By adhering to the rules outlined by the Income Tax Act and accurately reporting foreign investments and stocks, individuals can ensure a smooth filing process while minimizing the risk of penalties or tax-related issues.

(Author is Managing Director at SAG Infotech)