Investing in US stocks? Key ITR reporting rules you need to know

The Income Tax Department requires resident taxpayers to disclose details of their foreign assets and overseas financial interests in their Income Tax Return (ITR). Failure to make these disclosures can invite notices, penalties, and additional scrutiny from the tax department.  

When filing your ITR, you need to report details of foreign shares held during the financial year, including information such as the country where the asset is located, the nature of the asset, the date of acquisition, and the income earned from it. If you maintain an overseas brokerage account, details of the account may also need to be disclosed under the foreign assets schedule, depending on your residential status and the applicable ITR form.

You should also ensure that dividend income from foreign stocks, capital gains from the sale of overseas shares, and any taxes paid abroad are correctly reported. If tax has been deducted in the foreign country, you may be eligible to claim relief under the Double Taxation Avoidance Agreement (DTAA), subject to prescribed conditions.

Which ITR forms are required?

As per the Income Tax Department, a salaried individual with foreign shares, foreign dividends, or overseas brokerage account can file ITR-2, an individual having business/professional income along with foreign assets can file ITR-3, and a resident taxpayer holding foreign stocks, even if no income is earned during the year, can file ITR-2 or ITR-3, as applicable. 

For resident and ordinarily resident (ROR) taxpayers holding foreign stocks or overseas brokerage accounts, the disclosure is generally made in the Schedule FA (Foreign Assets) section of the ITR.

For AY 2026-27, investors holding US stocks through platforms such as foreign brokerage accounts should carefully review Schedule FA, Schedule CG, Schedule OS, Schedule TR, and Form 67, wherever applicable.

How should RSUs, ESOPs and ESPPs of foreign companies be disclosed?

Indian tax residents are required to disclose foreign assets held and foreign income earned during the financial year in their Income Tax Return (ITR). Accordingly, RSUs, ESOPs and ESPPs of foreign companies may trigger disclosure obligations under Schedule FA (Foreign Assets), depending on the stage at which rights crystallise and ownership is established.

“From a reporting perspective, the disclosure requirement generally arises when the employee acquires an actual ownership interest in foreign shares or securities. Mere grant of RSUs or ESOPs may not necessarily trigger reporting, as such grants typically represent contingent contractual rights subject to fulfilment of service or performance conditions and do not constitute legal ownership or a vested financial interest,” said CA (Dr.) Suresh Surana. 

Tax on Perquisite (Salary Income):
At the time of exercise (for ESOPs) or allotment (for RSUs), the difference between the Fair Market Value (FMV) and the exercise price (for ESOPs) or the FMV itself (for RSUs, since the exercise price is nil) is taxed as a perquisite under the head “Income from Salary.” The employer is responsible for deducting TDS on this perquisite value, which is why a portion of the shares is sold to cover this tax liability.

However, since this is non-monetary compensation (in the form of stocks), employers can either ask the employee to pay the TDS on such stocks via Bank transfer to the company account or, in some cases, the employer will do a sell-to-cover transaction, which involves selling a part of the shares from the allotted stocks to cover the taxes.

Capital Gains Tax Reporting:

The shares sold by the company to cover TDS are considered as sold on behalf of the employee. For tax purposes, the employee is treated as having received all the shares and then immediately sold a portion to meet the TDS obligation.

In the event that any foreign taxes are withheld (e.g., on dividends from foreign equity holdings), the employee may claim a Foreign Tax Credit (FTC) against their Indian tax liability.

“Indian employees receiving ESOPs/RSUs from a foreign company are required to disclose the details of the foreign demat under the relevant section of Schedule FA (i.e., “Foreign Custodial Account held (including any beneficial interest)” of the Income-tax Return) of ITR – 2 and ITR – 3. Additionally, the employee must also report the details of the foreign company in which such shares are held under the “Financial Equity and Debt interest held (including any beneficial interest) in any entity” section of Schedule FA,” Surana stated. 

Further, where the employee’s net total income exceeds Rs. 1 crore during the relevant financial year, the cost of acquisition of such foreign shares may also need to be reported under Schedule AL (Assets and Liabilities) of the ITR.

What are the disclosure requirements for RNOR (Resident but Not Ordinarily Resident) taxpayers?

From a disclosure perspective, an RNOR is generally required to report income that is taxable in India, including income received or deemed to be received in India, income accruing or arising in India, and income from a business controlled or profession set up in India. 

However, foreign income that is neither received nor accrued in India and is not derived from a business controlled from India is generally not taxable in the hands of an RNOR.

Further, RNOR taxpayers should carefully evaluate their residential status each financial year, since the disclosure requirement changes immediately upon transition to ROR status. Once an individual becomes ROR, comprehensive reporting of foreign assets and foreign income in Schedule FA becomes mandatory, irrespective of whether such assets generate taxable income in India. 

Therefore, maintaining complete documentation of overseas holdings during the RNOR phase can help ensure smooth compliance in subsequent years.

What are the most common mistakes taxpayers make while filling Schedule FA?

Taxpayers may make errors while reporting foreign assets in Schedule FA, particularly due to the detailed disclosure requirements and increasing data-sharing between tax authorities globally. Some of the most common mistakes include:

Non-disclosure of foreign assets or accounts: Taxpayers sometimes fail to report dormant bank accounts, foreign brokerage accounts, retirement accounts, stock holdings, ESOPs, foreign cash-value insurance policies, or beneficial interests held abroad, assuming that nil income or inactivity removes the reporting requirement.

Incorrect residential status assessment: Schedule FA disclosure requirements apply only to individuals qualifying as Resident and Ordinarily Resident (ROR) in India. 

“A common mistake occurs when taxpayers who initially return to India as Non-Residents (NR) or Resident but Not Ordinarily Resident (RNOR) continue to assume the same status over the years. With the passage of time, many transition into ROR status but fail to reassess their residential status annually, resulting in non-disclosure of foreign assets in Schedule FA despite the reporting obligation becoming applicable,” commented CA (Dr.) Suresh Surana. 

Reporting incorrect values or dates: Errors may arise in reporting peak balances, acquisition cost, country codes, account numbers, opening/closing dates, or beneficial ownership details, especially where records are maintained in foreign jurisdictions.

Mismatch between foreign income and Schedule FA disclosures: Taxpayers may disclose foreign income, such as interest, dividends, capital gains, or salary in the return, but fail to correspondingly disclose the underlying foreign asset in Schedule FA, which may trigger scrutiny.

Ignoring jointly held or beneficial ownership interests: Assets held jointly with spouses, parents, or through foreign entities/trusts are sometimes omitted under the assumption that legal ownership rests elsewhere, even where beneficial interest exists.

Incomplete reporting of overseas employment benefits: Individuals returning from overseas assignments often overlook reporting foreign pension accounts, social security interests, RSUs, ESOPs, or employer-sponsored investment plans.

Assuming tax-paid assets need not be disclosed: A common misconception is that if taxes have already been paid abroad or no taxable income arose during the year, disclosure in Schedule FA is not required. However, Schedule FA is a disclosure obligation independent of taxability.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.    

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