Have foreign assets or income? Not disclosing it may lead to heavy penalties

• Indian residents are required to report their foreign investments, which may include holdings in foreign stocks, bonds, or other financial instruments.
  
• Ownership of foreign real estate, whether residential or commercial, must be reported to Indian tax authorities.
  
• If you possess ESOPs from a foreign company, you are required to disclose these foreign holdings when filing your income tax return.
  

Recently, the IT Appellate Tribunal of Mumbai imposed a penalty of ₹10 lakh per year on taxpayers who failed to report foreign assets under schedule FA of the income tax return (ITR) form. The penalty was levied under black money Act. Compared to the Income Tax Act, the penalty under the black money act is enormous.

"The ITAT decision is a wake-up call for many working professionals and NRIs regarding the complexity of tax compliance in India; even if the taxpayer has paid their taxes, mere non-disclosure results in hefty penalties,” says Suneel Dasari, CEO and founder, EZtax.in.

Here's a breakdown of the key foreign assets and income that must be disclosed in the income tax returns.

Foreign investments: Indian residents are required to report their foreign investments, which may include holdings in foreign stocks, bonds, mutual funds, or other financial instruments.

This reporting extends to income generated from these investments, such as dividends, interest, or capital gains. Individuals need to disclose the nature and value of these investments in their tax returns.

For example, if you have invested in shares of Microsoft or Apple, the investments and any income from them, need to be disclosed when filing your tax returns.

ESOPs: If you possess employee stock ownership plans (ESOPs) from a foreign company, you are required to disclose these foreign holdings when filing your income tax return, typically under schedule FA.

“In India, when an Indian employee is allotted shares of a foreign parent company as a part of their compensation or as an employee stock option plan (ESOP), it is considered an investment in foreign assets,” says Abhishek Soni, CEO, Tax2Win.in, a tax filing platform.

Foreign bank accounts: Any foreign bank accounts, whether savings, current, or fixed deposit accounts, must be reported. This includes accounts held individually or jointly, along with details such as the name of the bank, account numbers, and the highest balance maintained during the financial year.

Foreign real estate: Ownership of foreign real estate, whether residential or commercial, must be reported to Indian tax authorities. This includes details about the property's location, current market value, and any income generated from it, such as rental income. “Any rental income or capital gains from selling these assets may be subject to taxation,” says Soni.

Financial or beneficial interest in overseas entities: In case an individual possesses a financial or beneficial stake in any overseas entity, such as serving as a partner in an overseas limited liability partnership (LLP) or firm, or receiving benefits from a foreign private trust, it is imperative to disclose this interest in accordance with tax regulations.

“Residents in India with foreign income from ESOPs, or the voluntary purchase of foreign stock or other non-tangible instruments are at risk due to country or central bank level reciprocity agreements that would allow the Indian government access to information that would otherwise be unavailable,” says Dasari. Non-declaration also revokes your right to claim relief under the double taxation avoidance agreement for your foreign income.

Hence it is critical to disclose such foreign assets in the schedule FA of ITR.