Introduction
Navigating tax compliance is essential for residents with foreign assets or income, ensuring they meet all reporting and disclosure obligations under the Income Tax Act and the Black Money Act. Not disclosing foreign assets and income in your Income Tax return could trigger tax and penalties under Black Money Act. This article simplifies these requirements, covering property, stocks, ESOPs, and shares held abroad. Understanding what needs to be disclosed in the income tax returns and the consequences of non-compliance can help avoid legal and financial penalties.
Disclosure Requirements in the Income Tax Returns in Schedule Foreign Asset (FA)
Schedule FA mandates the disclosure of the following information for individuals who are resident and ordinarily resident (ROR), concerning their foreign assets and income:
- Foreign Assets Held: This includes any external assets such as shares, bonds, life insurance policies, annuity contracts, real estate, or any other capital asset held outside India.
- Overseas Financial Interests: Holding a financial or beneficial interest in any entity based outside India, like being a partner in an overseas LLP or a beneficiary in a foreign trust, it must be reported.
- Authority Over Foreign Accounts: Reporting is required if one have signing authority over any foreign accounts, including but not limited to trading, depository, bank, or custodial accounts.
- Income from Foreign Sources: Any income derived from outside India, be it dividends, interest earnings, or capital gains, needs to be included.
This schedule requires reporting without regard to the form of ownership, covering both legal and beneficial holdings. However, the duty to report under Schedule FA is specific to individuals who are residents and ordinarily residents (ROR). Those who are non-residents or residents but not ordinarily resident (RNOR) are not required to disclose foreign asset and income.
Disclosure Timeline and Reporting Obligations
For the assessment year 2024-25, taxpayers are obligated to disclose details of foreign assets and income for the calendar year 2023 in the Schedule FA. This encompasses all foreign-held assets and income accrued from January 1, 2023, to December 31, 2023. Such information must be accurately filled out in Schedule FA of the Income Tax Return (ITR) forms for the specified assessment year.
Implications of Non-reporting or Inaccurate Reporting
In accordance with the provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Non-disclosed foreign income is taxed at 30% under Black Money Act with a potential penalty of 300% of tax payable, along with applicable interest.
Further residents possessing foreign assets or earning foreign income are required to furnish their income tax returns accurately and within the due date of filing income tax returns. Any failure to file the income tax returns, or the submission of inaccurate or omission of details of foreign asset or foreign income in the income tax returns in Schedule FA, may lead to penalty up to Rs. 10 lakhs. Furthermore, taxpayers may face imprisonment ranging from six months up to seven years, in addition to the imposition of fines, underscoring the critical importance of diligent compliance.
FAQs on Reporting and Disclosure Requirements for Residents with Foreign Assets
Q1: Who is required to comply with the reporting and disclosure requirements?
Every resident and ordinarily resident must comply with these requirements.
Q2: Do deemed residents under section 6(1A) need to comply with these requirements?
No, deemed residents, being not ordinarily residents, may not be subject to these reporting requirements.
Q3. What is undisclosed foreign asset?
Section 2(11) of this Act defines ‘undisclosed asset located outside’ India and the meaning of undisclosed has been given in this section to mean a situation where assessee has no explanation about the source of investment in such asset or the explanation given by him in the opinion of the Assessing Officer is unsatisfactory.
That means an asset can be said to have been acquired out of undisclosed source when any of the above sources of the investment cannot be established. It means that in case assessee is able to establish source of investment in foreign asset out of undisclosed domestic or foreign income, there may be action for bringing to tax such domestic or foreign income under applicable law but so far as the source of investment in the asset is concerned, it stands explained and such asset located outside India cannot be said to be in the nature of undisclosed asset and would not come within the ambit of undisclosed asset located outside India under section 2(11) of this Act.
Q4. When the undisclosed foreign income and undisclosed foreign asset is chargeable to tax under Black Money Act?
Undisclosed foreign income shall be assessed to tax in the previous year in which such income has been earned.
With respect to undisclosed foreign asset, the position of law under this Act is different in as much as such undisclosed foreign asset is to be assessed in the previous year in which it comes to the notice of the Assessing Officer. It is to be assessed in such previous year on its fair market value.
For example, Mr. Kumar owns a piece of land in Australia that he did not disclose in his Indian tax returns. This land was purchased in 2010 for Rs.20,00,000, but the Indian tax authorities only became aware of it in 2023.
Fair Market Value of the Asset in 2023: INR 50,00,000
According to the provisions of Black Money Act, if Mr. Kumar unable to establish the source of funds utilised for investment in land and since the undisclosed foreign asset was discovered by the Assessing Officer in 2023, it is to be assessed in the previous year 2023-24. For the purpose of taxation under Black Money Act, the asset will be evaluated based on its fair market value in 2023, which is Rs.50,00,000.
This means that Mr. Kumar's tax liability under Black Money Act for the year 2023-24 will be calculated based on the fair market value of the Australian land at Rs.50,00,000, regardless of its value when he initially purchased it.
Q5: Is disclosure required for shares & securities including ESOP acquired as a non-resident once the individual becomes a resident and ordinarily resident?
Yes, though the stocks have been acquired by an individual while he was a non-resident, such person is required to disclose those assets under Schedule FA immediately once such person becomes resident and ordinarily resident in India.
Q6: Are residents required to report foreign-held stocks annually or only in the year of acquisition?
Residents must report any foreign assets held, including stocks, every year until the asset is disposed of.
Q7: Is a retiree with no taxable income in India but holding shares acquired under ESOPs during employment required to file ITR and disclose those stocks in Schedule FA?
Yes, any resident & ordinarily resident holding foreign assets or beneficial interest outside India must file an ITR in India and disclose such assets in Schedule FA. This requirement applies regardless of whether they have taxable income in India or not.
Q8: What are the consequences under the Black Money Act for failing to comply with reporting requirements?
Non-disclosed foreign income is taxed at 30% under Black Money Act with a potential penalty of 300% of tax payable, along with applicable interest.
Further residents possessing foreign assets or earning foreign income are required to furnish their income tax returns accurately and within the due date of filing income tax returns. Any failure to file the income tax returns, or the submission of inaccurate or omission of details of foreign asset or foreign income in the income tax returns Schedule FA, may lead to penalty up to Rs. 10 lakhs. Furthermore, taxpayers may face imprisonment ranging from six months up to seven years.
For example: Mr. Arjun spent a decade working for a multinational corporation abroad before returning to India a few years back. As of the financial year 2023-24, he is considered a resident and ordinarily resident of India. During his tenure overseas, he opened a savings account in a foreign bank and also purchased a property outside India. For the financial year 2023-24, he earned interest of Rs.20,00,000 from his foreign savings account and did not disclose this income in his Indian income tax returns, nor did he disclose the ownership of the foreign property.
Consequences Under the Black Money Act
1. Taxation of Undisclosed Foreign Income
The undisclosed foreign income of Rs.20,00,000 would be taxed at a flat rate of 30% as per the provisions of Black Money Act. This means Mr. Arjun has to pay a tax of Rs.6,00,000 (30% of 20,00,000).
2. Penalty for Non-disclosure
On top of the tax, Mr. Arjun faces a penalty of up to 300% of the tax payable on the undisclosed foreign income. In the worst-case scenario, this could be Rs.18,00,000 (300% of 6,00,000).
3. Interest on Delayed Payment
Besides the tax and penalty, interest for the period of delay in paying the tax may also be applicable, further increasing the financial burden.
4. Penalty for Non-disclosure of Foreign Assets
Failure to report the foreign property (an asset) could attract a penalty up to INR 10,00,000 under the provisions related to the non-disclosure of foreign assets.
Total Financial Impact on Mr. Arjun
Tax on undisclosed income: Rs. 6,00,000
Maximum potential penalty for non-disclosure of income: Rs.18,00,000
Penalty for non-disclosure of foreign asset: Up to Rs.10,00,000
Interest (variable based on the time of delay)
In total, excluding interest, Mr. Arjun might face a financial hit of up to Rs. 34,00,000 plus interest for non-disclosure of his foreign income and asset, which underscores the seriousness with which the Indian tax authorities treat undisclosed foreign assets and income. Additionally, if he cannot satisfactorily explain to the assessing officer where the money came from to buy the overseas property, he will be required to pay tax and penalty on it. This example highlights the importance of disclosing foreign income and assets accurately in the income tax returns to avoid hefty penalties and legal complications.
Q9: What is the time limit for issuing a notice under the Black Money Act for assessing foreign undisclosed asset?
There is no time limit for issuing a notice under the Black Money Act. This means the regulators can enquire about foreign assets anytime, even years later. So, keeping good records and following the rules is key.
Q10: If income is taxed under the Black Money Act, is it also taxable under the IT Act?
No, once taxed under the Black Money Act, the same income is not subject to tax under the IT Act.
Q11: Is penalty of Rs.10,00,000 under the Black Money Act for undisclosed asset or income applied per each assessment year or for each instance of non-disclosure?
As per the provisions of Black Money Act, penalty for Rs.10,00,000/- for non-disclosure of foreign asset and income are applied per each assessment year. (Ms. Shobha Harish Thawani Vs Joint Commissioner of Income Tax (2023) 154 taxmann.com 564 (Mumbai Tribunal).
For example, Ms. Neha, an Indian resident, has investments in the form of shares in a technology company based in the United States. She acquired these shares in FY 2019-20 but did not disclose this foreign asset in her income tax returns for subsequent years.
Application of Penalties for Non-disclosure
According to the provisions under the Black Money Act, non-disclosure of foreign assets attracts a penalty.
In this example, Ms. Neha would incur a total penalty of Rs. 30,00,000 i.e Rs.10,00,000 per assessment year, over the three assessment years for not disclosing her foreign asset for the FY 2019-20, FY 2020-21 and FY 2021-22.
Q12: When disclosing an asset, must the income from that asset be separately disclosed?
Yes, disclosing an asset alone is not sufficient; income from any foreign source must also be included in the total income for tax purposes in India.
Conclusion
In conclusion, the stringent penalties imposed by the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act highlight the critical importance of full transparency in disclosing foreign income and assets in income tax returns. The act serves as a clear reminder to individuals with international financial interests about the legal and financial obligations tied to their global assets. It underscores the necessity of maintaining meticulous records and adhering strictly to tax regulations to avoid the hefty penalties that come with non-compliance.
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