For many Indian taxpayers who invest globally, the income tax return season brings not just the routine filing process but also a crucial compliance responsibility. The law mandates resident individuals, particularly those classified as resident and ordinarily resident, to disclose their global income and overseas assets in their annual tax filings in India.
The residential status of a taxpayer determines whether global income is taxable. A person is considered resident and ordinarily resident if they have stayed in India for at least 182 days in the financial year or 60 days in that year along with 365 days in the previous four years, and additionally have been a resident for at least two out of the last ten years while staying in India for a minimum of 730 days in the last seven years. Only individuals fulfilling both these criteria are taxed on their worldwide income.
Once an individual qualifies as a resident and ordinarily resident, all foreign income whether from salaries abroad, interest, capital gains, or mutual funds must be reported. The income should be converted into Indian rupees using the telegraphic transfer buying rate of the Reserve Bank of India on the last day of the financial year. This ensures consistency in currency conversion for tax calculations.
Taxpayers also have the option to avoid being taxed twice on the same income through what is known as the foreign tax credit mechanism. If tax has already been paid in a foreign country, individuals can claim relief under Section 90 or Section 91 of the Income Tax Act by filing Form 67. This form allows the taxpayer to claim credit for foreign taxes paid, provided the income has been disclosed in the return and the individual adheres to the rules laid out under India's Double Taxation Avoidance Agreements with respective countries.
Disclosure requirements go beyond just income. Resident Indians who own assets abroad such as shares of foreign companies, mutual fund holdings, immovable property, bank accounts, or retirement benefits must report them under Schedule FA of their ITR. This is mandatory regardless of whether these assets generated any income during the year. Taxpayers filing ITR-2 or ITR-3 are especially required to fill out this section with precise details, including the country of location, nature of the asset, date of acquisition, and value or balance during the year.
In cases where the taxpayer's total income exceeds one crore rupees, additional disclosure is required under Schedule AL, which covers the cost of acquisition of foreign securities. Even inherited foreign assets must be disclosed with the date of inheritance, fair market value, and information about the deceased owner.
The consequences of non-disclosure are serious. If an individual fails to report foreign assets valued above twenty lakh rupees, a penalty of ten lakh rupees per asset may be imposed. Furthermore, if misreporting is detected, the taxpayer could face penalties as high as two hundred percent of the tax due. In severe cases, the law even provides for prosecution and imprisonment of up to seven years under the Black Money Act.
Apart from assets, taxpayers must be careful while disclosing foreign income streams. For example, foreign dividends taxed at thirty percent in India may be taxed at a lower rate under certain treaties. In such cases, the individual can choose the more favorable provision under Section 90(2) of the Income Tax Act and pay tax accordingly.
The broader message for taxpayers is clear. Owning foreign assets or earning overseas income is entirely legal, but not reporting them correctly can lead to unnecessary trouble. With the income tax department increasing its scrutiny of global disclosures, individuals must ensure they meet all compliance requirements in a timely and transparent manner.
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