Foreign assets in ITR: Declare when in doubt

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Filing up the ITR forms have never been easy for any ordinary taxpayer. And this year those who have returned from abroad are finding it especially confusing to declare some categories of foreign assets even as the deadline of July 31 to file income tax approaches.

The Economic Times has reported some of the assets that are causing confusion are stock options overseas that are yet to be exercised, retirement schemes in the US and other countries and stakes in offshore companies. The IT Department has, in the past, issued many notices to such taxpayers when they discovered the existence of such undeclared assets.

The penalties that might be levied for such non-declaration is immense.

Chartered accountant Manish Dafria told the newspaper, “Many infotech sector employees, who are back from the US, have their funds invested in the 401(k) plans. Now, the foreign assets (FA) in the ITR form has no specific column for sharing details of such funds. The only option is to report them as ‘any other capital asset’, but here one needs to give details of the date of acquisition and amount of total investment. However, for 401(k) plans, there is no one date of acquisition as the amount had been invested every month while the person was working in the US. Also, what people have is the present fund value, not the amounts invested. Many people are not even reporting these funds in the FA schedule which may have serious consequences.”

There are problems with stock options too. Even if taxpayers do not report stock options abroad since they have not been exercised yet, the IT officials might come to know about them as the companies in possession of the stock option accounts could divulge the names of all beneficiaries. Therefore, professionals are also advising taxpayers to reveal stock options too though these might not have been exercised yet.

The FA schedule in ITR instructs a taxpayer to disclose all beneficial interests in assets abroad.

“Say an individual has invested less than 10% capital in a UK company, which has further invested less than 10% capital of a German company. As per the overseas investment regulations under FEMA, the UK company has no ‘control’ in the German company and hence such indirect investment in the German company would not require any reporting to the RBI. However, it may still be subject to reporting requirements under Table B of Schedule FA,” said Harshal Bhuta, partner of PR Bhuta & Co.

According to the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard Rules 401(k) is a non-reportable account for financial institutions.

Said Siddharth Banwat, partner of a CA firm, “It is similar to the NPS account of India. So, under the exchange of information mechanism, foreign governments would not report 401(k) accounts to India. But since schedule FA requires one to report all kinds of foreign assets, 401(k) is considered a reportable account. Though, technically, a 401(k) account is maintained through a financial institution, which, in turn, invests in bonds/stocks, it falls under the category of ‘equity and debt interest held’. But since it is not specifically covered, one may report this as ‘other assets’ held outside India.“

Incidentally, the wealth under the 401(k) account is taxed when it is withdrawn.

Possible mismatches between the information provided in the ITR and the information obtained by the IT department from foreign governments which is often done on the basis of a calendar year, could also be a source of trouble.

“There will be certain incomes (earned between January and March 23) that will be offered to tax in return for AY2023-24, but the assets and incomes will be reported in next year’s return (AY 2023-24) as they would get covered in the next financial year. This period mismatch may result in queries from the tax department as income would have already been offered in a prior year (AY 2023-24),” said Ashwin Mehta, partner at Khaitan & Co.

He said that one should report when in doubt. The taxpayer needs to be extra cautious when filing the ITR. Else, the taxman could come knocking.