Disclosure of Foreign Assets in Income Tax Return: Penalty & Deadline

The circulation of black money across the tax heavens has always been a point of concern for the Income Tax Authorities. Recognizing the need to curb black money, a comprehensive law ‘The Black Money Act’ was introduced in 2015. With the new law, it is now mandatory to disclose foreign assets and income in your income tax return to avoid tax evasion and enhance transparency in cross-border transactions.

As the final deadline of 31st December to file the revised/belated income tax return is fast approaching, the Income Tax Department has recently launched a Compliance-cum-awareness campaign urging Indian taxpayers to declare foreign assets and income in their AY 2025 Income Tax Returns. Failure to do so can lead to a hefty penalty of Rs. 10 lakhs and prosecution, depending on the severity of the omission.

Deep dive into this blog to learn more about the disclosure of foreign assets in ITR:

• Meaning of Foreign Assets
• Importance of Disclosing Foreign Assets in ITR
• People liable to report Foreign Assets
• How to Declare Foreign Assets in ITR
• Deadline to Report Foreign Assets in ITR
• Penalty for Non-disclosure of foreign assets in Income Tax Return

What are Foreign Assets?

If you’re an Indian resident, foreign assets will comprise of bank accounts in other countries, investments in real estate, stocks, mutual funds and other capital assets outside India, financial interest in any foreign entity, or signing authority over any account located abroad, insurance or annuity contract etc.

What is the Importance of Disclosing Foreign Assets in ITR? 

Disclosure of foreign assets and income in income tax returns is important and ensures compliance with Indian tax laws. Here’s a list of reasons which makes it super important:

• Legal Compliance

As per the Black Money Act, 2015, it is mandatory to disclose all foreign assets and income within the Income Tax return in the specified schedules, such as Schedule FA for disclosing foreign assets like a bank account, real estate etc. and Schedule FSI for foreign source income to disclose income such as dividends, interest, or capital gains earned from foreign sources. Accurate reporting ensures compliance with the tax laws.

• Avoiding Penalties

Non-disclosure of foreign assets and income in income tax returns can lead to a penalty of Rs. 10 lakhs, highlighting the seriousness of the Income Tax Department in dealing with such transactions.

• DTAA Benefits and Tax Credits

Accurate reporting and disclosures help taxpayers claim tax relief for the taxes paid in a foreign country by filling in Schedule TR (Tax Relief) and taking advantage of a double taxation avoidance agreement.

• Enhanced Transparency

Accurate reporting of foreign assets helps maintain transparency, aids the government in tracking overall global income, and ensures that every taxpayer is meeting their tax liabilities efficiently. 

Who Needs to Report Foreign Assets?

As per the Income Tax Act, 1961, Indian residents qualified as ‘Resident and Ordinarily Resident’ are mandatorily required to disclose their foreign assets and income in their income tax return. Get an idea about the specifics of who should make this disclosure in the income tax return:

• Resident Individuals and HUFs 
  All Indian taxpayers who are ‘Resident and Ordinarily Resident’ must disclose all the information about their foreign assets and income in the ITR. This includes details about the bank account in a foreign country or the signing authority of the accounts held abroad, investments in real estate, stocks, mutual funds or any other financial instruments. 
• Beneficial Owners
  If you are a beneficial owner of any financial asset abroad or have a signing authority of any foreign bank account, the details about these financial assets should be reported accurately in the Income Tax Return.
• Beneficiaries of Foreign Assets
  If you are a beneficiary of any financial asset in a foreign country and the income earned is not included in the income of the beneficial owner, then it is mandatory for a beneficiary to file a return of income and disclose all the required details.

How to Declare Foreign Assets in Income Tax?

To declare the foreign assets in the ITR, you have to fill in the details in the Schedule FA of the Income Tax Act, 1961. Here’s a step-by-step process to follow:

• Step 1: First and Foremost, you have to identify the different types of foreign assets held abroad, such as bank accounts, stocks, real estate, and other kinds of financial instruments.
• Step 2: Start filling out the Schedule FA wherein you need to provide the country name, code, currency code, zip code, name and address of the foreign institution, account number etc.
• Step 3: In this step, you have to provide details of the initial value of the investment, Opening balance, closing balance and the peak balance during an accounting year in both foreign and Indian currency.
• Step 4: Now, if you have earned any income/revenue from the sale/redemption of investment during an accounting year should be reported in both foreign currency and INR.

Remember to keep all the detailed records and documentation pertaining to all foreign assets to support the disclosures made in the Income-tax Return. 

What is the Deadline to Report Foreign Assets in the ITR?

The deadline to disclose foreign assets in the income tax return is generally 31st July of the assessment year. This deadline is aligned with the regular income tax filing due date. However, if your foreign assets were declared incorrectly or not declared, you have an opportunity to file a revised or belated return by 31 December of the assessment year without incurring severe penalties.

What is the Penalty for Not Declaring Foreign Assets in ITR?

Disclosure of foreign assets and income is super important. Non-compliance and non-disclosure lead to a severe penalty of Rs. 10 lakhs under the Black Money Act, 2015. In addition, non-adherence to tax laws regarding the declaration of foreign assets can also lead to prosecution, depending on the severity of the omission.

Recent Case Laws and ITAT Decision

In a recent ruling, the Mumbai Income Tax Appellate Tribunal (ITAT) upheld the penalty levied under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) Act, 2015, for the non-disclosure of foreign assets in the Income Tax Return (ITR). The assessee, despite declaring income from foreign assets, failed to disclose these assets in Schedule FA of their ITR for assessment years 2016-17 to 2018-19. The ITAT held that the failure to disclose foreign assets, even if income from them was reported, attracts penalties under Section 43 of the Black Money Act. Hence, it is important to disclose all the foreign assets held by you while filing the ITR.

What if you didn’t Disclose Foreign Assets in your ITR for FY 2023-24?

If you missed disclosing your foreign assets in your ITR for FY 2023-24, it’s crucial to file a revised return with complete details in Schedule FA to avoid penalties or action from the Assessing Officer. The IT Department’s recent crackdown, sending notices to taxpayers who have failed to disclose their foreign assets, highlights the importance of timely compliance. The deadline for filing the revised return is 31st December 2024, so make sure to submit it before the due date to avoid heavy penalties.

Click here to file your revised return with Cleartax. 

Conclusion

In a nutshell, disclosure of foreign assets and income in ITR is a critical requirement to ensure transparency in tax compliance and avoid penalties. Filling the schedules for foreign assets and income accurately also helps you to get tax relief for the taxes paid abroad. The appropriate ITR forms for these disclosures are ITR-2 or ITR-3, depending on your specific income situation. For instance, if you've got income from business or professional services along with foreign income, ITR-3 would be your go-to form.

Reporting foreign income accurately can be overwhelming and seeking guidance can help you sail through the complexities of international taxation. Connect with ClearTax Tax Experts who will assist you at every step and make your ITR filing easy.