Reporting of Foreign Assets by Indian Taxpayers under Section 139(1) of the Income Tax Act

As part of introducing transparency in the financial dealings, among various measures introduced over the years the mandatory reporting of foreign assets held by an Indian taxpayer is one of them. The Income Tax Act, 1961, under Section 139(1), requires taxpayers to disclose information about foreign assets and income accruing thereon. Failing to do so can attract severe penalties and consequences.

Summary of the requirements for reporting foreign assets, the penalties for non-disclosure, tax treatment of foreign income, and related provisions is given below:

 Section 139(1) and Mandatory Reporting of Foreign Assets

Section 139(1) of the Income Tax Act mandates that every individual, Hindu Undivided Family (HUF), or company must file an income tax return (ITR) if their total income exceeds the basic exemption limit. Along with reporting income from various sources, taxpayers must also declare foreign assets held by them, where applicable.

What Constitutes Foreign Assets?

Foreign assets typically include:

• Bank accounts (savings, current, or fixed deposits) held outside India.
• Financial assets like stocks, shares, bonds, or debentures held in foreign companies.
• Immovable property (real estate) located outside India.
• Other assets like trust, partnership interests, etc., held abroad.

Non-disclosure of these foreign assets will be construed as under-reporting of global assets and income, and assessee would be charged for tax evasion.

 Form for Reporting Foreign Assets

For the disclosure of foreign assets, taxpayers are required to fill in the schedule FA (Foreign Assets) in the ITR form. This form collects information regarding:

• Foreign Depositary Accounts,
• Foreign Custodial Accounts
• Foreign Equity and Debt Interest
• Immovable Property (Land and Building) Situated Outside India
• Cash and Equivalent Outside India
• Loans and Advance Given Outside India
• Unquoted Equity Shares Held Outside India
• Investment in Business Outside India
• Any other Foreign Asset or Financial Interest
• Income from Foreign Assets

Along with each asset, its value, country of residence, and the maximum balance or value during the year is also to be reported.

Non Reporting of Assets held abroad while filing Return of Income Tax can lead to penalty of RS 10Lakhs per year, besides Prosecution and revocation of right to claim the relief under Double Taxation Avoidance Agreement(DTAA).

 Consequences of Not Reporting Foreign Assets

If a taxpayer fails to disclose foreign assets as required under Section 139(1), they may face significant consequences. These include:

• Penalties: The penalty for failing to report foreign assets would be upto Rs 10 lakhs per year of offence.
• Prosecution: In more serious cases, prosecution can be initiated under Section 277 for wilfully submitting inaccurate information or concealing foreign assets.
• Assessment and Reassessment: Non-disclosure of foreign assets can lead to the reopening of assessments and penalties. The tax authorities have the right to reassess the taxpayer’s income under Section 147, which can lead to additional taxes being levied.
• It would also lead to revocation of right to claim relief under double taxation avoidance agreement to claim relief on your income accruing abroad on the assets.

Claiming Foreign Tax Credit on such Income having earned abroad:

To avoid double taxation, India provides a mechanism to claim relief for taxes paid on foreign income. Taxpayers can claim a Foreign Tax Credit (FTC) under Section 91 or under the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the foreign country. The tax credit is available to the extent of the lower of the foreign tax paid or the Indian tax payable on the same income.

For example:

• If a taxpayer pays tax on interest earned from a US bank account, they can claim a credit for the tax paid to the US government, reducing their Indian tax liability on the same income.

To claim the FTC:

1. The taxpayer needs to file the appropriate Form 67 along with the return.
2. They must provide proof of foreign taxes paid (like the foreign tax return or receipts) to substantiate the claim.

Other Allied Requirements

• Residential Status: The reporting requirement applies to resident Indians, including those who are ‘ordinarily resident’.
• Threshold: There is no minimum threshold for reporting foreign assets. Any asset held outside India must be disclosed.
• Due Date: The reporting must be done before the due date of filing the ITR.

 Requirement of Record Keeping for income on Assets held abroad:

Taxpayers need to be diligent in maintaining proper records of their foreign assets and income. This includes documents like:

• Bank statements showing foreign income.
• Property rental agreements for foreign properties.
• Proof of tax paid abroad to claim the Foreign Tax Credit.

 Summarizing:

Reporting of foreign assets by Indian taxpayers under Section 139(1) is a vital compliance requirement. The non-disclosure or incorrect reporting of foreign assets can lead to severe penalties, reassessments, and possible prosecution.

Taxpayers must ensure they provide accurate information about their foreign assets and income while filing their income tax returns. Moreover, they must also report foreign income, pay applicable taxes, and claim rebates under the Double Taxation Avoidance Agreements (DTAA) or through the Foreign Tax Credit mechanism.