If you fail to record any Foreign stocks or other assets you own on your income tax return (ITR), it might cost you a lot of money. For breaking the 2015 Black Money Act, a person could be held accountable.

If a person directly engaged in foreign assets (such as foreign shares, foreign business mutual funds, etc.) or owned employee stock options (ESOPs) of foreign corporations, they are legally required to complete Schedule FA of the ITR.

“A resident person is required to reveal information about his foreign assets located outside of India in the ITR pursuant to Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. If he doesn’t, the Assessing Officer may impose a direct fine of Rs. 10 lakh on that person. It is crucial to realize that Section 43 requires the disclosure of Foreign Assets in ‘Schedule FA’ in the applicable ITR form. The disclosure requirement will not be met by just declaring foreign asset income on the ITR form without declaring the assets on Schedule FA.

A person must file Schedules VDA and FA if they have obtained virtual digital assets (VDAs) from overseas exchanges and are keeping them in foreign wallets.

Schedule FA is not need to be filed, however, if an individual invests in an Indian-origin plan with a mandate for international investments, such as Indian mutual funds investing in the US, Taiwan, etc. Schedule FA must be submitted if an Indian person purchases foreign assets, such as the Blackrock i-Shares exchange traded fund (ETF), on the New York Stock Exchange (NYSE).

Discretionary powers of the income tax department

The income tax assessing officer has the authority to prosecute the person at fault for failing to disclose foreign assets either under the Income Tax Act or the Black Money Act, depending on which law the income tax department deems appropriate. The punishment will only be imposed once the Act is selected under which the prosecution will proceed.

The penalty might not be assessed if the person can show the tax authority that the error was inadvertent and not done so in an effort to escape paying taxes. However, strict imprisonment will also be imposed in addition to a fine if the tax department determines after further investigation that the person is also at fault for tax evasion, the transfer of black money outside of India, and other offenses in addition to failing to disclose foreign assets in schedule FA. This does not always occur when non-disclosure obligations are broken.

The Black Money Act’s punishment under Section 43 does not, however, apply when the foreign asset in question is one or more bank accounts with a combined balance of up to Rs 5 lakh. This means that even if a bank account was not disclosed in schedule FA, no penalty under section 43 of the Black Money Act will be levied if an individual has a foreign bank account or accounts and the total amount of all such accounts does not exceed Rs 5 lakh.

It’s crucial to keep in mind that this exemption only applies to accounts held in foreign banks. If the foreign asset consists of other foreign assets or shares held in a foreign corporation, no relief is provided.

Additionally, the fine will be applied to each year that was in default—that is, the year in which foreign assets were not disclosed in the ITR. If there are multiple years, the assessing officer may impose a penalty for each year that was in default.

In comparison to the Black Money Act, the Income-tax Act is more tolerant about the failure to disclose foreign assets. The failure to disclose foreign assets in an individual’s ITR will result in the designation of “Defective ITR”.

An individual must submit an updated ITR once their initial ITR is declared defective. The updated ITR will be given to the income tax division for processing. If any more tax is owed, penal interest may be applicable.

The fact that India has a robust Exchange of Information (EOI) network with various other nations, through which all financial and investment-related data is exchanged with Indian agencies, should be kept in mind by taxpayers. The Financial Intelligence Analysis Unit (FIAU) in India is currently responsible for collecting, processing, and disseminating financial data. When there are anomalies or inconsistencies between the information obtained through the Exchange of Information Network and the data entered into the FA Schedule of the ITR, legal action under the Black Money Act, the Prevention of Money Laundering Act, etc. is taken.

What information needs to be mentioned in Schedule FA?

The schedule FA in the ITR requires a taxpayer to disclose all foreign assets (including financial interest in any entity) held by him as a beneficial owner or otherwise including the beneficial interest in a Trust, signatory in a bank account (even on behalf of the Company etc.) at any time during such previous year.

An individual should make the following disclosures in Schedule FA:

(a) Any asset held outside India (Shares, Debentures, Life Insurances, Annuity Contract, Immovable Property, or any other capital asset),

(b) Financial or beneficial interest in any overseas entity (partner in an overseas LLP or firm, a beneficiary of a foreign private trust, etc),

(c) Signing authority in any account located outside India (Trading, Depository, Bank, or Custodian Account), and

(d) Income from any source outside India (Dividend, interest, or capital gain).

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“Any non-disclosure of the above information in the ITR may result in levy of penalty of Rs 10 lakh under Section 43,”

Sometimes individuals are of the view that when they have disclosed all the income including overseas income, then what is the need of disclosure in the Schedule FA. “We have also observed that these disclosures are missed by the NRI turning into Residents after coming back to India as they felt that these assets/incomes etc. were acquired by them when they were non-residents of India (NRI). Hence, it should not be the purview of the Indian Income tax Act.

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