How NRI should disclose their foreign income/ assets in Indian tax return

The regulatory landscape in India & across the world is fast changing. Countries are increasing becoming aware of the risks of tax evasion & are creating new mechanisms like the CRS and India has also recently enacted Black Money Act, which contains stringent penalties if residents fail to disclose their foreign income & assets to the Indian tax authorities.

In my work with the returning NRI clients on filing their Indian tax returns and advisory on Indian tax law, I find that those who go out on long term assignments mostly end up purchasing financial or real assets in that country, and most common of them is 401K.

Also read: What to do with my 401K on Return to India?

Here, the most common misconception that I come across is the view that if an income has been taxed abroad, it does not need to be disclosed in the Indian tax return. This is a completely wrong notion and can pose you in deep trouble if your case is picked by the income tax department in the scrutiny assessment. This has especially become relevant since Black Money Act has come into effect from July 1, 2015.

Also read: Black Money Act: An Analysis

The basic point is this: If your tax residential status in India is “Resident and Ordinarily Resident (ROR) (which you become within a couple of years on return to India), you become liable under the Income Tax Act to disclose and pay tax on your WORLDWIDE income & assets.

Also read: How NRI/PIOs can decode the Indian tax residency rules & save tax

Of course, if you’ve paid taxes abroad on those incomes, you’ll be able to claim DTAA relief if both countries have a DTAA in place, but that’s a secondary point. Main consideration is on proper disclosures in your tax return in India, which if not made can land you in deep trouble.

An important point in streamlining of finances involves a decision whether to continue or liquidate those assets (especially where client has returned permanently to India & has no plans to go back). But even there, some foreign assets (like 401K) cannot be liquidated easily without incurring huge penalties, and once the residential status changes to ROR, this is a very important piece that we have to take care when filing client’s tax returns.

Also Read: Returning NRI Financial Checklist

First let us discuss the provisions around this issue in brief so that you get an idea of your legal obligations:

What constitutes foreign income or asset under Indian tax law?

Foreign income or asset has not been expressly defined under the Income Tax Act & we have to take the general interpretation of the wordings.

Some of the examples can be as follows:

Dividend/ capital gains from your shares of foreign companies
Income from a 401K investment in USA
Income of freelancers from foreign clients
Your stint/project/full time employment for an employer based out of India & receipt of income
If you are a blogger and run Google Adsense on your website & earn an income from that
If you own a house property abroad, then rentals/ capital gains if the same is sold
Income from trust set up outside India

When we speak of the assets, following are some examples:

Shares/bonds/ ETF/ mutual funds/ other investments(e.g. 401k plans in USA)
ESOP/ ESPP/ RSU given by your employer outside India
House property purchased abroad
As a settler or beneficiary of a trust set up outside India
Bank accounts abroad
Beneficial interest in an investment or a trust set up outside India
Signing authority for any account/asset outside India
Pensions outside India (example: QROPS pension in UK)

Income tax rules on foreign income/ assets

A new proviso to Section 139(1) had been introduced by Finance Act, 2015 w.e.f. 1/04/2015 and modified by Finance Act, 2016 and stands as follows:

Provided also that a person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6, who is not required to furnish a return under this sub-section and who at any time during the previous year,—

(a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India; or

(b) is a beneficiary of any asset (including any financial interest in any entity) located outside India,

shall furnish, on or before the due date, a return in respect of his income or loss for the previous year in such form and verified in such manner and setting forth such other particulars as may be prescribed:

Provided also that nothing contained in the fourth proviso shall apply to an individual, being a beneficiary of any asset (including any financial interest in any entity) located outside India where, income, if any, arising from such asset is includible in the income of the person referred to in clause (a) of that proviso in accordance with the provisions of this Act:]

Basis an understanding of above provision & the instructions on return filing, I’ve tried to compile a residential status wise disclosure requirement as follows:

Residential status	Foreign income/asset disclosure required in tax return?
Non Resident (NR)	No
Resident & Not Ordinary Resident (RNOR)	No
Resident & Ordinary Resident (RNOR)	Yes, applicable: Return has to be filed even if income is below exemption limit. And when filing the return, necessary disclosures have to be made.

Hence, as I had covered in my earlier post on whether an NRI needs to file a return in India, if a person retains an NR/RNOR status and escapes requirement of filing tax return, the point on disclosure does not arise, However, once a person acquires ROR status, then even if income is below taxable limit (presently INR 250000) he will need to file a return & disclose foreign assets/ income.

Persons exempt from the above disclosure requirement

Following persons are exempt:

Non resident (NR) /Resident but Not Ordinarily Resident (RNOR) in previous year as per Section 6 of Income Tax Act
Beneficiary of any asset (including any financial interest in any entity) located outside India where, income is included in return filed by beneficial owner
Person who fulfil below conditions:
He is NOT a citizen of India
He is in India on a business, employment or student visa
Asset was acquired when he was a non-resident
No income is derived from that asset in the previous year

Point no. 3 has been included apparently to exempt overseas expats and foreign students. However, in case the asset concerned has yielded even a single rupee of income in the previous year, the concerned expat/student has to file the tax return in India & disclose both the income as well as the asset in the concerned schedules in the tax return.

It is difficult for me to understand which assets will qualify here – practically, all investments will earn some return, be it bank interest or dividend – government should have prescribed a threshold criteria to help expats/students get the intended benefit of exemption.

Also read all my posts on expats here: Expats

Which income tax return to select for disclosing foreign income/asset?

For the AY 2016-17, if you have any foreign income/asset, you cannot select ITR-1 or ITR-2A because it does not allow you to enter the details pertaining to foreign income & assets.

Hence, you will need to select either ITR 2 or ITR 4. Let us understand which income tax you’ll need to select. That will actually depend on which type of income you have.

Who should use ITR 2

You can use this form if you are an individual or an HUF whose total income for the assessment year 2015-16 does not include income from business/profession within or outside India.

Who should use ITR 4

This form can be used if you have an income from business or profession.

You can download the excel utility of these forms by visiting the Income Tax e-filing website www.incometaxefiling.gov.in or you can consult your CA to file your tax return.

Schedules for entering foreign income/asset details & points to note

Now, once you’ve downloaded the ITR utility, open the excel workbook (don’t forget to enable the macros). In the “Home” tab, you’ll see the following relevant schedules:

Schedule Name	Details
Schedule FSI	Details of Income accruing or arising outside India
Schedule TR, Schedule FA	Schedule TR: Details of tax relief claimed under Section 90/90A/91’ Schedule FA: Details of foreign assets

As an example, I have given below the information required:

Foreign Bank Accounts:

Country Name and Code
Name of the Bank
Address of the Bank
Account holder name
Status (Owner/Beneficial Owner/Beneficiary)
Account Number
Account opening date
Peak Balance during the Year (in rupees)
Interest accrued in the account

Immovable property/ Other asset:

Country Code
Address of the Property
Ownership
Date of acquisition
Total Investment (at cost) (in rupees)
Income derived from the property
Nature of Income

So, before filling the schedules, you have to have the bank statements, 401K statements

How to fill 401K income/assets in tax return?

401K taxation is a grey area under ITA. I have written a detailed post on this request you to first please check it: What to do with my 401K on Return to India?

Coming to 401K, I assume you’re a ROR, you’ve not made any withdrawal from 401K during the financial year and you have obtained account statement for period April 1- March 31 from your 401K provider. My approach is as follows:

In Schedule FSI, do not disclose any income – this is with the understanding that income from 401K is in nature of capital gain and will arise ONLY when you withdraw your units.

In Schedule FA, go to table D, and fill 401K information as follows:

Nature of Asset – 401K
Ownership – Direct
Date of acquisition – Date when you made your first contribution towards 401K
Total Investment – Total amount invested by you till date (Not the total balance in the account)
Income derived – Amount of accretion in fund value for period April 1- March 31
Nature of Income – Capital Gain
Income taxable and offered in the return? – 0 (zero)
Schedule to which offered? – Not Applicable
Item number of the schedule? Not Applicable

In Schedule EI, disclose amount of accretion in fund value for period April 1- March 31 in point 5: Others

Note: This interpretation of 401K taxability is not a conclusive interpretation and Income Tax Department (ITD) can take a different interpretation– consult your CA for more clarity before taking any decision.

What is the penalty for non-furnishing of tax return in case of foreign assets?

Under the ITA, non-filing of tax return invites a meagre penalty of INR 10,000 under Section 271 of the Act. However, the Black Money Act which came into effect in 2015 specifically to deal with foreign asset non-disclosures imposes penalty as well as prosecution.

Penalty: Flat penalty of INR 10 lacs for every assessment year where:

Return was due to be furnished but not furnished
Return was furnished but did not contain proper details of foreign assets

Prosecution: Rigorous imprisonment for anywhere between 6 months to 7 years