Income Tax Return Filing: Invested in foreign assets and stocks? Follow these steps to declare holding in ITR

Investment in foreign stocks is subject to tax for residents of India and must be reported while filing the Income Tax Return (ITR) for AY 2023-24. One can earn dividend income or capital gains, or one could also incur capital losses while investing in stocks in other countries.

The income tax return filing due date is approaching soon and you should be ready with all your investment details pertaining to assets and stocks in foreign countries.

The deadline for filing ITR, for individual taxpayers who don’t need an audit, is July 31, 2023. It is advisable to file the ITR before the last date to avoid any late filing charges.

There are specific rules to deal with the investments in foreign assets under the Income Tax Act 1961.

ITR Form to disclose foreign investments

You should choose the right ITR form to report these details in order to avoid any Income Tax notice. If a taxpayer has foreign investments, he or she will have to disclose the same in the Schedule of Foreign Assets (FA) using the Form ITR-2 or ITR-3.

Who should declare foreign assets?

Taxpayers need to mandatorily declare all their foreign assets in the ITR, and that also includes investments in US stocks or assets in any other countries. If an individual has taxable income that is below the basic exemption limit of Rs 3 lakh but has stocks in foreign countries, he or she will still need to file the ITR to disclose the stock holdings.

Foreign stocks have to be declared in the ITR every year until the taxpayer has their name on it. In case of failure to declare the foreign stocks or any foreign asset like real estate, bank deposits, accounts, or insurance policies, the taxpayer will be liable to inspection by the tax department under the Black Money and Imposition of Tax Act, 2015. Besides the scrutiny, they can be penalised with up to Rs 10 lakh fine.

Taxation for foreign investments and stocks

In India, when a foreign stock is sold after a term of two years, the profit earned from it is treated as long-term capital gains (LTCG) and is taxed at 20 percent (surcharge extra), with indexation benefit. While short-term capital gains (STCG) are taxed at the income slab rates. There is no tax liability on capital gains for the foreign-born.

Also, the dividend income earned on foreign investments is taxed at the pre-defined tax slab rates in India. In the US, when the dividend is paid, the government withholds a flat 25 percent as tax. India has a Double Taxation Avoidance Agreement (DTAA) with the US, due to which one can claim the tax paid in the US to avoid the tax liability in India while filing the ITR.

Tax reporting in ITR

Disclosing the foreign investments and stocks initiated in the year they were bought They should be disclosed in table A3 under schedule FA, and the values of the assets should be declared in Indian currency, i.e., rupees, after the conversion and should not be shown in the foreign currency.

However, reporting dividends in ITR is somehow complex. They should be declared as income from other sources in the year in which they are paid, and applicable tax should be paid on the same. Dividends are taxable in the year of accrual and do not necessarily depend on any displacement of the same in India. In situations where the tax is withheld in the country and the dividend is paid, the tax should be claimed as a deduction in the ITR in India to avoid any double taxes.

For the taxpayers, in the case of foreign assets, the ITR form requires the disclosure of assets held at any time during the calendar year. For example, when filing ITR for assessment year 2023–24, one needs to declare all the foreign assets held from January 1, 2022, to December 31, 2022. This is done as most countries follow the calendar year for assessment, unlike India, where the financial year is April 1 to March 31.

Hence, if one has bought foreign stocks in March 2022, it will be declared in Schedule FA even if it falls in FY22 as per India’s fiscal calendar. And investment or stocks or any other assets acquired in between January and March this year are not required to be declared during the current ITR filing.