Understanding Income Tax Filing for Indian Residents with Foreign Assets

The deadline for filing an income tax return form is nearing, and an extension of the last date for filing an ITR seems unlikely. For the assessment year 2024-25, the ITR filing deadline remains July 31, unless the government extends it. More than 5 crore ITRs for AY 2024-25 have already been received on the Income Tax Department’s e-filing platform as of July 26, 2024, 8% more than the ITRs filed in the previous year.

Indians are increasingly investing in foreign assets like shares and properties for diversification and potentially higher returns due to foreign exchange fluctuation. Indian residents’ global income is subject to taxation. If a person stays in India for 182 days or longer within a financial year (FY), they are deemed a resident of India for that financial year.

Obligations for Indian Residents with Foreign Assets

1. Individuals holding assets outside India, as beneficial owners or having financial interests, must file an income tax return under Section 139 of the Income Tax Act, 1961. It’s important to declare overseas investments and report them accurately while filing an ITR in order to receive applicable tax credits. This involves filing Form 67 and disclosing foreign assets in India precisely.
2. Capital gain tax implications vary based on the holding period of foreign assets. For instance, selling shares after holding them for more than 24 months results in a long-term capital gain (LTCG) taxed at 20%, in addition to surcharges and cess. Short-term capital gains are taxable at the slab rates applicable to individuals.
3. Salaried employees with foreign assets cannot use Form ITR-1 (SAHAJ) or ITR-4 (SUGAM) for filing their ITRs. They are required to file in Form ITR-2 or ITR-3 based on the nature of their income or foreign assets.
4. Schedule CG is necessary for taxpayers who transfer any capital asset they own, requiring the recording of both long-term and short-term capital gains from the sale or transfer of various types of capital assets.

Taxation of Foreign Asset Investments

5. Indian tax residents’ foreign asset investments are taxable in India unless specifically exempted under the Indian Income-tax Act. The Act allows for credit of foreign tax paid against Indian tax liability to reduce double taxation of the same income.
6. Indian residents investing abroad must report foreign assets in Schedule FA of their annual income tax return and furnish Form No. 67 for foreign tax credit claim. Schedule FA was introduced to prevent tax evasion through offshore routes, requiring taxpayers to disclose offshore assets and income upfront.
7. The updated ITR Forms require details of foreign assets held between January 1st and December 31st in returns for the relevant assessment year. Details of foreign assets for AY 2024-25 need to be furnished calendar year-wise, unlike India’s financial year.

Tax Considerations for Income from Foreign Sources

8. Dividends from foreign shares are taxed under “income from other sources,” and are included in the taxpayer’s total income at the individual taxpayer’s applicable rates. Indian taxpayer investors can claim a credit for tax withheld or paid in a foreign country under the applicable tax treaty, subject to certain restrictions. Rental income derived from abroad immovable assets is taxed in India similar to income from domestic house property.
9. Non-payment of tax on global asset income can lead to penalties of up to 200% of the tax payable, as per tax laws. The department may initiate prosecution under the Income Tax Act for tax evasion, with penalties for non-compliance with information and documents.

In conclusion, ~, Indian residents with foreign assets have specific obligations and tax implications that must be carefully considered and complied with while filing income tax returns. It is advisable to seek professional guidance to ensure accurate reporting and compliance with the relevant tax regulations.