It is mandatory to disclose your foreign stocks, dividends received in the income tax returns
Had you bought Apple stocks instead of an iPhone, you would have become a millionaire by now”. That’s how the internet sells financial advice and it would have most likely enticed many investors to buy shares of Apple or other foreign firms. Did they become millionaires? We are not sure about that. What is for sure is that the taxman considers all of them to be owners of foreign assets.
Taxpayers have to mandatorily declare all their foreign assets in the income tax return (ITR) and that includes foreign stocks as well. So, even an individual who has a taxable income below the basic exemption limit of ₹2.5 lakh but holds, say, a Tesla or Apple stock in the US will still need to file the ITR just to disclose this stock holding.
Foreign stocks have to be declared in the ITR every year as long as they are held in your name and not just report the capital gains or losses when you sell them. “Disclosing ownership of foreign assets and reporting income from those assets are two different requirements in the ITR. Both need to be done,” said Suruchi Mahajan, a Bangalore-based chartered accountant and owner, Suruchi & Co.
The failure to declare international stocks, or any foreign asset such as real estate, bank accounts, bank deposits, insurance policies and other financial assets can invite scrutiny by the tax department under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
“The Foreign Asset Investigation Unit (FAIU), a newly formed wing set up under the Income Tax Act, will investigate information received from foreign jurisdictions under the Tax Information Exchange Agreements (TIEA),” said Deepak Kakkar, a Delhi-based chartered accountant and senior manager, Jaikumar Tejwani & Co. LLP.
You can even be slapped with a ₹10 lakh penalty for each of the years that you do not disclose the assets. Foreign assets are declared in schedule FA (Foreign Assets) in ITR-2 or ITR-3.
Taxation
When a foreign stock is sold after two years, the gains made from it are treated as LTCG, or long-term capital gains, and taxed at 20% (surcharge extra), with indexation benefit, in India. Short-term capital gains (STCG) are taxed at your income tax slab rates. There is no tax liability on capital gains overseas.
Dividend income earned on foreign shares is taxed at tax slab rates in India. In the US, when the dividend is paid, a flat 25% is withheld as tax. India has a Double Taxation Avoidance Agreement (DTAA) with the US through which you can claim the tax paid in the US to offset your tax liability in India at the time of filing ITR. “To claim credit of foreign taxes paid, one has to fill form 67 before filing the ITR. It should be done in the year of accrual. Accordingly, form 67 is required to be filed each year when the taxpayer wants to claim foreign tax credit,” said Vishwas Panjiar, Partner, Nangia Andersen LLP.
Tax reporting
Disclosure of foreign stocks starts right from the year in which they are bought. These are to be declared in table A3 under Schedule FA and the values are to be declared in rupees (the Indian currency) after conversion and not in the foreign local currency. The standard practice is to convert as per TT (telegraphic transfer) buying rate of the State Bank of India (SBI).
When you sell stocks, these should be reported under “sale of equity share” to calculate the capital gains and net tax payable on them. Do note that conversion will happen on the net gains. “First calculate the gains in the local currency and then convert it into rupees. It would be inaccurate to first convert cost of acquisition and cost of sale in rupees and then calculate the gains/losses,” said Kakkar.
Reporting of dividends in the ITR is slightly complex. Dividends should be reported as income from other sources in the year in which these are paid and applicable tax should be paid on it. Panjiar pointed out that dividend is taxable in the year of accrual and does not necessarily depend on repatriation of the same in India.
In cases where tax is withheld in the country where the dividend is paid, the tax paid should be claimed as a deduction in your ITR in India to avoid paying double tax.
For instance, let’s assume you hold stocks of a US company and it has paid a dividend of $5,000, out of which $1,250 (25%) is deducted as tax in the US. Consider that you are in the 30% tax bracket and your total taxable income is ₹20 lakh, which includes the dividend income ₹4.1 lakh ($5,000 converted in rupees as per the prevailing rate). Your total tax liability will be ₹4.12 lakh. However, you can claim the amount ( ₹1.02 lakh) deducted as tax in the US while filing the ITR and your net taxable income will come down to ₹3.1 lakh. However, this can only be done if you submit form 67 before filing the ITR. Also, the extent of deduction or credit will not exceed your tax liability in India, said Kakkar.
Suppose, in the above example, if you are in the 5% tax slab and your total income is, say, ₹5 lakh, your tax liability would be ₹12,500. Setting off the tax paid in the US will make your tax due in India zero but you will not be reimbursed the remaining ₹89,000 (arrived by substracting the ₹12,500 tax liability in India from ₹1.02 lakh paid in the US).
Dividend is to be declared at two places in the ITR, explained Mahajan. “Dividend is reported under ‘income from other sources’ and the tax liability is determined. Separately, when you declare equity shares in schedule FA, there’s a section that asks whether you have earned income on this asset. You have to disclose the dividend payout here as well.”
The same applies to shares as well. In the year a stock is sold, the sale proceeds should be declared in the FA schedule under ‘total gross proceeds from sale or redemption of investment during the period’. But, the full details also need to be reported under the capital gains section separately.
It should be noted that even when dividend is reinvested, it still needs to be declared as income. “Some people give their broker a mandate to reinvest the dividends. They assume that since these are reinvested or are not repatriated, they are not required to be reported. This is an error,” said Kakkar. Essentially, you will need to declare the dividend payout and also add it to the total shares value and declare those as equity shares in schedule FA.
All the information required to fill in the ITR with respect to cost of acquisition, fair market value, peak value, sale price of stocks is available in the statement provided by your broker. “Information on dividend and the tax withheld is given in form 1042s that can be downloaded from the foreign brokerage account,” said Mahajan.
Do also note that this is the first year that cryptocurrencies have to be reported in ITR. Will cryptocurrencies that are bought, sold or held on a foreign exchange qualify as foreign assets? While the IT law doesn’t define this, Karan Batra, founder, charteredclub.com says it is better to declare these assets in schedule FA along with reporting in Schedule VDA.
Taxpayers should also note that, in the case of foreign assets, ITR forms require disclosures of assets held at any time during the previous calendar year. For instance, while filing ITR for the assessment year 2023-24, you will need to declare foreign assets held from 1 January 2022 to 31 December 2022. This is because most countries follow the calendar year, unlike India where the financial year starts from 1 April. So, even if you bought foreign stocks in February 2022, it must be declared in schedule FA even though it falls in FY22 as per India’s fiscal calendar. Stocks or any other assets bought between January and March this year are not required to be declared during the current ITR filing exercise.
Source: https://www.livemint.com/money/personal-finance/how-to-report-foreign-stocks-in-your-income-tax-returns-11687886370675.html
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