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ITR Filing: Navigating Foreign Assets in a Tricky Terrain

In the past, and even at present, a significant number of individuals remain unaware of the consequences of failing to disclose vested but unexercised overseas stock options, ongoing retirement schemes such as the US 401(k), and beneficial interests held in offshore companies.

Shivangi Rai
Taxpayers are required to report all types of foreign assets, including 401(k) accounts. (Image Courtesy- Pixabay)
Taxpayers are required to report all types of foreign assets, including 401(k) accounts. (Image Courtesy- Pixabay)

The last date to file ITR is July 31 and many professionals, businessmen, and diaspora members returning to India are concerned about disclosing their foreign assets to avoid issues with the tax authorities.

Some taxpayers were previously unaware of the consequences of not disclosing certain overseas assets, such as vested but unexercised stock options, ongoing retirement schemes like the US 401(k), and beneficial interests in offshore companies.

Tax practitioners and advisors are cautioning these well-heeled taxpayers as the Income Tax (I-T) department has been issuing notices after discovering missing information in their IT returns (ITRs) over the past year.

One particular challenge is reporting 401(k) plans in the ITR form's foreign assets (FA) schedule. The form lacks a specific column for these funds, leading some to report them as "any other capital asset." However, this approach may lead to incomplete information and potential penalties.

Additionally, even if individuals decide not to report stock options that haven't been exercised, the I-T department may still find out about them from overseas authorities through beneficiary disclosures by financial entities holding these accounts.

The Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard Rules state that 401(k) accounts are non-reportable for foreign financial institutions. Still, in the ITR's FA schedule, taxpayers are required to report all types of foreign assets, including 401(k) accounts. As there is no specific category for 401(k) accounts, some suggest reporting them as "other assets" held outside India to ensure compliance.

Taxpayers should also be aware that they must apply separately to the I-T department to ensure that amounts accruing in their 401(k) accounts are taxed only at the time of withdrawal.

Regarding beneficial interests in overseas assets, the FA schedule demands individuals to disclose such interests. However, complexity arises in cases of indirect investments through multiple companies. Some individuals may be unsure about how many layers of investments they should report, leading to a dilemma between not disclosing enough information and potentially triggering a notice or reporting everything and inviting scrutiny due to discrepancies in remittances.

Another concern is the mismatch between the information provided in the ITR (based on a financial year) and the data received by the I-T office from foreign governments (based on a calendar year). This could lead to queries from the tax department when income is offered in one year's return, while assets and incomes are reported in the following year's return due to the difference in reporting periods.

Given the complexities and potential consequences of not reporting foreign assets correctly, tax professionals advise taxpayers to be cautious and conservative. When in doubt, it is better to report the assets to avoid any adverse implications.

In conclusion, taxpayers with foreign assets should carefully assess the reporting requirements, seek advice from tax experts, and ensure compliance to avoid penalties and unnecessary scrutiny from the tax authorities.

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