How is the income from foreign equity shares taxed and disclosed in the ITR form?
Income-tax Return (ITR) Forms 2 and 3 include a Schedule FA for reporting foreign assets, income, beneficial interest and signing authority. This schedule is widely regarded as one of the most complex sections to fill in the ITR form.
Introduced to combat tax evasion and money laundering, Schedule FA has been a mandatory component of ITR forms since the Financial Year 2011-12 (Assessment Year 2012-13). Ordinarily Resident (ROR) individuals in India are required to disclose their foreign assets and income in this schedule, regardless of whether the income is taxable in India or not. However, non-resident individuals (NRIs) or Not Ordinarily resident individuals (NOR) are exempt from reporting under this schedule.
Individuals possessing foreign assets and income must file their tax returns using either the ITR 2 or ITR 3 forms, as Schedule FA is included in these forms.
Reporting Obligation
Schedule FA requires you to report the following:
- Income from any source outside India, such as dividend, interest, or capital gain.
- Any asset held outside India, including shares, debentures, life insurances, annuity contracts, immovable property such as a house property or other capital asset.
- Financial or beneficial interest in any overseas entity. For instance, if you are a partner in a partnership or firm located overseas or if you are a beneficiary of a private trust based in another country.
- Signing authority in any bank or trading account located outside India.
Disclosure in this schedule is mandatory, irrespective of whether the ownership of the asset is legal or beneficial.
Applicable timeframe for Reporting
When filing the tax return for FY 2023-24 (AY 2024-25), one must report any foreign assets or income for the calendar year 2023 (January 1, 2023, to December 31, 2023). It is important to note that while disclosures in Schedule FA follow the calendar year, taxable income is computed based on the financial year. Therefore, income earned during the financial year 2023-24 (April 1, 2023, to March 31, 2024) will be subject to tax, but the disclosure in Schedule FA will adhere to the calendar year 2023 for the ITR for FY 2023-24.
Consequences of non-reporting
The enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’) strengthened the obligation for Indian residents to disclose foreign assets and income. Under this act, individuals with assets or income from foreign sources must file their ITR accurately and promptly. It should be noted that the disclosure is mandatory irrespective of the value of the foreign assets and foreign income.
Failure to provide correct information in Schedule FA can lead to a penalty of Rs. 10 lakh, and the individual may face imprisonment for six months to seven years, along with additional fines. The Mumbai Tribunal, in the case of Shobha Harish Thawani v. Joint CIT [2023] 154 taxmann.com 564 (Mumbai – Trib.), upheld a penalty of Rs. 10 lakhs for each assessment year for non-disclosure of foreign assets in Schedule FA for the assessment years 2016-17 to 2018-19.
Reporting of foreign assets and income under Schedule FA
To understand how to report income or asset details in Schedule FA, let’s consider an example.
Mr. X, a resident of India, opened a trading account with an Indian broker in February 2023 to invest in shares listed on the NASDAQ (US stock exchange). To facilitate these investments, the Indian broker opened a Trading Account for Mr. X with a USA brokerage company.
To trade on the NASDAQ, Mr. X made an initial deposit of Rs. 10 lakhs into his USA Trading Account. On June 20, 2023, he made an additional deposit of Rs. 20 lakhs, followed by another Rs. 30 lakhs in September 2023.
During this period, Mr. X acquired shares of Apple, Tesla, Netflix, and Starbucks and earned dividend income from these shares. Here’s how these transactions will be reported in Schedule FA of the ITR form.
| Particulars | Apple | Tesla | Netflix | Starbucks |
| Shares acquired on | 07-02-2023 | 25-06-2023 | 15-09-2023 | 22-01-2024 |
| Sum paid for acquisition (in Rs) | 5,00,000 | 10,00,000 | 20,00,000 | 25,00,000 |
| Shares sold on | 21-03-2024 | – | 30-10-2023 | – |
| Sale consideration (in Rs) | 8,00,000 | – | 24,00,000 | – |
| Dividend earned (In Rs) | 10,000 | 20,000 | – | 60,000 |
| Date of receiving dividend | 23-03-2023 | 10-09-2023 | – | 11-03-2024 |
Schedule FA includes ten tables for reporting different foreign assets and incomes. In this case scenario, the relevant tables are A2 and A3:
- Table A2: Details of Foreign Custodial Accounts held (including any beneficial interest) during the calendar year ending on December 31, 2023. Under this table, individuals must report details of deposits transferred from the Indian Bank account to the USA trading account, including deposits made directly or through dividends earned from shares.
- Table A3: Details of Foreign Equity and Debt Interest held (including any beneficial interest) in any entity during the calendar year ending on December 31, 2023. Here, individuals must report the shares they held anytime between January 1, 2023 and December 31, 2023.
Mr. X’s financial transactions should be reported in Table A2 as follows
| Description of Table | Foreign Custodial Account |
| Country Name | United States of America |
| Country Code | 2 |
| Name of Financial Institution | Alpaca Securities LLC |
| Address of Financial Institution | USA |
| Zip Code | Code |
| Account Number | ******* |
| Status | Beneficial Owner |
| Account opening date | 01-Feb-23 |
| Peak balance during the period | Rs. 49.30 Lakh1 |
| Closing balance | Rs. 49.30 Lakh2 |
| Gross amount paid/credited to the account during the period | Rs. 24.30 Lakh3 |
1. The sum received from the transfer of Netflix shares, Rs 24 lakhs, and the dividend of Rs. 30,000 are also considered for computing the peak and closing balance.
2. The closing balance of Rs. 49.30 lakhs consists of Rs. 25 lakhs remaining after investing in Netflix shares, Rs. 24 lakhs from the transfer of Netflix shares, and Rs. 30,000 (Rs. 10,000 and Rs. 20,000) in dividends received on March 23, 2023, and September 10, 2023, respectively.
3. Table A2 requires reporting the amount paid or credited to the account, which can include interest, dividends, proceeds from the sale or redemption of financial assets, etc. In this case, it includes Rs. 24 lakhs from the sale of Netflix shares and Rs. 30,000 in dividends received from Apple and Tesla in 2023. The dividend received from Starbucks will be reported in the next ITR, as it was received in 2024. However, this dividend income will be considered for computing taxable income because it was earned during the relevant financial year. Further, it must be noted that the dividend income of Rs. 10,000 from Apple should not be included while computing the taxable income for the current ITR, as it pertains to the preceding financial year 2022-23 (AY 2023-24).
The financial assets held by Mr. X shall be reported in Table A3as under:
| Particulars | Table A3 | |||
| Description of Table | Foreign Equity and Debt Instrument | |||
| Country Name | United States of America | |||
| Country Code | 2 | |||
| Name of Entity | Apple | Tesla | Netflix | Starbucks1 |
| Address of Entity | USA | USA | USA | – |
| Zip Code | Code | Code | Code | – |
| Nature of Entity | Listed Company | Listed Company | Listed Company | – |
| Date of acquiring of interest | 07-02-2023 | 25-06-2023 | 15-09-2023 | – |
| Initial value of investment | Rs. 5 lakhs | Rs. 10 lakhs | Rs. 20 lakhs | – |
| Peak balance of investment during the period | Note 2 | Note 2 | Note 2 | – |
| Closing value | Rs. 5 lakhs3 | Rs. 10 lakhs | – | – |
| Total gross amount paid/credited with respect to the holding during the period | Rs. 10,0004 | 20,000 | – | – |
| Total gross proceeds from sale or redemption of investment during the period | Note 5 | – | Rs. 24 lakhs | – |
1. The purchase of Starbucks stock in 2024 does not need to be reported this year. However, any dividends received from Starbucks in the relevant financial year are considered for computing taxable income.2. When reporting the peak balance of foreign shares in Schedule FA of tax return, the market value on that date must be used. One can find this peak balance in the Schedule FA Report provided by the US stock investment app.3. Since the shares of Apple were transferred in March 2024, the equity holding of Rs. 5 Lakhs must be reported in Schedule FA as it seeks information for calendar year 2023. 4. Dividends earned from Apple in 2023 should be reported. Notably, it will not be included while computing the taxable income for the previous year since it was earned in the preceding financial year.5. The shares were transferred in the year 2024; therefore, the amount of Rs. 8 lakhs must be reported in the Schedule FA of the next ITR.Taxability of Capital Gains
On foreign shares – LTCG: held for more than 24 months; taxed at 20% with indexation benefit; STCG – slab rate; Dividend – taxed at slab rate Schedule FA in the income tax return (ITR) mandates the disclosure of certain foreign assets, rights, and income. However, it does not affect how much tax you owe on that income. Income generated from such foreign assets will be taxed as per the normal provisions of the Income Tax Act. For the purpose of computing capital gain, capital assets are bifurcated into short-term capital assets and long-term capital assets. This distinction is important as the incidence of tax is higher on short-term capital gains as compared to long-term capital gains. The distinction between a long-term and short-term capital asset is based on the period for which the owner holds it before transfer. Shares of a company listed on a foreign stock exchange are treated as a short-term capital asset if they are held for not more than 24 months immediately preceding the date of transfer. Since the shares of Apple are transferred within fourteen months and the shares of Netflix are transferred within two months, they will be considered short-term capital assets. Therefore, the gain arising from the transfer of such shares will be taxed as short-term capital gains as per the applicable slab rate of the assessee.The capital gain arising from the transfer of shares of Apple is not reported in the current year’s ITR as the reporting relates to calendar year 2023 (i.e., from 1st January 2023 to 31st December 2023). Since the transfer was made in March 2024, it will be considered for the computation of taxable income. However, the capital gains arising from the shares of Netflix will be considered for both reporting under Schedule FA and computation of taxable income.
Taxability of Dividend Income The dividend income is generally taxed at the applicable tax rates. In the instant case scenario, the dividend income received during the last quarter of FY 2023-24 (between January 1, 2024, and March 31, 2024) will be taxable for individuals, even if it is not reported in Schedule FA.Therefore, the dividend income of Rs 30,000 will be disclosed in Schedule FA, and the dividend income of Rs 80,000 will be subject to tax in the assessment year 2024-25.Conversion into INR
When filling out Schedule FA, you must convert all your foreign investments and income into rupees (INR) before reporting them. This conversion must be done according to the following guidelines:
This article has been co-authored with CA Manila Mehta, Assistant Manager, Taxmann
This is for informational purposes only. Consult your tax expert for individualized advice.
If stock units of a foreign listed company (employer) are received / vested in Jan 2024, how will that be reported given only calendar year disclosure is asked in FA schedule but as on 31 March 2024 there is ownership in foreign asset?