Guidance Note on Foreign Asset Disclosure in ITR (AY 2025–26)

 Part 2: Advanced Legal Interpretation, Grey Areas & Risk Management

Statutory Foundation

• Section 139(1), Explanation (d), Income-tax Act, 1961: Mandatory disclosure of foreign assets (FA) by residents, regardless of income threshold.

• Rule 12(1)(g), Income-tax Rules, 1962: Specifies reporting of foreign assets in ITR forms.

• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA): Tax at 30% on value of undisclosed foreign assets, with penalty of 3× tax and rigorous imprisonment.

Key Principle: Foreign asset disclosure flows directly from residential status → only Resident and Ordinarily Resident (ROR) are liable; NR and RNOR are exempt.

Comprehensive Coverage of Foreign Asset Categories

Each schedule of disclosure requires granular reporting:

1. Foreign Bank Accounts

   • Account number, peak balance during the year, closing balance, interest earned.

   • Grey area: Dormant or nil-balance accounts – still reportable.

2. Foreign Financial Interests

   • Shares, bonds, ESOPs/RSUs, crypto wallets, pension funds.

   • Planning: Report vesting year (not just grant year) for ESOPs to avoid mismatch.

3. Foreign Immovable Property

   • Address, ownership %, acquisition date, cost.

   • Grey area: Inherited property abroad – must disclose, even if no income.

4. Foreign Custodial/Trust Interests

   • Beneficiary of offshore trust, discretionary or otherwise.

   • Law: CBDT Circular No. 13/2015 mandates beneficiary disclosure even if no income.

5. Foreign Insurance / Annuity Products

   • ULIPs, foreign pension schemes.

   • Grey area: Even “retirement accounts” (like 401(k), Roth IRA) fall under FA disclosure.

6. Foreign Business Ownership / Partnership Interest

   • LLPs, LLCs, partnerships.

   • Report TIN, ownership %, jurisdiction.

7. Other Capital / Debt Instruments

   • Crypto exchanges abroad, peer-to-peer lending, online wallets.

   • Emerging issue: CBDT FAQs (2022) clarified virtual digital assets with foreign location must be disclosed.

Grey Areas and Interpretational Issues

Issue	Analytical Position	Risk Management
Joint Bank Accounts	Must disclose even if secondary holder	Report proportionate holding
Minor Children’s Accounts	Clubbed with parent u/s 64	Parent must disclose in FA
Foreign Credit Cards	Not “asset”, unless linked with prefunded wallet	Safer to disclose prefunded balances
ESOPs of Foreign Employer	Asset once vested	Maintain employer certificate for vesting year
Foreign Gift or Inheritance	Still an “asset” in FA	Disclose, with acquisition mode as gift/inheritance
Dormant or Closed Accounts	If held at any time during year → disclose	Mention closing date
Foreign Crypto	Location test = where held in exchange/wallet	Must disclose even if untraced

Interaction with Black Money Act (BMA)

• Trigger: Non-disclosure of foreign asset in FA Schedule.

• Section 3, BMA: Tax at 30% of fair market value (FMV), not just income portion.

• Section 41, BMA: Penalty equal to 3× tax.

• Section 49, BMA: Imprisonment (3–10 years).

• Case Reference: ACIT v. Balbir Chand Maini (Delhi ITAT, 2017) – non-reporting leads to serious consequences, even if income otherwise exempt.

Practical Compliance & Disclosure Strategy

1. Align with Financial Statements

   • Match balances with bank statements, Form 67 (if FTC claimed), and brokerage records.

2. Use Consistent Currency Conversion

   • Rule 115: Convert using SBI TT buying rate on specified dates.

3. Cross-check with Form 26AS & AIS

   • Foreign remittances, foreign dividends may be tracked by CBDT systems.

4. Document Support

   • Keep account opening docs, tax slips, vesting letters for 7 years minimum.

5. Audit Trail

   • NRIs returning to India → maintain clear audit trail of assets acquired before becoming ROR.

Tax Planning Considerations

• Residential Planning: RNOR window (2–3 years) allows legal non-disclosure of foreign assets.

• Gift Structuring: Foreign assets gifted to NR children → reporting liability shifts.

• Foreign Retirement Accounts: Use DTAA to claim relief on income from 401(k)/superannuation funds.

• Foreign Tax Credit (FTC): Form 67 must be filed before return to claim credit.

• Exempt Income: Even exempt foreign income (like NRE interest abroad) requires asset disclosure.

Penalties and Prosecution

• Income-tax Act: Penalty u/s 271(1)(c), 270A for misreporting.

• BMA: Severe penal regime (3× tax + imprisonment).

• FEMA: Non-reporting of foreign bank accounts may also breach FEMA 1999.

FAQs for Professionals

Q1. If a resident sells foreign shares and reinvests immediately, should the asset still be reported?
 Yes, if held anytime during the year.

Q2. Is reporting required if no income is earned from foreign asset?
 Yes, disclosure is asset-based, not income-based.

Q3. Does double reporting arise if income already shown under “Schedule OS”?
 Income must be shown separately, but asset must still be disclosed in FA.

Q4. If a taxpayer turns ROR midway in FY, do earlier assets abroad need disclosure?
 Yes, once ROR, global assets must be reported even if acquired while non-resident.

Professional Takeaway

-  Foreign Asset (FA) Schedule is not just a compliance item; it is a legal shield against BMA penalties.
- The safest principle: “If in doubt, disclose.” Non-disclosure risk far outweighs over-reporting.

- Tax professionals should integrate FA disclosure into residential status planning, DTAA relief, and FTC strategies.