By CA Surekha Ahuja
A practical guide to taxability, Foreign Tax Credit and correct disclosure
Indian investors are increasingly holding foreign shares, ETFs and overseas brokerage accounts. When these investments generate income — dividends, buy-back proceeds, merger consideration or liquidation distributions — the returns carry multi-schedule compliance obligations that go well beyond the usual salary-and-interest return.
Most disputes in this space arise not from wrong tax computation, but from reporting income under the wrong schedule, claiming Foreign Tax Credit (FTC) incorrectly, or missing a disclosure requirement altogether. This guide walks through each scenario for AY 2026-27.
Which ITR Form to Use?
Before getting into schedules, confirm the right form:
- ITR-2 — individuals and HUFs without business or professional income, but with foreign income, capital gains, or foreign assets. Due date: 31 July 2026.
- ITR-3 — individuals and HUFs who also have business or professional income (including F&O trading). Due date: 31 August 2026 (extended by the Finance Act, 2026 — do not rely on the old 31 July date).
- ITR-1 cannot be used if you have foreign income, foreign assets, or buy-back dividend income under Section 2(22)(f).
Quick Reference Matrix
| Receipt | Taxability | Rate | Key Schedules |
|---|---|---|---|
| Foreign Dividend (ROR) | Taxable | Slab rate | OS + FSI + TR + Form 67 + FA (where applicable) |
| Dividend from Indian Company | Taxable | Slab rate | OS |
| NRI — Dividend from Indian Company | Taxable in India | Section 195 / DTAA rate | ITR + DTAA claim |
| Buy-back Receipt (payment received 01.10.2024 – 31.03.2026) | Deemed Dividend u/s 2(22)(f) | Slab rate | OS |
| Capital Loss on same Buy-back | Capital Loss | Capital-gains provisions | CG |
| Qualifying Amalgamation / Demerger | Generally exempt u/s 47 | — | Disclosure as applicable |
| Cash Merger Consideration | Capital Gains | Applicable CG rates | CG |
| Liquidation Distribution | Section 46 implications | Case-specific | CG / OS |
| Return of Capital | Cost adjustment / CG | Case-specific | CG |
Foreign Dividend Income
Taxability by Residential Status
| Status | Taxable in India? |
|---|---|
| Resident & Ordinarily Resident (ROR) | Yes |
| Resident but Not Ordinarily Resident (RNOR) | Depends on facts and source |
| Non-Resident (NR) | Generally no, unless received/deemed to arise in India |
Common Misconceptions — None of These Create an Exemption
- Dividend received outside India
- Dividend retained in the foreign account and not remitted
- Dividend automatically reinvested (e.g. DRIPs)
In all three cases, the income is taxable for a ROR taxpayer in the year it arises.
Report Gross, Not Net
The gross dividend — before any foreign tax withholding — must be reported in Schedule OS. Foreign tax deducted at source does not reduce the taxable income; it is recovered separately through the FTC mechanism.
Illustration:
| Particulars | USD |
|---|---|
| Gross Dividend | 1,000 |
| Foreign Tax Withheld @ 25% | 250 |
| Net Amount Received | 750 |
Report INR equivalent of USD 1,000 in Schedule OS. Claim credit for the withholding tax separately — subject to the FTC ceiling (lower of tax paid abroad or Indian tax attributable to that income).
Schedule Mapping for Foreign Dividend
| Item | Where to Report |
|---|---|
| Dividend income | Schedule OS |
| Country-wise foreign income details | Schedule FSI |
| FTC claim | Schedule TR |
| FTC documentation | Form 67 (file before or with the return) |
| Foreign shares / overseas accounts | Schedule FA |
Note: Schedule FSI is available to residents only. Ensure Schedule FSI figures reconcile exactly with Schedule OS.
Buy-back Taxation — The Key Change for AY 2026-27
What Changed and Why
For buy-backs by domestic companies where the payment is received between 1 October 2024 and 31 March 2026, the entire consideration received by the shareholder is treated as a deemed dividend under Section 2(22)(f) and taxed at the applicable slab rate.
Critical point on dates: The trigger is the date of actual receipt of payment, not the announcement date, record date, tender date or acceptance date. Using the wrong date can result in the wrong tax regime being applied.
Tax Treatment
| Component | Treatment |
|---|---|
| Buy-back Consideration | Deemed Dividend u/s 2(22)(f) — taxable at slab rate |
| Capital Gains | Deemed Nil |
| Cost of Acquisition | Allowed as a capital loss |
Illustration:
| Particulars | Amount (₹) |
|---|---|
| Buy-back Proceeds | 1,00,000 |
| Cost of Acquisition | 18,000 |
| Capital Loss | (18,000) |
| Schedule | Entry |
|---|---|
| Schedule OS | Dividend ₹1,00,000 |
| Schedule CG | Capital Loss ₹18,000 |
AY 2026-27 ITR forms include a dedicated row in Schedule CG for buy-back losses. The loss entry will only be accepted if the corresponding dividend is disclosed in Schedule OS → Sl. No. 1a(iii). These two entries are interdependent — missing one will make the other invalid.
Set-off and Carry Forward of Buy-back Loss
| Loss Type | Can Be Set Off Against |
|---|---|
| Short-Term Capital Loss (STCL) | STCG and LTCG |
| Long-Term Capital Loss (LTCL) | LTCG only |
The loss cannot be set off against salary, house property, business income, dividend income or any other head. Where the return is filed by the due date, the loss may be carried forward for up to 8 assessment years.
Taxpayers who miss the filing deadline lose the right to carry forward this loss — another reason to file on time.
NRI Investors — Key Points
| Particulars | Position |
|---|---|
| Dividend from Indian Company | Taxable in India |
| Buy-back Dividend u/s 2(22)(f) | Taxable in India |
| TDS Provision | Section 195 |
| Standard TDS Rate | 20% plus applicable surcharge and cess |
| DTAA Benefit | Available, subject to eligibility and documentation |
Documents needed for treaty benefit:
- Tax Residency Certificate (TRC) from the country of residence
- Prescribed declarations as applicable
- Supporting treaty documentation
NRIs should verify whether the DTAA with their country of residence caps withholding at a rate lower than 20% — the difference can be material.
Mergers, Demergers and Other Corporate Actions
| Transaction | Broad Tax Treatment |
|---|---|
| Share-for-share Amalgamation satisfying Section 47 conditions | Generally exempt |
| Qualifying Demerger | Generally exempt |
| Cash Merger Consideration | Capital Gains |
| Fractional Share Cash Settlement | Capital Gains |
| Capital Reduction | Capital Gains implications |
| Liquidation Distribution | Section 46 implications |
| Return of Capital | Cost adjustment / Capital Gains |
Always determine the legal character of a corporate-action receipt from the underlying transaction documents before classifying it as dividend income or capital gains. Labels used by brokers or company communications may not align with the tax characterisation.
Documents to Retain
| Document | Purpose |
|---|---|
| Foreign broker statement | Dividend verification and cost records |
| Form 1042-S / foreign tax certificate | FTC support |
| Form 67 | FTC claim (file before or with the return) |
| Overseas account statements | Schedule FA disclosure |
| Buy-back communication | Date of payment — Section 2(22)(f) determination |
| Contract notes and purchase records | Capital-loss computation |
| Tax Residency Certificate (TRC) | DTAA benefit for NRIs |
| AIS and Form 26AS | Reconciliation before filing |
Pre-Filing Checklist
- ✅ Gross dividend (not net) reported in Schedule OS
- ✅ Schedule FSI reconciles with Schedule OS
- ✅ Form 67 filed where FTC is claimed
- ✅ Schedule TR reflects eligible FTC (capped at lower of foreign tax or Indian tax on that income)
- ✅ Schedule FA completed for all foreign shares and overseas accounts
- ✅ Buy-back dividend correctly disclosed under Section 2(22)(f) in Schedule OS
- ✅ Corresponding capital loss disclosed in the dedicated row in Schedule CG
- ✅ Both buy-back entries cross-linked — loss disclosure will not stand without dividend disclosure
- ✅ DTAA claims supported by TRC and prescribed documentation
- ✅ All figures reconciled against AIS and Form 26AS
- ✅ Correct ITR form confirmed (ITR-2 or ITR-3 — not ITR-1)
Key Accuracy Notes
A few points worth highlighting for AY 2026-27 specifically:
Buy-back from 1 April 2026 onwards falls under a different regime (capital gains treatment) — so if you received payment across both periods, the two tranches must be bifurcated and reported separately.
Interest deduction on dividend income: Taxpayers can claim a deduction for interest expenditure incurred to earn dividend income, capped at 20% of gross dividend income. No other expense deduction is permitted.
Advance tax and dividend: If a shortfall in advance tax instalment is on account of dividend income, interest under Section 234C is not charged — provided tax is paid in a subsequent instalment. This relief does not extend to deemed dividend under Section 2(22)(e).
In Summary
AY 2026-27 requires investors with foreign income or buy-back receipts to navigate multiple schedules, a new dedicated buy-back loss row in Schedule CG, and tighter cross-referencing between Schedule OS and CG entries. The cost of getting this wrong is not just a tax demand — it is the loss of carry-forward benefits, FTC claims and treaty relief that can take years to recover.
