What is Foreign Asset Disclosure?

According to the Income Tax Act, 1961, a foreign source income refers to any income received or earned by a taxpayer outside India. This includes income generated from several activities conducted outside the country. For instance, business profits, dividends, royalties, professional fees, salaries, interest, and other similar sources. To avoid penalties and legal issues, it is vital to report foreign income and pay applicable taxes.

Role of Residential Status

The tax implications of income from foreign sources also depend on the residential status of an individual. Considering this:

• Resident and Ordinarily Resident (ROR): A ROR is liable to pay tax on their global income. It includes both Indian and foreign source income, whether received in India or overseas.
• Resident but Not Ordinarily Resident (RNOR): An RNOR is liable to pay tax on foreign source income if:
  • Income accrued or received in India
  • Foreign income derived from a profession or business set up or controlled in India
  • Income deemed to arise or accrue in India
• Non-Resident Individuals (NRI): An NRI is taxed only on:
  • Income received in India
  • Income deemed or accrued to accrue in India

Types of Foreign Source Income & Their Tax Implications

Taxation of income from foreign sources also depends on the stream from which they arise. Considering this:

• Salary earned overseas: It is taxable only for ROR individuals.
• Dividends from foreign companies: Under the "Income from Other Sources", taxable for ROR.
• Rental income from foreign properties: Taxable for ROR as it is a part of their global income.
• Interest on foreign bank accounts: Taxable for ROR, exempt for NRI.
• Capital gains from foreign assets: According to applicable capital gain tax rules, it is taxable for ROR.
• Business income from foreign entities: Taxable if the person is ROR and he/she control it from India.

Double Taxation Avoidance Agreement

To avoid paying taxes twice on the same income, India has signed Double Taxation Avoidance Agreement (DTAA) treaties with over 90 countries. It allows taxpayers to claim tax relief on their already paid tax on foreign income against the payable tax in India.

Under sections 90 and 91 of the Income Tax Act, 1961, individuals can claim a foreign tax credit for the income that they are taxed in India and a foreign country. These sections allow them to claim credit for the taxes paid in foreign countries if the same income is liable to be taxed in India.

Reporting Requirements and Compliance

Indian residents, specifically RORs, need to report all their foreign income and assets in their income tax return. It includes:

• Foreign bank accounts
• Foreign directorships
• Foreign insurance or retirement accounts
• Financial interests in foreign entities
• Foreign directorships

Failure in reporting these foreign income sources triggers penalties under the Black Money Act, 2015. Further, for non-compliance, it may also lead to severe penalties and prosecution.