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Why taxpayers need to take stock of their foreign assets now

It is mandatory for taxpayers who hold foreign assets or earn an income from such assets to file Income Tax Return (ITR). 

Foreign assets include foreign immovable property, bank accounts (both depository and custodian), debt or equity interest, other capital assets, cash value insurance contract, annuity contract and accounts or financial interest in any entity where the taxpayer is a beneficiary, signing authority or settlor. 

Foreign assets are reported in schedule Foreign Asset or FA of ITR -2 or ITR-3, as applicable to the taxpayer

Until now, these assets had to be reported for the relevant ‘accounting period’, as defined by the foreign country, in which they were acquired. 

For assessment year 2022-23, the accounting period has been replaced by the calendar year (ending 31 December 2021) for jurisdictions that follow the calendar year such as the US. This means all foreign assets held between 1 January 2021 and 31 December 2021 should be declared in this year’s ITR. So, say, you bought shares of X company, which is located outside India, in February 2022. You don’t need to report them in the current assessment year’s ITR though it was bought during the previous financial year. Information regarding X’s shares will have to be disclosed in assessment year 2023-24. 

Note that, even though disclosure is as per calendar year, the tax computation has to be done according to the financial year in India. For example, if you have bought and sold an asset in January 2022 and made capital gains on the same, you need to pay tax on the same in FY2021-22. However, you will need to report it in AY2023-24 and not AY2022-23. 

Taxation of income from retirement benefits accounts (RBA) has for long been a pain point for taxpayers. In India, the income earned from deposits is taxed even if it is not withdrawn, while countries where the RBA is held typically tax withdrawals. This led to double taxation. 

“It also causes hardship for the non-residents who permanently return to India since they face difficulty in availing of the foreign tax credit (FTC) in respect of tax paid outside India on such income. In order to remove this hardship, Section 89A has been introduced,” said Yeeshu Sehgal, head—tax markets, AKM Global, a tax and consulting firm. 

Currently, three countries, the USA, UK and Canada have been notified for this purpose. “There are two different boxes in the ITR form to disclose income from the RBA for the notified country and a non-notified country,” said Sehgal. 

Taxpayers who want their income accrued during financial year 2021-22 from RBA to be taxed in the year of withdrawal should fill form 10EE before filing their ITR. Once opted, this option cannot be reversed.

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