This article gives you an overview of the tax-related tasks and calculations needed for resident Indians who hold foreign shares.
Who is this article applicable to?
You should be reading this article if you hold any foreign shares, ETFs or mutual funds listed in a foreign stock exchange:
- your company has given you Restricted Stocks Units (RSUs)
- your company allows you to buy foreign-listed company stock at a discount or at market price via an Employee Stock Purchase plan (ESPP)
- you company has given you a grant of foreign-listed company stock as a part of annual bonus or something similar
- you invest in foreign shares, ETFs and mutual funds using the Liberalised Remittance Scheme (LRS)
Note: The Schedule FA declaration rule applies to unlisted shares (e.g. Employee Stock Ownership Plan or ESOP) of foreign companies as well.
What is the penalty for not declaring foreign assets?
As per the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, not declaring foreign assets can lead to a ₹10 lakhs penalty per year if you do not declare foreign assets like shares in your ITR via Schedule FA (Foreign Assets).
Here a key distinction with tax-filing of normal capital gains tax:
- Capital gains by selling shares or mutual funds, whether domestic or foreign, is anyway needed when you sell these assets
- But and this is important: just holding these assets, and not necessarily selling them, will still require filling Schedule FA for every year you hold these stocks
You cannot, as a side effect, take advantage of any Double Taxation Avoidance Agreement (DTAA) provisions to offset taxes paid in the foreign country if you do not fill Schedule FA.
What if you hold the shares only for a short period?
Even if you hold these stocks for a day, say you receive a grant that can be sold immediately, you need to still fill Schedule FA in the next tax-filing. Of course, you will fill ITR2 (or equivalent) form for the share sale.
There is no way to miss filling Schedule FA since you can open a foreign brokerage account once you provide your PAN number. There is a bit of leeway that not necessarily Schedule FA, which is a bit cumbersome, has to be filled as long as you declare these assets in some form or the other in the ITR.
What other things can go wrong with holding foreign assets?
- There have been cases of tax notices sent in case of even correctly filed ITRs with foreign assets
- Manual scrutiny and delayed ITR processing when DTAA relief is sought in case of taxes already paid. A good example here is the Dividend Withholding tax that is common in many countries like the US
- If your spouse is in a role where declaration and audits of personal assets is required for both then declaration of these shares is required to the spouse’s organisation as well.
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