Own foreign stocks or MNC Esops? Omit them from ITR at your peril

The holding period of foreign assets to be declared in ITR forms is the previous calendar year.
The holding period of foreign assets to be declared in ITR forms is the previous calendar year.

Summary

  • These assets are to be disclosed in Schedule FA every year that you hold them, and not just when you sell. Failing to do so could attract hefty fines and prosecution under the Black Money Act.

The run-up in Nvidia's stock has turned many of its employees into millionaires. Indian employees of the American multinational have a serious task at hand this tax-filing season: declaring their multimillion-dollar stock options in their Income Tax Return (ITR). That is because equity compensation structures such as employee stock options (Esops) and restricted stock units (RSUs) are seen as foreign assets under India's income tax (I-T) law and must be disclosed in tax returns.

I-T rules require all taxpayers who hold foreign assets to declare them under Schedule FA. These include stock options, foreign stocks, bonds, bank accounts and other financial instruments. Even taxpayers whose income is below the 2.5-lakh tax exemption limit but own foreign assets must file an ITR to declare these assets.

Also read | Income tax deadline looms: Know your ITR forms to avoid penalties

Foreign stocks and stock options are to be disclosed in Schedule FA every year that the taxpayer holds them, and not just when they are sold. Failing to do so could attract hefty fines and prosecution under the black money law.

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Graphic: Mint

Deepak Kakkar, a chartered accountant in Delhi and senior manager at Jaikumar Tejwani & Co LLP, said the information exchanged between India and other countries under the Tax Information Exchange Agreements (TIEA) is investigated by the Foreign Assets Investigation Unit (FAIU).

“It sends summons under Section 131(1A) of the Act to ask for information related to foreign assets. Non-disclosure may result in a levy of tax, penalty, and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015," he said.

Foreign assets are to be declared in Schedule FA even if they are declared separately in Schedule AL (assets-liabilities) by taxpayers whose income exceeds 50 lakh.

Also read: Understanding Schedule AL: Declaring assets for income above 50 lakh

How to report foreign assets

The holding period of foreign assets to be declared in ITR forms is the previous calendar year. So, when filing your ITR for the assessment year (AY) 2024-25, you'll need to declare foreign assets held from 1 January 2023 to 31 December 2023. Stocks and any other assets bought between January and March 2024 are not required to be declared in this filing.

“If a resident taxpayer opened a bank account in Singapore in January 2024, it will not be reported in the Schedule FA in ITR filing of the current assessment year as it was not held any time during Jan-Dec 2023. It will need to be declared in AY25-26," said Kakkar.

Foreign stocks: Under Schedule FA, the taxpayer must include the date when the stock was bought, the company's name and address, the purchase amount, closing value of the stock, any income from holding it, including dividends, and any gains from selling the stock.

The value of purchase amount, closing amount and gains, if any, must be converted into Indian rupees based on the TT buying rate of State Bank of India on the day of reporting, said Mayank Mohanka, founder, TaxAaram India, and partner, S M Mohanka & Associates.

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Graphic: Mint

Esops and RSUs: Esops must be declared from the year they are granted until they are exercised. Declaring RSUs is slightly more complicated as exercising them triggers two components that need to be reported. RSUs are cashless stocks that are awarded to employees upon achieving career milestones, such as completing a certain number of years at the company or a promotion.

When RSUs are exercised, the parent MNC located outside India automatically sells 30% of the shares, the proceeds of which are used by the Indian subsidiary to pay tax on perquisites. “Almost all employees who are awarded RSUs fall in the 30% tax bracket, so 30% of the total stocks are sold," said Prakash Hegde, a chartered accountant and principal consultant of direct taxation at Acer Tax & Corporate Services LLP. As most employees don’t have cash to pay tax on perquisites, the company does an automated sale to get the required cash needed to pay TDS.

Also read: Budget may hike tax on F&O trading. Here's what it could mean

The sale of stocks in the employee’s name means there will be capital gains that need to be reported. But since the stocks are sold the same day they are exercised, the capital-gains liability is nearly zero. However, the employee still has to declare these capital gains in the ITR.

The second declaration concerns the remaining 70% of shares, which are transferred to a foreign demat account in the employee’s name. These are to be declared every year that the employee holds them.

Dividends: Dividend income from stocks or stock options must be declared in two places. So long as it remains in the demat account, it must be mentioned in Schedule FA under the section “gross amount paid/credited with respect to holding".

In the year the dividend is credited, it should also be reported as ‘income from other sources’. Dividend income from foreign stocks is taxed in the year it is credited in the foreign demat account and not when it is repatriated to India.

If the tax on dividends is withheld in the country where they are paid, it should be claimed as a deduction in the ITR to avoid paying double tax. Information on dividends and the tax withheld on them is available in Form 1042s, which you can download from your foreign brokerage account.

Also read: Donations, online gaming, bank accounts: ITR forms seek more disclosures

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