When a reporting lapse can turn honest taxpayers into ‘black money’ accused

A Mumbai-based professional learned this the hard way after receiving a penalty order from the tax department, which accused him of concealing foreign assets and imposed a ₹40 lakh penalty under the Black Money Act (BMA).

This senior executive at a multinational company (MNC), who did not wish to be identified, held stock options in his firm's foreign parent between 2016 and 2020. He earned no dividend or other income from these holdings, but his only lapse was failing to disclose them in the Foreign Assets (FA) Schedule of his income tax returns (ITR). In 2023, he received a summons and despite explaining that the omission was inadvertent, the assessing officer invoked the Black Money Act and imposed a penalty of ₹10 lakh for each year of non-disclosure, totalling to ₹40 lakh.

“There was no concealment of income, only a reporting failure," the executive said. “I’ve been a salaried taxpayer with nearly 20 years of clean tax records. Nothing is more humiliating than being investigated for black money."

He appealed to the Commissioner of Income Tax, but the penalty was upheld. The case is now before the Income Tax Appellate Tribunal (ITAT). “I’m not worried about the huge penalty. I just don’t want the ‘black money’ label attached to my name," he said.

In distant Baroda, a retired senior citizen faces a similar ordeal over a long-forgotten insurance policy he purchased in 1997 while he was living overseas. An NRI for nearly three decades, he returned to India in 2015 after liquidating his foreign assets. So, when the tax department sent a notice earlier this year seeking an explanation for an undisclosed foreign asset in the Cayman Islands, he was confused. “It turned out to be an old single-premium offshore insurance policy. I didn’t even know insurance qualified as a foreign asset," he said.

He has responded to the summons and is awaiting the department’s order. “I hope the tax officer won’t apply the ₹10 lakh BMA penalty. I haven’t evaded any tax and only missed disclosing this policy due to lack of awareness," he said.

These cases reflect the tax department’s heightened scrutiny of foreign asset disclosures. Under tax laws, all foreign assets—including bank accounts, brokerage accounts, stocks, ESOPs, restricted stock units (RSUs), insurance policies with surrender value, pension accounts and immovable property—must be disclosed annually in the FA Schedule of ITR-2 or ITR-3, even if they generate no income.

Disclosing ownership of assets and reporting income from them are two separate compliance requirements, both of which taxpayers have to mandatorily follow, said Prakash Hegde, a Bengaluru-based chartered accountant (CA). Failure to report even though there is no evasion of tax can attract a ₹10 lakh annual penalty and even imprisonment of up to seven years under the BMA.

Parag Ramsukh Rathi, managing partner at Rathi Rathi & Co, recalls a senior couple summoned for a US bank account with a balance of just $20–50. “They opened it for procedural reasons while visiting their children and did not disclose it on returning. Even small, dormant accounts can trigger notices," he said.

Although the BMA came into force in 2015, enforcement has intensified in recent years. The Foreign Asset Investigation Unit (FAIU), set up in 2021 to act on international tax information exchange agreements, has widened its scrutiny. Over the past two years, even minor compliance lapses have pulled taxpayers into proceedings under the BMA. “Most such cases involve reporting lapses due to lack of awareness, not deliberate tax evasion. But for small, honest taxpayers, these summons feel harsh as they require in-person meetings with the tax officer. The ‘black money’ label adds to their stress," said Hegde.

When you have foreign ESOPs, RSUs

Indian employees granted stock options, like RSUs and ESOPs from foreign multinationals are particularly vulnerable as these stock options involve multiple steps from vesting to exercising, tax incidence on allotment and once transferred, they also pay out dividends.

From the date stock options are vested, they must be declared in the FA Schedule every year of holding. There is another disclosure for RSUs on vesting, as perquisite tax as per slab rates is to be paid. The foreign employer automatically sells about 30% of the shares to recover tax and the proceeds are sent to the Indian subsidiary to pay TDS. Employees need to separately report the value of these shares sold as sale of shares under capital gains section in their tax return. The same applies when foreign ESOPs are exercised.

Most employees miss this because the sell-to-cover exercise is done by the employer. Since the 30% shares are also sold in the employee’s name, that sale must be reported, even though the capital gains are usually negligible because the sale happens at the same price as vesting.

Another commonly missed item is dividend income from stocks. Dividends must be reported both as income and in Schedule FA in the year they are paid. Such dividends are taxable in India at slab rates, and if tax has already been withheld abroad, it can be claimed as foreign tax credit in the Indian ITR to avoid double taxation. Importantly, the dividend lying in the foreign broker account must continue to be disclosed in Schedule FA in subsequent years until the funds are repatriated to India.

Investors who take the services of wealth managers for their investment portfolios should also bear caution. In one such case, a Pune-based high net worth individual (HNI) investing through a wealth management firm was unaware that over ₹1 crore deployed into an overseas Segregated Portfolio Company (SPC) fund qualifies as foreign assets in his name. The investment was made in FY22, and two years later, he received a summons from the tax department. “I have disclosed the investment in Schedule AL every year and provided proof of remittance under LRS, but the officer is unwilling to drop the penalty. If an order is passed, I will challenge it. I have not evaded any tax," he said.

CA Ajay Vaswani, founder of ARAS & Company, says returning NRIs are among the most vulnerable. “The moment an individual becomes a resident and ordinarily resident (ROR), disclosure of all foreign assets in Schedule FA becomes mandatory," he said. “The reverse mistake is equally common. Many taxpayers who turn NRI continue filing tax returns as residents for convenience. Updating the correct residential status and filing as an NRI can spare them from the hassle of FA Schedule and scrutiny."

What taxpayers must know

To address small, inadvertent omissions, the 2024 budget exempted undisclosed foreign assets with an aggregate value under ₹20 lakh (excluding immovable property) from penalties and prosecution. However, they still need to be reported in the FA Schedule.

Since December 2024, instead of directly sending summons, the tax department is notifying taxpayers via email when foreign assets are detected in their name, giving them a chance to disclose previous-year foreign assets by filing a revised ITR by 31 December. Last week, hundreds of taxpayers, mainly salaried individuals holding foreign RSUs, ESOPs, or bonus shares and retail investors using platforms like INDmoney, Vested Finance, and Angel One, received such notices.

Taxpayers should gather all relevant documents and revise their ITR to declare foreign assets in Schedule FA, with employees seeking employer help to report stock options correctly.

Not every taxpayer who has not been reporting assets may get this email. So, it is prudent to take stock of your global holdings and revise your return (see grfx).

Hegde said that when taxpayers begin reporting foreign assets after missing disclosure in initial years, the department may refrain from aggressive action if it sees bona fide intent. Declaring income and offering it to tax should not be missed at any cost. “Even if the income is as small as $1, such as dividends or shares sold automatically on vesting of RSUs or ESOPs, it must be reported in the ITR. Where tax has been paid but disclosure in Schedule FA was missed, the department may take a lenient view," he said.

Ashish Karundia, founder of CA firm Ashish Karundia & Co., said penalties under BMA are levied in a largely automatic manner. However, a recent Special Bench ruling of the ITAT marks a significant shift. “In Vinil Venugopal & Ranjeeta Vinil vs DDIT, FAIU-4(1), Mumbai (October 2025), the ITAT held that penalties under the BMA are not mandatory and must be applied judiciously. Tax authorities retain discretion and should refrain from imposing penalties for minor or technical defaults where there is no dishonest intent," he said.

As scrutiny tightens and data-sharing with foreign jurisdictions expands, taxpayers can no longer overlook foreign asset compliance. Experts stress that employers must play a proactive role to spread awareness. “Some large MNCs issue guidance notes with sample transactions for employees. All companies granting foreign stock options should adopt this, it will save employees unnecessary trouble," said Karundia.