In today’s time, buying shares of big American companies like Apple and Tesla has become child’s play for Indian investors. Investing in foreign markets is a great step towards diversifying your portfolio; However, it also comes with some serious responsibilities. Often, people invest just out of enthusiasm, but ignore the strict tax rules. The biggest and common mistake among these is that the information about dividends received from foreign shares is not given in the Income Tax Return (ITR). This seemingly small mistake can lead to huge penalties and legal notices from the Income Tax Department.
The entire global income is subject to tax
As per Indian income tax rules, if you are a resident of India, your entire global income is taxable. Simply put, this means that no matter where in the world you earn your money, you will have to give an account to the Government of India. Taking the example of the American market, companies there usually deduct about 25% tax before paying dividends to foreign investors. As a result, many investors assume that since tax has already been deducted, they do not need to report it in their ITR. However, this is a huge misconception. It is mandatory for you to declare the *full* amount of dividend in your ITR. The good thing is that you can avoid paying tax twice on the same income (double taxation) by claiming ‘Foreign Tax Credit’ (FTC).
Only details of assets have to be given in ‘Schedule FA’
When filing taxes, the most confusion often arises during the form filling process. Investors diligently and honestly enter the details of their foreign shares in ‘Schedule FA’ (Foreign Assets) of their ITR, yet they often forget to report the income from those assets. It is important to understand that Schedule FA only asks for details related to your assets—not the income derived from them. It is always mandatory to declare dividends received from shares under the column titled ‘Income from Other Sources’. Failure to do so may result in your tax return being considered technically incorrect.
A fine of up to 200% may be imposed
Today the Income Tax Department has become more hi-tech than before. The Government of India has signed agreements with many countries for exchange of financial information. Through these agreements, every detail of your foreign bank accounts and investments is automatically sent to the tax department. When the department’s database is matched with the ITR filed by you, and any discrepancies are found, an investigation is immediately initiated. Hiding such foreign earnings comes under the category of ‘under-reporting’. Even if such cases do not come under the purview of the Black Money Act, in such cases a heavy penalty ranging from 50 percent to 200 percent of the amount of tax paid can be imposed.
One last chance to correct mistakes
If you have inadvertently made this mistake when filing your last tax return, it is important to take immediate steps to correct it. The Income Tax Department provides the facility to taxpayers to file ‘Updated ITR’ to correct such mistakes. This updated return can be filed within 24 months from the date of filing the original return. However, you will have to pay late fees for this facility. If you rectify the mistake within a year, you will have to pay additional tax of 25 percent. However, if you update the return after one year but before the completion of two years, this additional charge increases to 50 percent. The easiest way to avoid this problem is to carefully preserve your important documents—such as brokerage statements, dividend reports, and Form 1099—and use them appropriately when filing your tax return.
