Foreign broker account reporting: what to disclose in ITR

Foreign broker account reporting: what to disclose in ITR

Tl;dr

- If you are Resident and Ordinarily Resident (ROR) AND you have a foreign broker account, you have to disclose it in Schedule FA if your ITR form. Schedule FA uses the calendar year. Said another way, schedule FA uses January to December and not the Indian Financial year (April to March).

- If you work as an independent contractor and raise invoices, your income is classified under Business/Profession.

- If you have foreign assets, ITR-4 does not apply, so you should file ITR-3.

- In Schedule FA (Foreign Custodial Accounts), report broker details plus peak balance, closing balance on 31 Dec and gross credits. Convert to INR using SBI TT buying rate.

- Report income separately: dividend/interest under Other Sources and sale gains under Capital Gains. Report foreign source income in Schedule FSI and claim relief in Schedule TR when foreign tax is cut.

- If any Income Tax has been paid/deducted outside India, file Form 67 to claim Foreign Tax Credit. ₹20 lakh limit is only a penalty relief, you still have to make proper disclosure.

Scenario: You work remotely from India and also use a foreign broker account to buy US shares or ETFs. If your residential status for the year is Resident and Ordinarily Resident (ROR)(most common case; you were in India for 183 days or more), the broker account becomes a foreign asset disclosure item in the Income Tax Form. Schedule FA must be filed.

Missing the broker account is what caused so many notices in December last year. Taxpayers reported only the income and skipped the broker accounts.

Here is what to disclose and how to file it.

Step 1: Confirm that you earn Income as an Contractor or as salaried person

This is already sorted for professionals who are not filing ITR for the first time. For others: ITR forms available to Freelancers and Full time contractors (ITR-3 and ITR-4) are different from ITR forms available to salaried professionals (ITR-1 and ITR-2).

Step 2: Select the correct ITR form

If you earn business or professional income, you have to file ITR-3 or ITR-4. ITR-4 is a smaller form compared to ITR-3 (15 pages vs 90 pages)

A foreign broker account is a foreign asset. ITR-4 does not apply when you have foreign assets.

Your only option is to file ITR-3.

Step 3: Deciding if you are a resident and ordinary resident in India (R&OR)

Schedule FA applies only when you are R&OR.

If you never left India for long periods in the past year, you can skip this step. Schedule FA is applicable to you.

For rest: Do not assume your status. Calculate it by counting your days outside of India.

How to decide if you are Resident and Ordinary Resident of India

You are Resident in India for a financial year if:

Condition 1: You stay in India for 182 days or more during that financial year.

OR

Condition 2: You stay in India for 60 days or more during that financial year

AND (applicable only to condition 2)

You stay in India for a combined total of 365 days or more during the 4 financial years before that year.

If you satisfy either Condition 1 or Condition 2, you are a Resident and Ordinarily Resident.

For an Indian citizen or a person of Indian origin who comes on a visit to India and whose total income (other than foreign-source income) exceeds Rs. 15 lakh, the 60-day threshold in the 60+365 test becomes 120 days.

If you do not satisfy these conditions, you are a Non-Resident.

Step 4: What needs to be disclised about the broker account

Your disclosure has two parts.

Part one is the foreign asset disclosure. This is Schedule FA.

Part two is income reporting. This is reported in the normal income schedules and in the foreign income schedules.

4A: Schedule FA disclosure

A foreign broker account is disclosed in Schedule FA under foreign custodial accounts.

Schedule FA follows a calendar year ending 31 December. It does not follow April to March.

In Schedule FA you will enter the broker account details. You will also enter these values in INR:

- Peak balance during the calendar year

- Closing balance as on 31 December

- Gross amount paid or credited during the same calendar year

- Nature of gross amount, such as dividend, interest, sale proceeds or other income

Schedule FA also asks your ownership type. Foreign brokerage accounts held by you are classified as Legal Owner.

Step 5: Exchange rate rule for Schedule FA

Schedule FA values must be reported in INR using SBI telegraphic transfer buying rate for conversion.

Use the TT buying rate on the date of peak balance for the peak balance figure. Use the TT buying rate on 31 December for the closing balance figure.

Do not use Google rates.

Step 6: Income reporting from the broker account

Schedule FA reports the asset. It does not complete your income reporting.

You must report the income from the broker account in the main computation and also in the foreign income schedules.

6A: Dividends and interest

Dividends and interest go under "Income from other sources". Report gross income, not the net amount after foreign tax cut.

6B: Sale of shares or ETFs

Sale of shares, ETFs, and other securities goes under "Capital gains". Report your sale gains in the capital gains schedule of the ITR.

6C: Schedule FSI and Schedule TR

Foreign source income must be reported in Schedule FSI. If foreign tax is cut, tax relief is claimed through Schedule TR.

These schedules must match your income in "Other sources" and "Capital gains".

Step 7: Foreign tax cut and Form 67

Depending on foreign law, a foreign broker will deduct taxes on dividends and capital gains.

Even when foreign tax is cut, you must report the full income in India.

Foreign tax reduces Indian tax on the same income through Foreign Tax Credit.

You must file Form 67 to claim Foreign Tax Credit. Form 67 must be filed on or before the due date under section 139(1).

Step 8: What happens if you skip disclosure

If you are resident and you fail to disclose foreign assets or foreign income, penalty exposure becomes serious.

There is limited relief. If the total value of all foreign bank accounts and other movable foreign assets does not exceed ₹20,00,000, the ₹10 lakh penalty under that section does not apply.

This is only penalty relief, disclosure is mandatory.

How to file this on the Income Tax portal

Below is the filing flow that works for remote workers with a foreign broker account.

Step A: Keep your data ready

- Lot-wise purchase details of your holdings (incase of first time filers)

- Broker statement for the calendar year used in Schedule FA

- Dividend statement and withholding tax statement

- Trade report for all sales

- Bank statements for India accounts

- Statements for Wise, PayPal, or other foreign balances, if you use them

Step B: File Form 67 first when foreign tax exists

- Log in to the Income Tax e-filing portal

- Go to e-File and then Income Tax Forms

- Select Form 67 and select the Assessment Year

- Fill foreign income and foreign tax details

- Attach proof of foreign tax cut

- Submit and e-verify Form 67

If you do not have foreign tax cut, Form 67 is not required.

Step C: Prepare and file ITR-3

During filing days, the Income tax portal is overloaded and sluggish. ITR-3 filing works best through the Offline Utility.

- Download the ITR-3 Offline Utility from the portal

- Open the utility and import pre-filled data or start a fresh return

- Fill your business income schedules for remote work

- Fill your capital gains schedule for sale of shares or ETFs

- Fill your "Other sources" schedule for dividends and interest

- Fill Schedule FA for the broker account and other foreign assets

- Fill Schedule FSI for foreign source income

- Fill Schedule TR if you claim foreign tax credit

- Validate all schedules in the utility

- Generate the JSON and upload it on the portal, or submit from the utility

- e-Verify the ITR

Your ITR filing is not complete until e-verification is done.

Example for a remote IT worker

Ajay lives in Hyderabad. He works remotely for a US company on a contract and receives money in USD. He also buys US shares using a US broker.

Ajay files ITR-3.

Ajay reports the broker account in Schedule FA. He reports the peak balance and the closing balance for the calendar year stated in the ITR. He converts those values to INR using SBI TT buying rate.

Ajay reports dividends under "Income from other sources". Ajay reports gains from sale of shares under "Capital gains".

Ajay fills Schedule FSI for the US income. If US tax is cut on dividends, Ajay files Form 67 and claims Foreign Tax Credit. Ajay then fills Schedule TR.

Checklist

- Confirm residential status

- File ITR-3 when you have a foreign broker account

- Fill Schedule FA for the calendar year ending 31 December shown in the ITR

- Convert balances using SBI TT buying rate

- Report dividends and interest under "Other sources"

- Report sales under "Capital gains"

- Fill Schedule FSI for foreign source income

- File Form 67 when foreign tax is cut and claim credit in Schedule TR

- e-Verify your ITR