Income Tax: Nowadays, buying shares of big American companies like Apple and Tesla has become a left-handed game for Indian investors. Investing in foreign markets is a great step to diversify your portfolio, but it also comes with some serious responsibilities. Often people invest out of enthusiasm, but ignore the strict rules related to tax. The biggest and common mistake among these is not giving information about dividends received from foreign shares in your Income Tax Return (ITR). This small negligence can lead to huge fine and legal notice from the Income Tax Department.
All global income is subject to tax
According to Indian income tax rules, if you are a resident Indian, your entire global income is taxable. This simply means that no matter which corner of the world you are earning, you will have to give an account of it to the Government of India. Take the example of the American market, where companies deduct about 25 percent tax before paying dividends to foreign investors. In such a situation, many investors feel that the tax has already been deducted, now why show it in ITR. But this is a big illusion. You have to show the entire dividend amount in your ITR. The saving grace is that you can avoid paying tax twice on the same income by claiming ‘Foreign Tax Credit’ (FTC).
‘Schedule FA’ asks only for details of properties
The biggest mistake while paying taxes is in the process of filling the form. Investors enter the information about their foreign shares very honestly in ‘Schedule FA’ (Foreign Assets) of their ITR, but they forget to show the income earned from that asset. You need to understand that Schedule FA only asks for details of your assets and not your earnings. It is always mandatory to declare the dividend received from shares in the column ‘Income from Other Sources’. Failure to do so will result in your return being considered technically incorrect.
Penalty up to 200% may be imposed
Today’s Income Tax Department is more hi-tech than ever before. The Government of India has made agreements with many countries for exchange of financial information. Through this, every small and big information related to your foreign bank accounts and investments automatically reaches the tax department. When the department’s database and the ITR filed by you are matched and any discrepancy is found, investigation starts immediately. Hiding this foreign earning comes under the category of ‘under-reporting’. Even if it does not come under the Black Money Act, in such cases a heavy penalty ranging from 50 percent to 200 percent of the tax payable can be imposed.
Last chance to correct mistake
If you have made this mistake in your previous return, then there is a need to take correct steps. The Income Tax Department provides the facility to taxpayers to file ‘Updated ITR’ to correct their mistakes. This can be filed within 24 months of filing the original return.
However, for this you will have to pay late fees. If you rectify this mistake within a year, you will have to pay 25 percent additional tax. However, if updated after one year but before two years, this additional charge increases to 50 percent. The easiest way to avoid this problem is to keep important documents like your brokerage statement, dividend report and ‘Form 1099’ safe and use them properly at the time of tax filing.