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I have stocks in French MNC, I got through ESPP. Do I need to declare the stocks in Foreign Asset? This article covers the Undisclosed Foreign Income and Assets,What are ESPP,ESOP, RSU. Who is resident Indian? What are foreign assets? The Foreign Asset schedule in ITR2.

We received the query sometime back. We also came across Business Standard article Declare foreign assets and income to avoid penalty which mentioned that a multinational information technology company organised a workshop on tax filing for its employees. Nothing unusual, except that the workshop focused on how to account for shares received under the company’s equity compensation scheme. Since these shares are listed abroad, they are foreign assets in the hands of the employees.  Is the company being too cautious? Maybe not, considering the provisions of the Undisclosed Foreign Income and Assets Bill, 2015. We decided to dig deeper into the issue.

Disclaimer: This is for educational purpose only. Please consult your CA/Tax lawyer. Though we have tried to give the information to best of our ability but We accept no liability.

Please note: from CBDT FAQ

Question. 4: I have held shares of a company during the previous year, which are listed in a recognized stock exchange outside India. Whether I am required to report the requisite details against the column “Whether you have held unlisted equity shares at any time during the previous year?”

Answer: No.

How to show ESPP, ESOP, RSU as Foreign Assets

One needs to show shares received as ESPP/RSU/ESOP of MNC as Capital Asset in Schedule FA(Foreign Assets) of ITR2 as shown in the image below. ITR1 does NOT have the schedule for Foreign Assets.

In this example we shall take the case of only when shares of a company in the US was allotted to the employee and the employee has not sold them till filing of the income tax return. To fill this please go through Prerequisite on Stock Options report or the break up provided by your employer on stocks allotted to you, similar to one shown below. Our article RSU of MNC, perquisite, tax , Capital gains, ITR, eTrade covers RSU in detail.

You need to get the Date of Alloment of shares, Fair Market Value of the Share on the date of Allotment.

Calculating Perquiste income for RSU

Calculating Perquiste income for RSU

Details of any other Capital Asset (including any beneficial interest) at any time during the previous year

  1. Country Name and code :
  2. Nature of asset : Shares
  3. Nature of Interest-Direct/Beneficial/owner/Beneficiary : Direct
  4. Date of acquisition : Date on which stocks were allotted
  5. Total Investment (at cost) (in rupees) : Price at which RSU/ESPP was allotted. (Please deduct the number of shares that were credited to your account after tax deduction. Say you were alloted 70 shares but because of tax only 49 stocks were credited into your broking account). In example 49*17.89(FMV)*62.90(USD Exchange rate)
  6. Income accrued from such :
    1. 0, if you haven’t sold the shares.
    2. If you have earned dividend then declare the dividend received.
    3. If you have sold the shares then you have to show the profit/loss received from the sale of the shares.
  7. Nature of Income :

    1. Not Applicable or NA if you haven’t sold any shares
    2. If you have earned dividend then declare the dividend recived. You need to declare divided as Income from other sources
    3. If you have sold the shares then you have to show them in Long Term Capital Gains/Short Term Capital Gains section
  8. Income taxable and offered in this return: if you haven’t sold any shares
    1. Amount Schedule where offered : Not Applicable or NA if you haven’t sold any shares
    2. Item number of schedule :Not Applicable or NA if you haven’t sold any shares

If shares were allotted at different times, says 25% of RSU in the first year and 25% in the second year, then you have to fill in multiple rows.

How to show RSU, ESPP in Foreign Assets

How to show RSU, ESPP in Foreign Assets

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015

The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income Tax Act but under the provisions of the proposed new legislation on unaccounted money. It’s overview is given below.

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 was introduced in Lok Sabha on March 20, 2015 by the Minister of Finance, Mr. Arun Jaitley.

The Bill will apply to Indian residents and seeks to replace the Income Tax (IT) Act, 1961 for the taxation of foreign income. It penalizes the concealment of foreign income, and provides for criminal liability for attempting to evade tax in relation to foreign income.

Tax rate: A flat rate of 30 per cent tax would apply to undisclosed foreign income or assets of the previous assessment year. No exemption, deduction or set off of any carried forward losses (as provided under the IT Act) would apply. This would apply from April 1, 2016 onwards.

Scope of income to be taxed: The total undisclosed foreign income and asset of an individual would include:

  • income, from a source located outside India, which has not been disclosed in the tax returns filed;
  • income, from a source outside India, for which no tax returns have been filed; and
  • value of an undisclosed asset, located outside India.

One – time compliance opportunity: A one-time compliance opportunity to persons who have any undisclosed foreign assets (for all previous assessment years) will be provided for a limited period. Such persons would be permitted to file a declaration before a tax authority, and pay a penalty at the rate of 100%.

Tax Authorities: The relevant tax authorities and their jurisdiction would be as specified under the IT Act. They would have powers of inspection of documents, and evidence. The proceedings are to be judicial.

Penalty for offences:

  • Undisclosed foreign income/assets: The penalty for nondisclosure of foreign income or assets would be equal to three times the amount of tax payable, in addition to tax payable at 30%.
  • Failure to furnish returns: The penalty for not furnishing income tax returns in relation to foreign income or assets is a fine of Rs 10 lakh. This would not apply to an asset, with a value of five lakh rupees or less.
  • Undisclosed or inaccurate details of foreign assets: If a person who has filed tax returns does not disclose his foreign income, or submits inaccurate details of the same, he has to pay a fine of Rs 10 lakh. This would not apply to an asset, with a value of five lakh rupees or less.
  • Second time defaulter: Any person, who continues to default in paying tax that is due, would be liable to pay an amount equal to the amount of tax arrears.
  • Other defaults: If a person fails to abide by the tax authority in (i) answering questions, (ii) signing off on a statement, (iii) attending or producing relevant documents, he is to pay a fine between Rs 50,000 to two lakh rupees.

Prosecution for certain offences:

  • Wilful attempt to evade tax: The punishment would be rigorous imprisonment from three to 10 years, and a fine.
  • Wilful attempt to evade payment of tax: The punishment would be rigorous imprisonment from three months to three years, and a fine.
  • Failure to furnish returns: or non disclosure of foreign assets in returns: The punishment is rigorous imprisonment of six months to seven years, and fine.
  • Punishment for abetment: The punishment is rigorous imprisonment of six months to seven years, and fine.
  • Liability of company: For any offence under this Act, every person responsible to the company is to be liable for punishment. His liability is absolved if he proves that the offence was committed without his knowledge.

ESOP,  RSU ,ESPP

Let’s just get an overview of ESOP, RSU and ESPP which can be given to employee of company, listed or not listed on Indian stock exchange or foreign stock exchange

  • Employee Stock Options or ESOP  is a employee benefit plan offered by a company to its employees. ESOPs provide an opportunity to employees to acquire a stake in the company. ESOPs confer a right and not an obligation on the employees to buy shares of the company at a future date at a pre-determined price. Our article What are Employee Stock Options (ESOP) covers it in detail.
  • Restricted Stock Units (RSUs) : Restricted Stock Units represent an unsecured promise,i.e no strings attached, by the employer to grant an employee a set number of shares (at zero strike price) on completion of the vesting schedule or other conditions.
  • In Employee Stock Purchase Plan or ESPP: the employee is allowed to directly buy the company’s stock on a monthly basis at a certain discount to the market price. For example, if the market price is Rs 150, the company will offer this to their employees at Rs 135, a 10 per cent discount. our article  Employee Stock Purchase Plan or ESPP covers it in detail.

These benefits form a part of the employee’s salary income and are taxable as a prerequisite. The perquisite value is computed as the excess of the fair-market value (FMV) of the share. There are specific valuation rules prescribed for listed and unlisted companies to determine the FMV. The employer is required to withhold tax at source or deduct TDS  in respect of such a perquisite. It would also be reflected on your Form 12BA. Our article Understanding Form 12BA explains perquisite and salary in detail.

In the event of employee disposing of the shares, the difference between the sale consideration of the shares and the FMV on the date of exercise is chargeable to tax under the head, capital gains, in the hands of the employee. The nature and rate of capital gains would depend upon the period of holding of shares from the allotment date. Further, the fact that whether security transaction tax (STT) has been paid on sale of such shares, is also a factor.. Most of us sell the shares immediately upon receipt to enjoy the gains and regard this money as a bonus. But the tax implications need to be factored in before utilisation of such proceeds. As a planning tool, to optimise returns from Esops,ESPPs,RSUs hold them for a longer duration to characterise such gains as long-term gains.

What is the foreign income of a Resident taxpayer

Who is resident taxpayer?

An Indian citizen who lives abroad will qualify as an ordinarily resident in India if she spends 182 days or more in India during the financial year and 729 days or more in the seven years immediately preceding the current financial year.

Schedule FA requires a resident assessees to disclose the following particulars relating to overseas assets

  • Bank accounts   Did you work outside India for some period of time and opened a bank account at such place? One has to indicate the location of the country, name and address of the bank, the account holder’s name and the peak balance maintained in the account during the year.
  • Financial interests in an entity Hold stocks or stock options, ESOPs, ownership rights, shares, or debentures (by whatever name called) or have investments in a mutual fund, pension fund or even a financial interest in an intellectual property right.  You have to mention the country name and code, name and address, and nature of the entity where the interest is held and the total investment.
  • Immovable property :other asset You to give information about the country name and code, location of property/asset and total investment;
  • Details of accounts with signing authority that have not been included in the above together with the name and address of the institution where the account is held. Have income from foreign royalties, or earn rent from a property owned outside India, earned capital gains from assets outside India

Please note that  Many countries across the global have reporting requirements with respect to overseas assets. The US, in fact, recently introduced the mandatory reporting of foreign assets in Form 8938. Other countries which mandate such reporting include countries such as Ireland, Italy, Korea, Brazil and Canada.

The declaration of  foreign assets has been since FY 2011-12. The CBDT had introduced Schedule FA in all the tax return forms other than ITR1.

In the following situations FA does not have to filled.

  • If someone has earned some google adsense income which was transferred directly to his savings bank account. All Incomes from Blogging and other online incomes (incl. Adsense, Affiliate, Services etc) are required to be disclosed under head  “Profits or Gains of Business or Profession” and you can submit this information in either ITR 4 or ITR 4S.
  • You worked in the foreign country for a few months and earned some salary and later returned to India and is now a resident. Income earned during the stay in foreign is not considered foreign income
ITR-foreign-assets

Foreign assets in ITR2 Schedule FA

Disclaimer: This is for educational purpose only. Please consult your CA/Tax lawyer. Though we have tried to give the information to best of our ability but We accept no liability.

Related articles:

When we talked to a few people who work in MNC and have stocks in the foreign country, they were not aware of it. Many of them haven’t filed or are not filing their stocks as Foreign assets. The intention of the article is not to scare but to make aware.

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