Failure to Disclose Foreign Income in ITR? Penalty & Tax Rules Explained

In today’s connected world, many Indian residents hold foreign assets or earn income from foreign sources. It might be a bank account abroad, foreign shares, property overseas, or income earned from a foreign client. But here’s the thing: if you forget or choose not to disclose your foreign income or foreign assets in your income tax return (ITR), the consequences can be serious.

The Income Tax Department of India has made it mandatory for residents to report all foreign assets and income in their ITR under Schedule FA (Foreign Assets). Non-disclosure, whether intentional or accidental, could attract a hefty penalty — in some cases, even ₹10 lakh. To ensure you stay fully compliant and avoid mistakes, it’s always wise to consult an experienced CA firm in Gurgaon.

In this guide, we break down the importance of disclosure, penalties involved, and how to stay compliant with Indian tax laws.

Why It Is Important to Disclose Foreign Assets and Income

If you're an Indian resident and have:

• A foreign bank account
• Shares in a foreign company
• Property located outside India
• Income earned from a foreign source
• Acted as a beneficiary of a foreign asset

... then you're required to disclose these details in your ITR under Schedule FA.

The Income Tax Act mandates this disclosure as part of the government's effort to curb black money and undisclosed foreign income and assets.

What Is Schedule FA of the Income Tax Return?

Schedule FA (Foreign Assets) is a specific section in the ITR form where taxpayers must report all their foreign assets and income. This includes:

• Bank accounts held outside India
• Financial interest in any foreign entity
• Immovable property located outside India
• Accounts where you're a signing authority
• Trusts or any other entity formed or created abroad

Even if these assets do not generate income, you must disclose them.

For a clear example of how to draft an Income Tax Notice Reply, you can also check our detailed Income Tax Notice Reply Format blog.

Who Needs to Disclose Foreign Assets?

If you are a resident and ordinarily resident (ROR) under Indian tax law, you must disclose foreign assets and income. This applies even if the income was already taxed abroad or remains untaxed.

Non-residents (NR) and Resident but Not Ordinarily Resident (RNOR) individuals are not required to disclose such assets.
Recommended: How Foreign Companies are Taxed in India: A Complete Guide

Penalty for Not Declaring Foreign Assets

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 makes it clear: failure to disclose foreign income or assets can attract steep penalties.

Penalties Include:

• ₹10 lakh penalty (approx. USD 12,000) for each year of non-disclosure
• Applicable even if the asset or income doesn’t generate any income
• Additional tax, interest, and prosecution under the Income Tax Act

This means even a foreign bank account with zero balance or dormant status must be reported to avoid penalties.

Must Read: How to Report & Pay Tax on Foreign Income in India

How to Declare Foreign Assets in Income Tax Return

1. Choose the Right ITR Form

Use ITR-2 or ITR-3, which include Schedule FA and Schedule FSI (Foreign Source Income). These schedules are not available in ITR-1 or ITR-4.

2. Fill in Accurate Details

Report your:

• Foreign bank accounts
• Foreign investments (shares, bonds, mutual funds)
• Income earned from foreign sources
• Trusts or other foreign entities where you're a beneficiary

3. Use Schedule FSI for Income Disclosure

If you’ve earned any income from foreign sources, such as rental income, dividends, or interest, declare it in Schedule FSI.

For NRIs unsure about which forms or schedules to use, consulting an experienced income tax consultant in Gurgaon can help ensure accurate disclosure and avoid penalties.

What Counts as Foreign Assets and Income?

Foreign assets may include:

• Bank accounts abroad
• Shares in foreign companies
• Immovable property overseas
• Retirement accounts held abroad
• Partnership in foreign entities

Foreign income may include:

• Interest income from a foreign bank
• Dividends from foreign shares
• Rental income from property outside India
• Salaries or freelance income from foreign clients

All of this is taxable in India if you are a resident.

Common Mistakes While Reporting Foreign Assets

• Missing Dormant Foreign Accounts Even if you haven’t used an account for years, it must be disclosed.
• Reporting Only Income, Not Assets Both foreign income and foreign assets must be declared separately.
• Not Including Gifts or Inheritance from Abroad These should also be reported, even if exempt under some circumstances.
• Not Filing Schedule FA Correctly Any mismatch or omission in the schedule can lead to notices from the Income Tax Department.

Consequences of Non-Disclosure

• Hefty Penalties: ₹10 lakh per asset per year
• Income Tax Notices and demand for back taxes
• Interest and Prosecution under the Income Tax Act
• No Time-Bar: The IT department can reopen assessments for up to 16 years for foreign assets

Even a small oversight in your ITR could lead to significant consequences.

Do I Get Any Relief If I Already Paid Tax Abroad?

Yes. Under Double Taxation Avoidance Agreement (DTAA) and Schedule FSI, you can claim credit for taxes paid abroad using Form 67.

This helps you avoid paying tax twice on the same income. But you must file Form 67 before the ITR filing deadline to claim this tax credit.

Stay Compliant, Stay Safe

Disclose all foreign assets and income honestly in your ITR. Avoid shortcuts. A simple failure to disclose can result in legal complications and penalties you don’t want.

Tax compliance isn't just a legal requirement; it’s peace of mind.

Final Thoughts

With globalization, more Indians are earning or holding assets abroad. But with that comes the responsibility of proper reporting.

If you have any foreign assets or income, or are confused about how to report them, it’s best to talk to a tax expert. It’s always better to disclose than defend.