Introduction
For many resident taxpayers, holding an asset outside India is now routine. Salaried employees of multinational companies receive RSUs and ESPP shares in overseas brokerage accounts. Individuals invest abroad under the Liberalised Remittance Scheme. Returning NRIs often keep the bank accounts they opened while working overseas.Holding such assets is not a problem by itself. The difficulty arises when the asset is not reported in Schedule FA of the income-tax return. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ("BMA") treats this omission seriously, and the penalties apply even where the asset was purchased from fully taxed income.
The Income-tax Department now receives foreign account data automatically under the Common Reporting Standard (CRS) and FATCA. Mismatches between this data and Schedule FA are being picked up and taken up for action. This article explains the penalty framework, the relief available for small holdings and the one-time disclosure window open until 31 December 2026.
Who is covered
The reporting penalties under Sections 42 and 43, and prosecution under Sections 49 and 50, apply to a person who is resident and ordinarily resident (ROR) in India in the relevant previous year. A non- resident or a resident but not ordinarily resident (RNOR) is outside these provisions for that year.The tax under Section 3 has a wider reach. Under Section 2(2), it also covers an NR or RNOR who was resident in India in the year the foreign income was earned or the undisclosed asset was acquired. Becoming a non-resident later does not take an old undisclosed asset out of the Act.
The obligation applies to assets held as a beneficial owner "or otherwise", and to assets of which the person is a beneficiary. It applies to every category of person, including individuals, HUFs, firms and companies.
Two points are often overlooked:
• A returning NRI usually becomes ROR after a few years in India. From that year, every foreign account and investment still held must be reported.
• A foreign asset must be reported even if it earned no income during the year. Reporting and taxation are separate obligations.
Penalty and prosecution provisions at a glance
The BMA works at two levels. Where the source of a foreign asset cannot be explained, the asset itself is taxed at 30% and a penalty follows. Where the asset is explained but not reported, a flat penalty applies for the reporting failure.| Section | Default | Consequence |
|---|---|---|
| 3 and 41 | Undisclosed foreign income or asset (source not explained) | Tax at 30% of the income or the value of the asset; penalty equal to three times the tax (90% of the value) |
| 42 | ROR holding a foreign asset or income does not file the return before the end of the assessment year | Penalty of Rs 10 lakh |
| 43 | Return filed, but foreign asset or income omitted or inaccurately reported | Penalty of Rs 10 lakh |
| 44 | Default in payment of tax under the BMA | Penalty equal to the tax in arrears |
| 45 | Failure, without reasonable cause, to answer questions, sign statements, attend or produce documents | Penalty of Rs 50,000 to Rs 2 lakh |
| 49 and 50 | Wilful failure to file the return, or to report foreign assets or income in it | Rigorous imprisonment of 6 months to 7 years, with fine |
| 51 | Wilful attempt to evade tax, penalty or interest under the BMA | Rigorous imprisonment of 3 to 10 years, with fine |
Consequences under the Income-tax Act
The BMA is not the only exposure. The same lapse can also trigger consequences under the Income-tax Act. The Income-tax Act, 2025 applies from tax year 2026-27, and the Income-tax Act, 1961 continues to govern earlier years. The new Act renumbers the penalty provisions but keeps the rates unchanged.| Provision (1961 Act / 2025 Act) | Default | Consequence |
|---|---|---|
| Fourth proviso to Section 139(1) | ROR holding a foreign asset, signing authority in a foreign account, or a beneficial interest abroad | Return must be filed even if total income is below the basic exemption limit |
| Section 234F | Return filed after the due date | Late fee of Rs 5,000 (Rs 1,000 where total income does not exceed Rs 5 lakh) |
| Sections 234A, 234B and 234C | Foreign income not offered to tax, or tax not paid on time | Interest on the unpaid tax |
| Section 270A / Section 439 | Foreign income such as dividends, interest or capital gains not offered to tax | Penalty of 50% of the tax on under-reported income |
| Section 270A / Section 439 | Under-reporting arising from misreporting, such as suppression of facts | Penalty of 200% of the tax on under-reported income |
| Sections 276C and 276CC | Wilful attempt to evade tax, or wilful failure to file the return | Prosecution, with the term of imprisonment depending on the amount involved |
• Immunity is available for under-reporting. Under Section 270AA (Section 440 of the 2025 Act), the 50% penalty can be avoided by paying the tax and interest as assessed and not filing an appeal. This immunity is not available where the case is one of misreporting.
• No double taxation of the same income. Section 4(3) of the BMA provides that income taxed under the BMA does not form part of total income under the Income-tax Act. The department will proceed under one law or the other for the same income.
• Reporting and taxing are separate. Under-reporting penalties apply to income not offered to tax. The penalty for not reporting the asset itself in Schedule FA arises only under Section 43 of the BMA.
• Reassessment. Information received under CRS or FATCA is a common basis for reopening an assessment under Sections 147 and 148, within the time limits in Section 149.
The Rs 10 lakh penalty and the Rs 20 lakh relief
Sections 42 and 43 are the provisions most taxpayers encounter in practice. They impose a flat penalty
of Rs 10 lakh for the reporting failure itself. Paying full tax on the income from the asset is not, by itself,
a defence.
Section 42 applies only where the return is not filed before the end of the relevant assessment year. A belated return filed within that period takes the case out of Section 42, though Section 43 can still apply if Schedule FA is incomplete. Section 43 covers returns filed under Section 139(1), 139(4) or 139(5).
Position up to 30 September 2024. The only exception was where the asset was one or more foreign bank accounts with an aggregate balance not exceeding Rs 5 lakh at any time during the year. Shares, RSUs, insurance policies and other assets had no threshold at all.
Position from 1 October 2024. The Finance (No. 2) Act, 2024 substituted the proviso to Sections 42 and 43. The penalty does not apply where the aggregate value of the foreign asset or assets, other than immovable property, does not exceed Rs 20 lakh.
Prosecution aligned. The Finance Act, 2026 inserted the same Rs 20 lakh proviso in Sections 49 and 50, with retrospective effect from 1 October 2024. Prosecution for non-filing or non-reporting is therefore also excluded for such assets.
The relief has clear limits:
• Immovable property is excluded. A flat or plot abroad of any value remains exposed to the Rs 10 lakh penalty if not reported.
• The limit is an aggregate. All foreign assets other than immovable property are added together. Splitting holdings across accounts does not help.
• Reporting is still mandatory. The relief removes the penalty, not the obligation to fill Schedule FA.
• Section 41 is unaffected. Where the source of the asset is not explained, tax at 30% and the Section 41 penalty can still apply, whatever the value.
• Rupee value. Foreign currency balances are converted at the SBI telegraphic transfer buying rate, as provided in the Explanation to Section 42.
• Earlier years need care. The penalty threshold applies from 1 October 2024. Penalty proceedings for earlier years may be examined under the old Rs 5 lakh bank-balance exception.
Section 42 applies only where the return is not filed before the end of the relevant assessment year. A belated return filed within that period takes the case out of Section 42, though Section 43 can still apply if Schedule FA is incomplete. Section 43 covers returns filed under Section 139(1), 139(4) or 139(5).
Position up to 30 September 2024. The only exception was where the asset was one or more foreign bank accounts with an aggregate balance not exceeding Rs 5 lakh at any time during the year. Shares, RSUs, insurance policies and other assets had no threshold at all.
Position from 1 October 2024. The Finance (No. 2) Act, 2024 substituted the proviso to Sections 42 and 43. The penalty does not apply where the aggregate value of the foreign asset or assets, other than immovable property, does not exceed Rs 20 lakh.
Prosecution aligned. The Finance Act, 2026 inserted the same Rs 20 lakh proviso in Sections 49 and 50, with retrospective effect from 1 October 2024. Prosecution for non-filing or non-reporting is therefore also excluded for such assets.
The relief has clear limits:
• Immovable property is excluded. A flat or plot abroad of any value remains exposed to the Rs 10 lakh penalty if not reported.
• The limit is an aggregate. All foreign assets other than immovable property are added together. Splitting holdings across accounts does not help.
• Reporting is still mandatory. The relief removes the penalty, not the obligation to fill Schedule FA.
• Section 41 is unaffected. Where the source of the asset is not explained, tax at 30% and the Section 41 penalty can still apply, whatever the value.
• Rupee value. Foreign currency balances are converted at the SBI telegraphic transfer buying rate, as provided in the Explanation to Section 42.
• Earlier years need care. The penalty threshold applies from 1 October 2024. Penalty proceedings for earlier years may be examined under the old Rs 5 lakh bank-balance exception.
Illustrations
The three cases below assume the taxpayer is ROR and the omission relates to a year after 1 October
2024.
In Case B, the entire Rs 10 lakh exposure arises only from the reporting lapse. Correct reporting in
Schedule FA would have avoided it. Cases B and C may also be eligible for the disclosure scheme
explained below.
| Case | Facts | Likely exposure under the BMA |
|---|---|---|
| A | A salaried employee holds RSUs worth Rs 15 lakh in the employer’s overseas brokerage account. Perquisite tax was deducted through payroll. Not reported in Schedule FA. | No Section 43 penalty, as the aggregate value is within Rs 20 lakh. Schedule FA should still be corrected. |
| B | Same employee, but RSUs and an ESPP holding together are worth Rs 35 lakh. Source fully explained through Form 16 and payroll records. | Section 43 penalty of Rs 10 lakh may be levied. No tax or Section 41 penalty, as the source is explained. |
| C | Resident businessman holds a fixed deposit abroad of Rs 60 lakh. Source of the deposit cannot be explained with records. | Tax of Rs 18 lakh (30%) and Section 41 penalty of Rs 54 lakh. Section 43 penalty of Rs 10 lakh may also be levied. |
One-time window: FAST-DS, 2026
The Foreign Assets of Small Taxpayers Disclosure Scheme, 2026 (FAST-DS) is open from 16 August 2026
to 31 December 2026. It is contained in Sections 130 to 144 of the Finance Act, 2026, and the Rules
were notified on 14 August 2026. Declarations are filed online in Form 1.
| Category | Value Limit | Amount Payable |
|---|---|---|
| Undisclosed foreign asset or income, where the source cannot be explained or the income was not taxed | Aggregate up to Rs 1 crore | Tax at 30% plus an equal additional amount (60% in all) |
| Foreign asset acquired from income already taxed in India, or while non-resident, but not reported in Schedule FA | Aggregate up to Rs 5 crore | Flat fee of Rs 1 lakh |
Key conditions:
• Assets are valued as on 31 March 2026, under the valuation rules in the Scheme Rules.
• A valid declaration gives immunity from further tax, penalty and prosecution under the BMA for the declared asset or income.
• The scheme is not available for assessment years where BMA assessment is already completed, or for proceeds of crime under PMLA proceedings.
• The amount determined in Form 2 must be paid within two months of the month-end of receipt.
A further two months is allowed with interest at 1% per month.
For an employee in Case B, a fee of Rs 1 lakh under FAST-DS compares with an exposure of Rs 10 lakh per year under Section 43. The scheme has to be evaluated on the facts of each case before 31 December 2026.
• Assets are valued as on 31 March 2026, under the valuation rules in the Scheme Rules.
• A valid declaration gives immunity from further tax, penalty and prosecution under the BMA for the declared asset or income.
• The scheme is not available for assessment years where BMA assessment is already completed, or for proceeds of crime under PMLA proceedings.
• The amount determined in Form 2 must be paid within two months of the month-end of receipt.
A further two months is allowed with interest at 1% per month.
For an employee in Case B, a fee of Rs 1 lakh under FAST-DS compares with an exposure of Rs 10 lakh per year under Section 43. The scheme has to be evaluated on the facts of each case before 31 December 2026.
Judicial view on bona fide omissions
Section 43 says the Assessing Officer "may" levy the penalty. A Special Bench of the Mumbai Tribunal
has now held that the penalty is discretionary, not automatic. The outcome in each case still turns on
facts and evidence.
• Vinil Venugopal v. DDIT (Inv.) (ITAT Mumbai Special Bench, BMA Nos. 33 and 34/Mum/2024, order dated 14.10.2025): "may" in Section 43 cannot be read as "shall". The requirement of a hearing under Section 46(3) shows the penalty is not automatic. A technical or bona fide breach need not attract the penalty. The matter was sent back to the Division Bench on merits.
• Addl. CIT v. Leena Gandhi Tiwari (ITAT Mumbai, BMA No. 1/Mum/2022, order dated 29.03.2022): the assessee was only a signatory to a foreign account belonging to her late mother. The penalty was deleted as the omission was bona fide.
• Ocean Diving Centre Ltd. v. CIT(A) (ITAT Mumbai, BMA No. 22/Mum/2023, order dated 30.08.2023): the foreign investment was shown in the balance sheet and elsewhere in the return, but not in Schedule FA. With no mala fide, the penalty was cancelled.
• Kumar Ramanathan v. DDIT (ITAT Chennai, AYs 2020-21 to 2023-24): a salaried employee had reported his ESOPs but missed one foreign fund investment. The penalty was deleted, as the investment came from disclosed sources and the lapse was not deliberate.
• Shobha Harish Thawani v. JCIT [2023] 154 taxmann.com 564 (ITAT Mumbai, order dated 09.08.2023): on the other side, the penalty of Rs 10 lakh for each of two years was upheld, despite the source being explained. The Tribunal held that Section 43 punishes non-reporting, not unaccounted investment. The Special Bench later distinguished this ruling on the ground that the bona fide claim was unsubstantiated.
The lesson from these rulings is that a bona fide plea must be backed by documents. These include the source of funds, tax already paid, disclosures elsewhere in the return or financial statements, and the taxpayer's conduct once the lapse was noticed.
• Vinil Venugopal v. DDIT (Inv.) (ITAT Mumbai Special Bench, BMA Nos. 33 and 34/Mum/2024, order dated 14.10.2025): "may" in Section 43 cannot be read as "shall". The requirement of a hearing under Section 46(3) shows the penalty is not automatic. A technical or bona fide breach need not attract the penalty. The matter was sent back to the Division Bench on merits.
• Addl. CIT v. Leena Gandhi Tiwari (ITAT Mumbai, BMA No. 1/Mum/2022, order dated 29.03.2022): the assessee was only a signatory to a foreign account belonging to her late mother. The penalty was deleted as the omission was bona fide.
• Ocean Diving Centre Ltd. v. CIT(A) (ITAT Mumbai, BMA No. 22/Mum/2023, order dated 30.08.2023): the foreign investment was shown in the balance sheet and elsewhere in the return, but not in Schedule FA. With no mala fide, the penalty was cancelled.
• Kumar Ramanathan v. DDIT (ITAT Chennai, AYs 2020-21 to 2023-24): a salaried employee had reported his ESOPs but missed one foreign fund investment. The penalty was deleted, as the investment came from disclosed sources and the lapse was not deliberate.
• Shobha Harish Thawani v. JCIT [2023] 154 taxmann.com 564 (ITAT Mumbai, order dated 09.08.2023): on the other side, the penalty of Rs 10 lakh for each of two years was upheld, despite the source being explained. The Tribunal held that Section 43 punishes non-reporting, not unaccounted investment. The Special Bench later distinguished this ruling on the ground that the bona fide claim was unsubstantiated.
The lesson from these rulings is that a bona fide plea must be backed by documents. These include the source of funds, tax already paid, disclosures elsewhere in the return or financial statements, and the taxpayer's conduct once the lapse was noticed.
Common reporting lapses we see
• RSUs and ESPP shares. Vested shares and the cash balance in the overseas brokerage account are reportable, even if no shares were sold. Employees often report only the shares sold during the year.• Wrong reporting period. Schedule FA in the current ITR forms asks for details for the calendar year ending 31 December, not the Indian financial year. Peak and closing values must be taken for that period.
• Old foreign bank accounts. Accounts opened during an overseas assignment and left dormant are frequently forgotten.
• LRS investments. Investments made through overseas investing platforms must be reported, including small balances.
• Signing authority. Accounts held for a family member, or a company abroad where the taxpayer is a signatory, are reportable even without beneficial ownership.
• Foreign insurance and pension plans. Policies with a cash or surrender value fall within Schedule FA.
• Wrong ITR form. A resident with foreign assets cannot file ITR-1 or ITR-4, as these forms have no Schedule FA.
If a notice is received
1. Read the notice closely and note the section invoked, the assessment year and the date for reply.2. Confirm residential status for that year. If the taxpayer was NR or RNOR, Sections 42 and 43 do not apply.
3. Compute the aggregate value of the foreign assets for the relevant period, separating immovable property. Check whether the Rs 20 lakh threshold applies.
4. Collect evidence of the source: Form 16, payroll records, LRS remittance documents (Form A2), bank statements and earlier returns.
5. Reconcile the department's CRS or FATCA data with the taxpayer's own records. Differences in valuation or account ownership are common.
6. File a reasoned reply within the time allowed, with supporting documents and relevant case law. A belated or incomplete reply weakens even a good case.
7. If a penalty order is passed, an appeal lies to the CIT(A) within 30 days of service of the demand notice (Section 15), and then to the ITAT within 60 days (Section 18). Until 31 December 2026, also check whether a FAST-DS declaration is available for the asset.
Frequently asked questions
Is the Rs 10 lakh penalty levied per asset or per year?
Section 43 refers to a failure in the return “for
any previous year”. In practice it is levied once per assessment year, not per asset. Where the omission
continues over several years, a separate penalty may be proposed for each year, as happened in Shobha
Harish Thawani.
I paid tax on all income from the foreign asset. Can a penalty still apply?
Yes. Sections 42 and 43
penalise the failure to report. Tax paid on the income helps establish bona fides, and the Special Bench
has confirmed the officer's discretion, but it does not by itself remove the penalty.
Can I correct Schedule FA after filing the return?
A revised return can be filed within the time allowed
under the Income-tax law. Correcting the omission before the department raises it is strong evidence of
good faith.
Does the Rs 20 lakh relief cover a foreign apartment worth Rs 15 lakh?
No. Immovable property is
excluded from the relief, whatever its value.
Are NRIs required to fill Schedule FA?
No. Schedule FA applies only to residents who are ordinarily
resident in the relevant year. However, an asset acquired while the person was resident can still be
taxed under Section 3 of the BMA if its source is not explained.
I have an RSU account that I never reported. What should I do now?
First correct Schedule FA in the
current year's return. For past years, check whether the aggregate value was within Rs 20 lakh. If it was
not, FAST-DS allows such assets, acquired from taxed income, to be regularised for a fee of Rs 1 lakh if
the declaration is filed by 31 December 2026.
