Rupee depreciation and strict valuation rules hinder foreign income disclosure

Mumbai: The rupee's slide over the years, stern valuation rules, and amounts beyond the low stipulated cut-offs are deterring many who want to come clean on undisclosed foreign income and assets.

The one-time voluntary disclosure window, which opened on August 16, allows a person to regularise overseas stocks, properties, ESOPs, dividend, interest etc up to ₹1 crore on payment of 60% tax and penalty.

While date of exchange rate for converting dollar assets into INR is fixed as March 31, 2026, the rules don't spell out the corresponding date for income. Given rupee's fall of 14 - 33% in 3-7 years, for many the ₹1 crore is breached if March 31 is taken as currency conversion date.

But, opinions differ. Ved Jain, former ICAI president, said that since under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015, the valuation date for undisclosed foreign asset is the date on which it comes to assessing officer's notice, the scheme takes the valuation date as March 31, 2026 for income as well so as to provide clarity regarding eligibility and for computing tax and penalty.

However, according to chartered accountant Ashish Karundia, "Undisclosed foreign income means income from a source outside India that was chargeable to tax in India but not offered to tax under the 1961 I-T law. The starting point is to determine how that income would have been computed and offered to tax under existing law. This requires reference to the I-T Rules, 1962, including Rule 115, which prescribes conversion of foreign-currency income. Thus, the applicable rate is the one that prevailed during the year income was earned."

Taxpayers with undisclosed income above ₹1 crore (say, ₹2 cr) are exploring options like first filing an 'updated return' followed by filing under Foreign Assets of Small Taxpayers Disclosure Scheme, 2026 (FAST-DS). Since tax outgo for updated return could be higher, an assessee could save ₹30-40 lakh.

Thanks to the ₹1 crore cap, there's a temptation to split undisclosed income between an updated return and the FAST-DS scheme (by offering the excess over ₹1 crore to tax through the updated return while claiming the benefit of FAST-DS for the balance), said Harshal Bhuta, a chartered accountant. While this looks attractive given tax differential of up to 40%, along with immunity from penalty and prosecution, one risks the FAST-DS declaration being treated as void on grounds of misrepresentation or suppression of facts, leaving a taxpayer with no recourse in future, said Bhuta.

Aimed at giving assessees a chance to correct genuine mistakes, the scheme allows declaration of upto ₹5 cr foreign assets acquired with tax-paid money by residents using the liberalised remittance scheme or returning NRIs who missed declaring foreign accounts. But valuation rules can produce curious result.

For several foreign assets, the value is broadly the higher of acquisition cost and market value. "If an overseas asset bought for ₹5.25 crore is today worth only ₹3 crore, its value for the scheme may still remain ₹5.25 crore. The taxpayer could therefore fall outside the scheme," said advocate Priyanshi Chokshi.

Where the prescribed valuation is not done, indexed cost of acquisition is the deemed fair market value. Consider a property bought for ₹4 crore is now worth ₹3.5 crore, while its indexed cost is ₹5.2 crore. Here, the indexed cost pushed the taxpayer beyond the ₹5 crore limit. "In borderline cases, valuation is not merely a compliance exercise. It could decide eligibility itself. Some clarification on falling-value assets and borderline cases would help," said Chokshi.