Section 42 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 42 puts a fixed penalty on a resident who must file a return, who held a foreign asset or foreign income during the year, and who does not file the return in time. The penalty is ten lakh rupees as enacted, with a proviso for small bank balances and an Explanation on converting foreign currency. This article reads the section as the Act as enacted and published in the Gazette of India on 27 May 2015 prints it. Every amount and period below is "as enacted".
If a resident other than not ordinarily resident, who is required to furnish a return under section 139(1) of the Income-tax Act or its provisos, held a foreign asset, was a beneficiary of one, or had foreign-source income at any time during the previous year, and fails to furnish the return before the end of the relevant assessment year, the Assessing Officer may direct a penalty of ten lakh rupees, as enacted. The section does not apply to bank accounts with an aggregate balance not above a value equivalent to five hundred thousand rupees at any time during the previous year.
Who the section covers
Section 42 applies to "a person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act". That is the same group as an "assessee" under section 2(2). In plain terms, it is a resident who is not in the "not ordinarily resident" category. A non-resident is outside the section's words.
The person must also be one "who is required to furnish a return of his income for any previous year, as required under sub-section (1) of section 139 of the Income-tax Act or by the provisos to that sub-section". So the section bites only on someone who was required to file a return. This Act does not state who must file or the due date; it points to section 139(1) of the Income-tax Act, 1961 as printed in 2015. For residential status, see our guide on residential status under section 6; this Act takes nothing from it beyond naming the clause.
The three conditions
The person must, "at any time during such previous year":
| Limb | Condition |
|---|---|
| (i) | Held any asset (including financial interest in any entity) located outside India as a beneficial owner or otherwise |
| (ii) | Was a beneficiary of any asset (including financial interest in any entity) located outside India |
| (iii) | Had any income from a source located outside India |
The limbs are alternatives, joined by "or". Holding as "beneficial owner or otherwise" is wide, and limb (ii) separately catches a person who was only a beneficiary. Limb (iii) needs no foreign asset at all: any foreign-source income during the previous year is enough. The test is "at any time during such previous year", so an asset held for a short part of the year counts.
The default and the penalty
The person "fails to furnish such return before the end of the relevant assessment year". Then "the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten lakh rupees". The amount is as enacted.
Three points to note.
- The default is not filing the return before the end of the relevant assessment year. It is not about what the return says. A return furnished in time that is incomplete about foreign assets is the subject of section 43.
- The word is "may direct", so the penalty is imposed by a direction of the Assessing Officer.
- The sum is fixed. It is ten lakh rupees as enacted. It is not a multiple of tax, unlike the penalty in section 41.
If you hold foreign assets or earn foreign income and are unsure whether a return was required of you for a year, an early check of your filing position helps. Our income tax return filing team can go through your status and your return history with you.
The proviso: small bank balances
The proviso says that the section "shall not apply in respect of an asset, being one or more bank accounts having an aggregate balance which does not exceed a value equivalent to five hundred thousand rupees at any time during the previous year".
Read each part:
- "an asset, being one or more bank accounts": the proviso is about bank accounts, one or several.
- "aggregate balance": the balances in all such accounts are added up.
- "does not exceed a value equivalent to five hundred thousand rupees": the test is an amount in rupees as enacted, converted for foreign currency as the Explanation says.
- "at any time during the previous year": if the aggregate balance exceeded the limit at any time in the year, the proviso does not help.
A drafting point: the proviso speaks of "an asset". Limb (iii), foreign-source income, is not an asset. The proviso is silent on whether income earned in such an account is within it, and this article does not decide that. A reader with a small account that earned interest should read the words as printed and take advice.
The Explanation: converting foreign currency
For an account maintained in foreign currency, the Explanation says the rate of exchange for calculating the value in rupees "shall be the telegraphic transfer buying rate of such currency as on the date for which the value is to be determined as adopted by the State Bank of India constituted under the State Bank of India Act, 1955". The date for which the value is to be determined is therefore the date of the balance being tested. The State Bank of India Act, 1955 is quoted as printed; check current law.
How section 42 connects
The tax charge is in section 3. A wilful failure to furnish a return in relation to foreign income and asset can also be prosecuted under section 49; see sections 48 and 49. Our guides on the Black Money Act and foreign asset disclosure and on Schedule FA cover reporting under income-tax law.
An example
Sanjay Kulkarni, a resident other than not ordinarily resident, was required to file a return for a previous year. During that year he held shares in a company incorporated abroad. He did not file the return before the end of the relevant assessment year. Limb (i) is met because he held an asset located outside India, and the default is the failure to furnish the return in time. The Assessing Officer may direct a penalty of ten lakh rupees. Had he held only one foreign bank account whose aggregate balance never exceeded a value equivalent to five hundred thousand rupees at any time during the previous year, the proviso would have taken that asset out of the section. If the account had been in foreign currency, its balance would be converted at the telegraphic transfer buying rate adopted by the State Bank of India for the date being tested.
Need help with a missed return and foreign assets?
If a return was due and you held foreign assets or had foreign income, how and when you act matters. Our income tax return filing team can help you review the position, the foreign holdings and the next step.
Key takeaways
- Section 42 applies to a resident other than not ordinarily resident who was required to furnish a return under section 139(1) of the Income-tax Act or its provisos, as printed.
- The conditions are holding a foreign asset (including financial interest in any entity), being a beneficiary of one, or having foreign-source income, at any time during the previous year.
- The default is failing to furnish the return before the end of the relevant assessment year.
- The Assessing Officer may direct a penalty of ten lakh rupees, as enacted.
- The proviso excludes bank accounts with an aggregate balance not above a value equivalent to five hundred thousand rupees at any time during the previous year.
- Foreign-currency balances are converted at the State Bank of India telegraphic transfer buying rate for the date being tested.
- Later Finance Act amendments to section 42 must be checked before acting. References to the Income-tax Act, 1961 are as printed in 2015; check the corresponding provision of the current income-tax law, and check current law for the State Bank of India Act, 1955.
Read next
- Section 43: penalty for not disclosing foreign assets in the return
- Sections 48-49: prosecution for wilful failure to furnish a return
- Section 41: penalty in relation to undisclosed foreign income and asset
- Black Money Act and foreign asset disclosure
Disclaimer: Based on the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 as enacted and published in the Gazette of India on 27 May 2015, and on the Rules of 2015 as notified on 2 July 2015, as consulted on 2 October 2026. Later Finance Act amendments, amendment rules and the current income-tax law should be checked. This article is general information, not legal advice; check the official text before acting.