Section 5 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 5 sets the rules of arithmetic for the charge. It denies deductions and set-off of losses, lets income that has already been assessed reduce the value of an undisclosed foreign asset, fixes a proportion for immovable property, and ends with an Illustration. All of it is read here from the Act as enacted and published in the Gazette of India on 27 May 2015.
In computing the total undisclosed foreign income and asset, no deduction for expenditure or allowance and no set-off of any loss is allowed. Income already assessed or assessable for an earlier year under the Income-tax Act, or under this Act, is reduced from the value of the asset if the assessee furnishes evidence, to the Assessing Officer's satisfaction, that the asset was acquired from that income. For immovable property the reduction is proportionate, and the Act's Illustration shows it working.
Sub-section (1)(i): no deduction, no set-off
Section 5(1)(i) says no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, "whether or not it is allowable in accordance with the provisions of the Income-tax Act".
The words "whether or not" matter. Even a deduction that would be available under the Income-tax Act, 1961 is not available here. If an assessee has a foreign loss in one place and undisclosed foreign income in another, the loss cannot be set off, as printed. This follows the basic idea of the Act: the charge in section 3 is a flat rate on the gross total, so the computation does not trim it by costs.
Sub-section (1)(ii): income already assessed reduces an asset's value
Section 5(1)(ii) deals with an asset that was bought out of income that has already borne tax. It covers two kinds of income:
- (a) income which has been assessed to tax for any assessment year under the Income-tax Act prior to the assessment year to which this Act applies; or
- (b) income which is assessable or has been assessed to tax for any assessment year under this Act.
Such income "shall be reduced from the value of the undisclosed asset located outside India". The condition comes after the main words: "if, the assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has been acquired from the income which has been assessed or is assessable, as the case may be, to tax."
Three things follow.
- It is a reduction of value, not a refund. The income is taken out of the value of the asset before tax is charged on the asset.
- The burden of evidence is on the assessee. The assessee has to furnish evidence of acquisition from the assessed or assessable income.
- The officer must be satisfied. The test is the Assessing Officer's satisfaction, so documents that tie the asset to the income matter. The Act prescribes no document list, and the text is silent on form.
If you are preparing this evidence for a foreign property or account, our legal consultation team can help you organise the records.
Sub-section (2): the immovable property proportion
Section 5(2) gives a formula in words for immovable property. The amount of deduction under clause (ii) is the amount which bears to the value of the asset as on the first day of the financial year in which it comes to the notice of the Assessing Officer the same proportion as the assessable or assessed foreign income bears to the total cost of the asset.
| Element | Meaning |
|---|---|
| Value of the asset | As on the first day of the financial year in which it comes to the Assessing Officer's notice |
| Assessable or assessed foreign income | The part of the cost that was funded from income that is assessable or assessed |
| Total cost of the asset | The full cost of the asset |
| Deduction | Value of the asset multiplied by (assessed or assessable income divided by total cost) |
In effect, if one-fifth of the cost came from income that was assessed, one-fifth of today's value is deducted, not one-fifth of the cost. The proportion is applied to the value at the date the clause names.
The Act's own Illustration
Section 5 ends with this Illustration, quoted from the Act as printed.
A house property located outside India was acquired by an assessee in the previous year 2009-10 for fifty lakh rupees. Out of the investment of fifty lakh rupees, twenty lakh rupees was assessed to tax in the total income of the previous year 2009-10 and earlier years. Such undisclosed asset comes to the notice of the Assessing Officer in the year 2017-18. If the value of the asset in the year 2017-18 is one crore rupees, the amount chargeable to tax shall be A-B=C, where A=Rs.1 crore, B=Rs. (100 x 20/50) lakh = Rs.40 lakh, C=Rs. (100-40) lakh = Rs.60 lakh.
Read in order: the house cost fifty lakh rupees; twenty lakh rupees of that was already assessed, so the assessed share is twenty out of fifty. The value in the year of notice is one crore rupees (A). The deduction is that share of the value: forty lakh rupees (B). The amount chargeable is sixty lakh rupees (C). The figures and years are exactly as the Act prints them; they are the Act's own illustration and not a statement about any actual case.
One printing point: the illustration is printed with "A-B=C" and "Rs. (100 x 20/50) lakh", which is how the Act writes it. The article does not correct the notation.
A second example, with invented numbers
Rohit Menon, a resident other than not ordinarily resident, owns a flat abroad bought for eighty lakh rupees. Twenty lakh rupees of the cost came from income that was assessed in his earlier returns, and he gives the Assessing Officer evidence of that. The value of the flat on the first day of the financial year in which it comes to notice is two crore rupees. The proportion is twenty over eighty, so the deduction is one-quarter of two crore rupees, which is fifty lakh rupees. The amount chargeable is one crore fifty lakh rupees. At the rate section 3 prints, thirty per cent. as enacted, the tax would be forty-five lakh rupees, before the other provisions of the Act. This is arithmetic on the printed rules only.
What section 5 does not say
The section is silent on movable assets such as bank accounts and shares: the proportion in sub-section (2) is for immovable property. It is also silent on how evidence is to be presented. Section 5(1)(ii) still applies to the value of "the undisclosed asset located outside India" in general, but the Act gives the proportion method for immovable property only.
Need help with documenting how a foreign asset was funded?
The reduction in section 5 turns on evidence that an asset was bought from income already assessed. If you have overseas property or investments and need to pull together proof of funding, speak to us. Our legal consultation service can help you assess your records and the next step.
Key takeaways
- No deduction for expenditure or allowance, and no set-off of any loss, is allowed in computing total undisclosed foreign income and asset.
- Income already assessed under the Income-tax Act for an earlier year, or assessable or assessed under this Act, reduces the value of the asset if evidence satisfies the Assessing Officer.
- For immovable property the reduction is the proportion that assessed or assessable income bears to the total cost, applied to value on the first day of the financial year of notice.
- The Act's Illustration gives one crore rupees less forty lakh rupees equals sixty lakh rupees.
- The section is silent on the proportion for movable assets and on the form of evidence.
- Later Finance Act amendments to section 5 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.
Read next
- Section 3: charge of tax on undisclosed foreign income and asset
- Section 4: scope of total undisclosed foreign income and asset
- Section 10: assessment of undisclosed foreign income and asset
- Black Money Act: undisclosed foreign income, an overview
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.