Resident Indians must report foreign mutual fund holdings and other overseas assets in ITR under Schedule FA. Know how to determine residential status, convert income to INR, claim foreign tax credit via Form 67, and avoid hefty penalties for non-disclosure.
In cases of non-disclosure of foreign assets, a penalty of Rs 10 lakh per undisclosed foreign asset may be levied for assets worth over Rs 20 lakh. (Canva)
As the foreign income of taxpayers categorised as resident and ordinarily resident (ROR) is taxable in India, it must be reported in the income tax returns (ITR). This has to be reported under specific heads such as salary, house property, and capital gains.
This foreign income needs to be converted into rupee using the telegraphic transfer buying rate on the last day of the financial year.
Taxpayers can claim foreign tax credit (FTC) via Form 67 if tax was paid abroad (relief under Section 90/91 of the Income-Tax Act).
Who is an ROR
According to the Indian income-tax provisions, an individual is taxed based on his residential status. While an ROR is taxed on global income, a non-resident (NR) or not ordinary resident (NOR) is taxed only on India sourced income.
An individual is considered a ROR for income tax purposes if they satisfy two conditions. First, they must qualify as a resident in the current financial year, which means they were present in India for 182 days or more during the year, or 60 days or more during the year and 365 days or more in the preceding four years.
Second, to be classified as “ordinarily resident,” they must have been a resident in India for at least two out of the 10 immediately preceding financial years, and must have stayed in India for 730 days or more during the seven preceding years. Only individuals meeting both conditions are treated as ROR and are taxable in India on their global income.
Disclose in Schedule FA
Resident Indians who own foreign assets must disclose them in Schedule FA (Foreign Assets) of their ITR, applicable in ITR-2 or ITR-3. The types of assets to be reported include foreign bank accounts, foreign shares and holdings in mutual funds investing abroad, immovable property abroad, interests in trusts, retirement accounts, and other foreign-held financial assets.
Amit Baid, head, Tax, BTG Advaya, a tax and consulting firm, says if the individual’s total income exceeds Rs 1 crore during the financial year, details of the cost of acquisition of foreign shares must also be reported in Schedule AL. “Foreign assets must be declared in Schedule FA, even if they generate no income during the year,” he says.
Penalties for non-disclosure
In cases of non-disclosure of foreign assets, a penalty of Rs 10 lakh per undisclosed foreign asset may be levied for assets worth over Rs 20 lakh. Additionally, misreporting can attract penalties of up to 200% of the tax due. In more serious cases, the Act also provides for prosecution, with imprisonment of up to seven years.
Sonam Chandwani, managing partner, KS Legal & Associates, says the Schedule FA requires detailed particulars such as country of location, nature of asset, date of acquisition, and peak balance in case of accounts. “Omission, understatement, or misrepresentation of such assets may amount to a prosecutable offence under Section 50 of the Black Money Act,” she says.
For valuation purposes, in the case of foreign bank accounts and shares, the peak balance or peak value during the year must be reported. For other assets such as property or retirement accounts, taxpayers generally disclose the original purchase cost, especially when a current valuation is not readily available.
Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm, says if a foreign asset is inherited, the taxpayer should report the date of inheritance, the fair market value at that time, and the details of the deceased owner from whom the asset was inherited.
Claim foreign tax credit
In case any foreign sourced income is already taxed in the foreign jurisdiction and the individual is also subject to tax in India owing to residency, the individual can claim foreign tax credit on the doubly taxed income in accordance with Double Taxation Avoidance Agreement (DTAA) which India has entered into with various countries.
Santhosh Sivaraj, partner, Global Employer Services, tax & regulatory services, BDO India, says in case of reporting of foreign sourced income, in accordance with Section 90(2) of the I-T Act), it allows an individual to choose between the provisions of the I-T Act or the Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the individual.
For example, foreign sourced dividend is taxable for an individual at the 30% tax rate in India whereas the DTAA requires to offer the dividends to tax at 15%. Since the DTAA is more beneficial to the individual, the treaty rate can be adopted.
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