It is important to ensure transparency in the foreign exchange transactions and holdings. Therefore, the government has mandated disclosure of foreign assets while filing the income tax return. This was done through the introduction of Schedule FA in income tax return form. Let’s understand in detail the disclosure requirements of foreign assets in income tax returns.

What is Schedule FA?

Schedule FA forms part of the ITR form that requires the assessee to disclose the foreign assets and liabilities being held by them. It helps the government to track the foreign assets owned by the Indian taxpayers. It also assists the government in keeping an eye on the money laundering and siphoning off the black money into foreign and tax haven countries.

Who is Required to Report Foreign Assets?

Reporting under Schedule FA is required to be done by those individuals and HUFs who are residents and ordinarily resident in India. They shall declare whether they hold any asset outside India including any financial interest in an entity or having signing authority in an account located abroad. Reporting shall also be done by the taxpayers who hold foreign assets as beneficial owners or who derive benefit from the assets as beneficiaries.

The following provisions of the Income Tax Act, 1961 specify explicit requirements for the persons to file returns and disclose their foreign assets in ITR as well as exceptions for the same:

Fourth Proviso to Section 139(1): A person who is resident and ordinarily resident in India who is not required to file the income tax return shall still file the same on or before the due date if such person:

• Holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India; or
• Is a beneficiary of any asset (including any financial interest in any entity) located outside India

Fifth Proviso to Section 139(1): The person who is the beneficiary of any asset (including financial interest in any entity) located outside India shall not be required to file the income tax return where the income arising from such asset is includible in the income of the person specified in clause (a) above i.e., in the income of the beneficial owner.

Disclosure Requirements Under Schedule FA

Schedule FA in ITR is a detailed schedule that covers most of the information relating to holding of foreign assets by the Indian citizens. Here’s the format and disclosure requirement under Schedule FA:

Table section	Description	Examples
A1	Foreign Depositary Accounts	Details relating to savings accounts, checking accounts and money market accounts held outside the country of residence of the taxpayer.
A2	Foreign Custodial Accounts	Details relating to investment accounts held with a custodian bank outside outside the country of residence of the taxpayer.
A3	Foreign Equity & Debt Interest	Details relating to mutual funds, stocks, bonds, and other financial instruments held outside the country of residence of the taxpayer. This also includes holding beneficial ownership of foreign entities outside India.
A4	Immovable Property (Land & Building) Outside India	Details relating to physical property like houses, apartments, or land located outside India.
A5	Cash & Equivalents Outside India	Details relating to physical cash and other assets including precious metals, jewels etc., easily convertible into cash held outside India.
A6	Loans & Advances Given Outside India	Details relating to money provided as loans to individuals or entities outside the country of residence of the taxpayer.
A7	Unquoted Equity Shares Held Outside India	Details relating to shares in private companies located outside the country of residence of the taxpayer.
A8	Investment in Business Outside India	Details relating to ownership interest in a business operating outside the country of residence of the taxpayer.
A9	Other Foreign Assets or Financial Interest	Details relating to any other foreign asset or financial interest not covered above.
A10	Income from Foreign Assets	Details relating to income generated from foreign assets (dividends, interest, rent).

Important Points Regarding Schedule FA in ITR

It is important to provide accurate disclosure and information in Schedule FA in ITR to avoid any legal hassle. Here are certain points that are crucial in this regard:

• Properly categorise your foreign asset based on the above table as you have to furnish the asset type while filing the Schedule FA in income tax return. Also keep the basic details of the asset handy like name, address, country etc.
• You will need to provide the financial details of your asset as well. This includes the value at the time of acquisition, the opening balance at the start of the financial year, the highest value the asset reached during the financial year and the closing balance at the end of the financial year.
• You need to report the income earned and the proceeds received from the sale or redemption of the foreign asset.
• You can claim the Double Taxation Avoidance Agreement relief if you have taxable income that can be taxed in both the foreign country as well as India.

Consequences of Not Disclosing Foreign Assets in ITR

In case you hold foreign assets but don’t disclose them in the ITR as per the requirement, then it may attract penalties. This includes:

• Penalty of Rs. 10 lakhs for each year of non-compliance
• Non-reporting of foreign assets can suggest willful evasion of tax. In such cases, this may attract criminal proceedings and consequent imprisonment.
• In case you fail to disclose your foreign asset or income, you may not be able to claim the benefits of the Double Taxation Avoidance Agreement (DTAA), thereby leading to double taxation of your income.

In a Nutshell

Therefore, it is important for taxpayers to ensure proper disclosure of their assets and income through Schedule FA of ITR. Non-disclosure can lead to heavy penalties as well as unnecessary legal proceedings against the taxpayer. Further, understanding the DTAA is crucial if you are generating income from such foreign assets. Having a thorough understanding of the taxation laws in India as well as the DTAA becomes crucial to avoid double taxation on your income. For more such useful information, feel free to contact the ASC Group.