It is mandatory for every individual, who qualifies as “Resident and Ordinarily Resident” of India, to file income-tax return (ITR) if the person has any asset (including financial interest in any entity) located outside India or is a signing authority in any account overseas. This applies to even those who do not have any taxable income. This is reported under Schedule FA, which now also includes “beneficial owner or otherwise” and “beneficiary” of any asset (including any financial interest in any entity) located outside India.
However, the “beneficiary” is not required to file ITR if income from such assets is included in the income of the individual who is required to file ITR in India. Reporting in schedule FA is mandatory even if the same information is captured in any other schedule (like schedule AL).
The schedule FA, unlike any other schedule, requires exhaustive information that may not be always readily available. For instance, holding equity shares, bonds and debentures requires you to disclose peak value of the investment during the accounting period. Apart from value, the income earned from such foreign assets during the relevant financial year along with the nature of income and head of income under which such income has been offered to tax also needs to be reported about each foreign asset. The taxpayer has to scan through all the investments, bank statements, property records, loan statements, etc, to correctly report the information in Schedule FA.
Interestingly, schedule FA follows the “accounting period” concept instead of financial year. Accounting period is categorized into three types. Type 1 is where the accounting period is from 1 January to 31 December in jurisdictions where the calendar year is considered for the purpose of closing of accounts and tax filings. Many European countries, the US, and Singapore follow this. Type 2 is where the accounting period is from 1 April to 31 March in jurisdictions where the financial year is adopted. Type 3 is where the accounting period is of 12 months, which ends on any day succeeding 1 April in respect of assets in those jurisdictions where any other period of 12 months is adopted as the basis for the purpose of closing of accounts and tax filings. Australia follows this method.
The above difference between the accounting period and financial year can lead to a mismatch of assets reported and income taxed in the ITR. For instance, any foreign asset acquired and held, say, in May 2021, will need to be reported in the ITR for financial year 2021-22. However, if a foreign asset is acquired, say, in January 2022, for which the relevant accounting year in the foreign jurisdiction is the calendar year 2022, the same may not require reporting in the financial year 2021-22. Although the asset acquired in January 2022 may not require reporting in the financial year 2021-22, the income earned from such asset during financial year 2021-22 will have to be reported.
The income-tax department has also provided some relief for an expat (not being an Indian citizen), who is in India on a business, employment, or student visa, and has acquired an asset during any financial year in which he was non-resident, is not required to be reported in schedule FA if no income is derived from such asset during the current financial year.
Non-Residents and Not Ordinarily Residents are out of the ambit of schedule FA.
Expats and Indian citizens, who qualify as “Resident and Ordinarily Residents”, should be very careful in reporting foreign assets/ income in the ITR. Any omission or inaccurate particulars may invite additional tax at a flat rate of 30%, a penalty up to 3 times the tax and prosecution under the Black Money Act. Failure to furnish any information or furnishing inaccurate information in the return with respect to foreign income and foreign assets could also trigger a penalty of ₹10 lakh.
Sonu Iyer is tax partner and people advisory services leader & Siddharth Deb is tax director, people advisory services, at EY India.