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It is mandatory for anyone qualifying as a “resident and ordinarily resident” of India to file an income tax return (ITR) if the person owns any asset (including a financial interest in an entity) located outside India or is a signing authority in any offshore account. This applies even to those who have no taxable income. This is declared in Schedule FA, which now also includes “beneficial or other owner” and “beneficiary” of any asset (including any financial interest in any entity) located outside India.
However, the “beneficiary” is not required to file an ITR if the income from these assets is included in the income of the person who is required to file an ITR in India. Reporting in Appendix FA is mandatory even if the same information is entered in any other timetable (such as the AL timetable).
Schedule FA, unlike any other schedule, requires comprehensive information that is not always readily available. For example, holding stocks, bonds and debentures requires you to disclose the maximum value of the investment during the accounting period. In addition to the value, the income derived from these foreign assets during the financial year concerned as well as the nature of the income and the head of income under which this income has been proposed for tax must also be declared for each foreign asset. . The taxpayer must go through all investments, bank statements, property records, loan statements, etc., to properly report information on Schedule FA.
Interestingly, Schedule FA follows the concept of “accounting period” instead of financial year. The accounting period is classified into three types. Type 1 is where the accounting period runs from January 1 to December 31 in jurisdictions where the calendar year is considered for the purposes of closing accounts and tax returns. Many European countries, the United States and Singapore follow this model. Type 2 corresponds to the accounting period from April 1 to March 31 in jurisdictions where the financial year is adopted. Type 3 corresponds to the 12-month accounting period, which ends on any day following April 1 in respect of assets in jurisdictions where any other 12-month period is adopted as the basis for the purpose of closing accounts and tax returns. Australia follows this method.
The above difference between the accounting period and the fiscal year may result in a mismatch between the assets declared and the income taxed in the ITR. For example, any foreign assets acquired and held, say, in May 2021, will need to be reported in the ITR for the 2021-22 fiscal year. However, if a foreign asset is acquired, for example, in January 2022, for which the relevant accounting period in the foreign jurisdiction is the calendar year 2022, it may not be necessary to report during the 2021-22 financial year. Although the asset acquired in January 2022 may not require reporting in fiscal year 2021-22, income from this asset in fiscal year 2021-22 will need to be reported.
The Income Tax Department has also granted some relief to an expatriate (not an Indian citizen) who is in India on a business, employment or student visa, and who has acquired an asset in a fiscal year in which it was not resident, should not be reported on Schedule FA if no income is derived from that asset in the current fiscal year.
Non-residents and ordinary non-residents are not covered by Schedule FA.
Expatriates and Indian citizens, who qualify as “Residents and Ordinarily Residents”, should be very careful in declaring foreign assets/income in the ITR. Any omissions or misrepresentations may result in additional tax at a flat rate of 30%, a penalty of up to 3 times the tax, and prosecution under the Black Money Act. Failure to provide information or providing inaccurate information in the declaration regarding foreign income and assets could also result in a penalty of ₹10,000,000.
Sonu Iyer is Tax Partner and Head of People Advisory Services and Siddharth Deb is Tax Director of People Advisory Services at EY India.
