Disclose Foreign Investment in Mutual Funds in Income Tax Returns

Disclose Foreign Investment in Mutual Funds in Income Tax Returns

In a recent development, resident Indians who own foreign assets are required to disclose these assets in Schedule FA (Foreign Assets) of their Income Tax Return (ITR), applicable in ITR-2 or ITR-3. This rule, stemming from amendments in the Finance Act 2020, is effective for the Assessment Year 2021-22 onwards.

The Importance of Schedule FA

Foreign assets, even if they generate no income during the year, must be declared in Schedule FA. Failure to do so may result in a penalty of Rs 10 lakh per undisclosed foreign asset for assets worth over Rs 20 lakh. Omission, understatement, or misrepresentation of such assets may amount to a prosecutable offence under Section 50 of the Black Money Act.

Reporting Foreign Income

Foreign income needs to be converted into rupees using the telegraphic transfer buying rate on the last day of the financial year. In case of foreign sourced income, an individual can claim foreign tax credit on the doubly taxed income in accordance with the Double Taxation Avoidance Agreement (DTAA) which India has entered into with various countries.

Taxation Scope for Resident Indians

An individual is considered a Resident in India for income tax purposes if they satisfy either of these conditions during a financial year:

1. They stay in India for 182 days or more, or
2. They stay in India for at least 60 days in the year and a total of 365 days or more in the preceding four years.

Once classified as a resident, the individual is further categorized as either Ordinarily Resident (ROR) or Not Ordinarily Resident (NOR), based on specific tests.

Ordinarily Resident (ROR)

An individual is a Resident and Ordinarily Resident if they:

1. Have been a resident in at least 2 out of the 10 preceding years, and
2. Have stayed in India for 730 days or more in the previous 7 years.

If these conditions are met, the individual's global income is taxable in India.

Not Ordinarily Resident (NOR/RNOR)

A resident will be treated as NOR if any one of these conditions is met:

1. The individual was a non-resident in India for 9 out of the 10 preceding years, or
2. Their stay in India was for 729 days or less in the last 7 years prior to the relevant year, or
3. An Indian citizen or person of Indian origin (PIO) who has stayed in India for 120 days or more but less than 182 days in the current financial year and whose income from Indian sources exceeds Rs. 15 lakh.

Types of Assets to be Reported

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. 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.

Schedule FA requires detailed particulars such as country of location, nature of asset, date of acquisition, and peak balance in case of accounts. Taxpayers can claim foreign tax credit via Form 67 if tax was paid abroad.

In more serious cases, the Act provides for prosecution, with imprisonment of up to seven years. Misreporting foreign assets can attract penalties of up to 200% of the tax due.

Amit Baid, head of Tax at BTG Advaya, a tax and consulting firm, made the statement about foreign assets declaration. It's crucial for resident Indians to understand and comply with these rules to avoid potential penalties and legal issues.

1. The significance of Schedule FA requires residents to declare foreign financial assets, such as foreign bank accounts, stocks, and dividends, even if they do not generate income, to avoid penalties.
2. Foreign-sourced income can be subject to double taxation, but individuals can claim foreign tax credit in accordance with the Double Taxation Avoidance Agreement (DTAA) to avoid being taxed twice.
3. In the realm of personal-finance, an individual's global income becomes taxable in India if they are considered a Resident and Ordinarily Resident (ROR), a status determined by specific criteria, including staying in India for 730 days or more in the previous 7 years.
4. Defi assets may not be directly addressed in Schedule FA, however, it's crucial for residents to understand the implications of holding any foreign-held financial assets and comply with the disclosure requirements to avoid legal issues.

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