Understanding Schedule FA – Guide on Disclosing Foreign Assets and Income in ITR Filing for Indian Residents

Table of Contents

1. Introduction
2. Disclosures required
3. Relevant period for disclosure
4. Consequences of faulty reporting
5. How to report?
6. Taxability of the Income
7. Conversion into INR
8. Conclusion

1. Introduction

As the due date to file the Income-tax return (ITR) comes to a close, investors grapple with the complexities of return filing, much like they ponder over finding that multi-bagger share. Among the various components of tax return filing, Schedule FA often emerges as the tougher nut to crack.

Introduced to combat tax evasion and money laundering, Schedule FA has been an integral component of the ITR forms since the assessment year 2012-13. Under this schedule, ordinarily resident Indians are required to disclose details of their foreign assets and income, irrespective of whether the income is taxable in India or not. The enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, reinforced the obligation for Indian residents to disclose such foreign assets and income.

Notably, Schedule FA is exclusively available in ITR 2 and ITR 3 forms, meaning individuals with foreign assets and income must file their returns using either of these forms.

2. Disclosures required

The following details are required to be disclosed in Schedule FA:

• Any asset held outside India (Shares, Debentures, Life Insurances, Annuity Contract, Immovable Property or any other capital asset);
• Financial or beneficial interest in any overseas entity (partner in an overseas LLP or firm, a beneficiary of a foreign private trust);
• Signing authority in any account located outside India (Trading, Depository, Bank or Custodian Account); and
• Income from any source outside India (Dividend, interest, or capital gain).

Reporting in this schedule is made irrespective of the type of ownership, whether legal or beneficial ownership. However, the reporting is required by a resident person only. No disclosures are required in case of a non-resident or resident but not ordinarily resident person.

3. Relevant period for disclosure

Taxpayers must disclose any foreign assets or income relating to the calendar year 2022 when filing the ITR forms for the assessment year 2023-24. This means that individuals need to report details of any Foreign Assets they held, and Income earned during the period from January 1, 2022, to December 31, 2022 in Schedule FA, while submitting their ITR for the Assessment Year 2023-24.

4. Consequences of faulty reporting

Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, residents with assets or income from foreign sources must accurately and timely furnish their income tax returns. Failure to do so or providing inaccurate information in Schedule FA can result in a penalty of Rs. 10 lakhs. Additionally, the individuals may face rigorous imprisonment for a term of six months to seven years, along with fines.

5. How to report?

Let’s understand the disclosure in Schedule FA with the help of an example.

Mr. A is a resident in India. In April 2022, he opens a trading account with an Indian Broker for making investment in the shares listed on NASDAQ. To make such investment, the Indian Broker opens his two accounts – Trading Account with a USA Broker company and Saving Account with State Bank of Mauritius (SBM) to facilitate deposit in USA Trading Account. To trade on the NASDAQ, he has to first deposit the amount in his SBM Account, which is transferred to his USA Trading Account. He makes an initial deposit of Rs. 15 lakhs in his USA Trading account. He makes another deposit Rs. 30 lakhs on 1^st October 2022 into his account.

During the financial year 2022-23 (April’22 to March’23) he acquires shares of Google, Microsoft, Amazon and Nvidia. He has also earned dividend income from these shares. How should these transactions be reported in the Schedule FA of ITR 2/3?

Schedule FA has 10 Tables for reporting of different foreign assets and foreign incomes. In this case, Tables A1, A2 and A3 are relevant for reporting, namely:

• Table A1: Details of Foreign Depository Accounts held (including any beneficial interest) at any time during the calendar year ending as on 31^st day of December 2022
• Table A2: Details of Foreign Custodial Accounts held (including any beneficial interest) at any time during the calendar year ending as on 31^st day of December 2022
• Table A3: Details of Foreign Equity and Debt Interest held (including any beneficial interest) in any entity at any time during the calendar year ending as on 31^st day of December 2022

It should be noted that depository account does not mean Demat accounts in a depository, but deposits with a financial institution. In the given case, deposit made in SBM account should be reported in Table A1 and subsequent transfer of such deposits to USA Trading account should be reported in Table A2. Holding of shares shall be reported in Table A3.

The financial transactions done by Mr. A shall be reported as under:

4.1 In Table A1 and A2

4.2 In Table A3

6. Taxability of the Income

It is to be noted that Schedule FA seeks disclosures of certain assets, rights, and income, it does not impact the taxability of an income. Income earned from the assets held outside India shall be taxable as per the relevant provisions of the Income Tax Act, even if it is not required to be disclosed in Schedule FA.

Thus, the dividend income earned in the last quarter of the previous year 2022-23 i.e., between 01-01-2023 and 31-03-2023 shall be taxable in the hands of the assessee, even if it is not reported in Schedule FA. Hence, the Dividend Income of INR 20,000 will be reported in Schedule FA, while the Dividend Income of INR 90,000 will be subject to tax in the assessment year 2023-24.

7. Conversion into INR

The reporting in Schedule FA shall be made after converting the investment and income in Indian currency. Such conversion shall be made as per the following:

8. Conclusion

We leave the readers to draw the conclusion if reporting in Schedule FA is easy or finding a multi-bagger share.

1. Peak balance has been computed assuming that the subsequent deposit of Rs. 30 lakhs have been made after the previous deposit fully utilised for investment in the shares.

2. In Table A2, sum received on account of transfer of shares of Amazon, i.e., Rs, 12 lakhs and dividend of Rs. 20,000 is also considered for computing the peak and closing balance.

3. Closing balance is nil because the entire deposit has been transferred to the USA trading account before the year end.

4. Closing balance is Rs. 32.20 lakhs which consist of Rs. 20 lakhs remaining after investment in shares of Amazon, plus Rs. 12 lakhs received after transferring the shares of Amazon, and plus Rs. 20,000 of dividend received on 3^rd October 2023.

5. It is assumed that the SBM did not pay any interest on the deposit made in the account.

6. Table A2 requires reporting of amount paid or credited to the account which can be in the nature of interest, dividend, proceeds from sale or redemption of financial assets, etc. In the present case, it should be Rs. 12 lakhs from sale of shares of Amazon and dividend of Rs. 20,000 received from Google in the Calendar Year 2022. Dividend received from Microsoft and Nvidia shall be reported in the next ITR because it has been received in the Calendar Year 2023. However, such dividend income shall be considered for computation of the taxable income because it has been earned during the relevant previous year.

7. No reporting shall be made for the investment in Nvidia because it has been made in next calendar year 2023.

8. Dividend income earned from Microsoft and Nvidia shall not be reported in this table because it has been earned in next calendar year 2023. However, such dividend income shall be considered for computation of the taxable income because it has been earned during the relevant previous year.

* TTBR = Telegraphic Transfer Buying Rate