Disclosure of Foreign Assets in Income Tax Return: Schedule FA in ITR Filing

In 2016, the Panama Papers leaks caused an uproar across the world, where illegal properties worth ₹20 crores were found to be held by over 500 Indians. To prevent more such incidents, Schedule FA was introduced to prevent tax evasion by resident Indians. 

In this blog, the leading tax consultant in Gurgaon will discuss why you should report foreign income and assets in Schedule FA, how to maintain compliance with Indian tax laws, and the consequences of undisclosed foreign income and assets.

What are Foreign Assets in ITR?

A foreign asset refers to any asset owned by an Indian resident outside the country. Foreign assets need to be disclosed under the Schedule FA(Foreign Assets) if you are a Resident and Ordinarily Resident (ROR) in India, as per the Income Tax Act, 1961. It is mandatory to disclose foreign assets or income within Income Tax Returns under the Black Money Act, 2015.

Read More: Why Foreign Direct Investment (FDI) in India Matters - Benefits

What is Schedule FA (Foreign Assets) in ITR?

Schedule FA is a part of the ITR form, and was introduced in the Assessment Year 2012-2013. This was introduced to increase transparency in the foreign assets of Indian residents and to prevent any chances of tax evasion by them. This is why it's necessary for Resident Indians to disclose foreign assets in Schedule Foreign Assets in the ITR form.

Why is it Important to Disclose Foreign assets in the Income Tax Return?

It is important to disclose foreign assets in income tax returns because:

• Maintain Compliance: This helps to ensure that you are maintaining compliance with laws and regulations. It also helps you to avoid hefty fines or penalties. 
• No Black Money: This actively discourages Resident Indians from hiring wealth outside of India and prevents black money circulation. If you don't report foreign assets, then it will be considered a violation of the Black Money Act, and will lead to penalties. 
• Double Taxation Avoidance Agreement(DTAA): By disclosing your foreign assets, you can avoid paying taxes twice under the DTAA, if applicable. This ensures proper taxation of individuals.

What are the Foreign Assets that need to be disclosed under Schedule FA?

Read Also: The Role & Impact of Foreign Investment in India

Who needs to Report Foreign Assets?

Under the Income Tax Act, 1961, the following individuals need to report foreign assets:

• Resident and Ordinarily Resident(ROR): Resident Indians who fall under this category need to report their foreign assets in the ITR.
• Hindu Undivided Family (HUF): These family units with a shared income need to report foreign assets in the ITR.
• Beneficiary Owners: If you are a beneficial owner with a foreign asset outside India or have a signing authority of a foreign bank account, you need to share the details about the foreign assets in the ITR.
• Beneficiaries of Foreign Assets: If you are a beneficiary of a foreign asset, and the income is not included in the income of the beneficiary owner, then you must disclose the details within the ITR.

How to Disclose Foreign Assets and Income in the ITR Form?

The following is the step-by-step process to disclose your foreign assets and income in the ITR 2 form:

• Step 1: You need to identify the type of foreign assets you have outside of India, such as bank accounts or real estate. After you identify the type, choose the right category from the drop-down menu in the ITR form.
• Step 2: Provide basic details in the Income Tax Return form. This includes details such as the country name, code, zip code, and currency code.
• Step 3: Now, you have to provide details of the financial value of the asset, opening balance, peak balance, and the closing balance as per the ongoing financial year in both Indian and foreign currency.
• Step 4: Finally, you need to report the income or revenue and sale/redemption proceeds from the foreign asset during the financial year in both foreign and Indian currency.

What Happens if You Don't Declare Foreign Assets under the Income Tax Act?

If you don't declare your foreign assets under the Income Tax Act, then you may face the following:

• Hefty Fine or Penalty: If the taxpayer misrepresents or does not disclose foreign assets, then they will need to pay a penalty of ₹10 lakhs for each financial year of non-compliance.
• Risk of Imprisonment: If there's proof of the non-disclosure of foreign assets, then it can be considered a severe offense of willful tax evasion. This can lead to imprisonment of up to 7 years.
• No DTAA Benefits: Double Taxation Avoidance Agreements (DTAAs) help Resident Indians to avoid the need to pay taxes separately for the same income in two different countries. If any taxpayer does not disclose their foreign assets, then they will lose the right to claim the income or any other tax reliefs under the DTAA.

Read More: Tax Implication On Foreign Source Income Of Resident Indian

Conclusion

Disclosure of foreign assets in Schedule FA is crucial to maintain compliance with Indian tax laws. If there is non-disclosure or misrepresentation of foreign assets in the ITR, then you may need to face financial penalties or imprisonment.