Schedule FA in ITR 2: Disclosure of Foreign Assets in ITR-2 Form

Schedule FA in ITR 2: Disclosure of Foreign Assets in ITR-2 Form

The Panama Paper leaks exposed illegal properties worth over 20,000 crores held by more than 500 Indians, highlighting significant tax evasion through offshore routes. The Black Money Act of 2015 was introduced to combat such illegal practices, and Schedule FA became a crucial role of the Income Tax Return (ITR) Form from the Assessment Year (AY) 2012-13, relevant for the Financial Year (FY) 2011-12. Schedule FA mandates the disclosure of foreign shares, foreign assets, and employee stock options (ESOPs) of foreign companies. This article delves into Schedule FA in ITR-2, its importance, foreign assets to be disclosed, how to fill it, and the applicable penalties for non-disclosure.

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What is Schedule FA in ITR?

Schedule FA is a part of the Income Tax Return (ITR) form in India specifically for disclosing foreign assets and income. This Schedule FA applies to resident Indians (including those ordinarily resident). It requires you to detail any investments, accounts, or other financial holdings outside India. This includes stocks, mutual funds, bank accounts, and even employee stock options (ESOPs) from foreign companies. The purpose is to promote transparency and combat tax evasion through offshore accounts. Failing to report these assets in Schedule FA could lead to penalties under the Black Money Act.

When was Schedule FA introduced in ITR?

Schedule FA became part of the Indian Income Tax Return process in the Assessment Year 2012-13. This means it first appeared in the ITR forms used to report income for the financial year 2011-12. The introduction of Schedule FA in ITR aimed to increase transparency and prevent tax evasion by requiring resident Indians to disclose details of their foreign assets and income.

What is the Importance of Schedule FA in ITR?

The following points emphasize the importance of Schedule FA in ITR:

• Disclosure of Foreign Assets: It compels taxpayers to disclose any foreign assets they hold, including bank accounts, stocks, mutual funds, properties, or other financial instruments. This helps the Income Tax Department maintain a record of a resident’s global financial holdings.
• Combats Black Money: Introduced partly in response to situations like the Panama Papers leak, Schedule FA discourages hiding wealth abroad to avoid taxes. Not reporting foreign assets can be seen as a violation of the Black Money Act, which leads to a penalty.
• Taxation and Double Tax Avoidance: By revealing your foreign holdings, you can ensure proper taxation on any income generated from them. Additionally, it allows you to claim relief under Double Taxation Avoidance Agreements (DTAAs) with other countries, preventing you from paying tax on the same income twice.

Who Should Report Foreign Assets (FA)?

Disclosing foreign assets in Schedule FA is mandatory for a specific group of taxpayers in India. Here’s information on who needs to file and the relevant exemptions:

• Residents and Ordinarily Residents (R&OR): This includes individuals with residential status in India for most of the year or for previous years.
• HUFs (Hindu Undivided Families): These family units with a shared income are also obligated to report foreign assets.

The reporting requirement applies if you have any of the following:

• Foreign Assets: This includes bank accounts, stocks, properties, or any financial instruments held outside India.
• Financial Interest: You have a stake in a company or other entity located abroad.
• Signing Authority: You have control over an account maintained in a foreign country.

Beneficial Ownership:

The requirement extends to those who hold beneficial ownership of foreign assets, even if they are not the legal owner. This includes situations where you derive benefit from assets held by someone else.

Exceptions:

• Beneficiary with Included Income: If you are a beneficiary of foreign assets and the income from those assets is already taxed in the return of the legal or beneficial owner, you might be exempt from filing your own return. (Fifth Proviso to Section 139(1))
• Foreign Citizens with Specific Visas: Foreign citizens classified as R&OR but holding business, employment, or student visas may be exempt from disclosing foreign assets acquired during their non-resident period, provided no income is earned from them currently. (Foreign Citizens’ Disclosure Exemptions)

Relevant Period to Disclose Foreign Assets

Disclosing foreign assets in Schedule FA requires understanding the difference between the ‘calendar year’ and the ‘assessment year’. You must report details of any foreign assets held or income earned during the calendar year. This information is then included in your ITR for the corresponding assessment year. For instance, when filing your ITR for 2024-25 (due July-September 2024), you’d report foreign assets and income you had between January 1, 2023, and December 31, 2023. For this calendar year, gather all relevant documents like bank statements, investment records, and property ownership documents to ensure a smooth ITR filing process.

What Foreign Assets must be Disclosed under Schedule FA?

Schedule FA of your ITR requires disclosing a wide range of foreign assets you hold or are interested in during the calendar year. In the table below, we have laid down the foreign assets that need to be disclosed in the ITR-2 form:

Information Required to Report Schedule FA

You must provide detailed information for each asset category when reporting foreign assets in Schedule FA. The specific details required vary depending on the asset type, but generally include:

• Country: The country where the asset is located or held.
• Identifying Information: Details like names, addresses, and account numbers for institutions, entities, or properties.
• Dates: Acquisition date for investments or property and the period for which the information applies.
• Values: Opening, peak, and closing balances or rupee investment values.
• Income Details: Any income derived from the foreign asset, its nature, and tax implications in India.

How to File Schedule FA in ITR?

Disclosing your foreign assets in Schedule FA is crucial to your ITR filing process. Here are the steps involved based on the ITR-2 form:

Step 1: Categorize Your Asset

The first step involves identifying the category under which your foreign asset falls. The ITR form provides a drop-down menu with various asset types. Choose the most relevant category that best describes your holding.

Step 2: Provide Basic Details

Once categorized, you’ll need to provide basic information about the asset. This typically includes Name, address, Zip, Country, and currency codes.

Step 3: Detail Investment Values

Here, you’ll provide details about the financial value of your asset. This might include:

• Initial Investment Value: The value at the time of acquisition (if applicable).
• Opening Balance: The asset’s value at the beginning of the relevant financial year.
• Peak Balance: The highest value the asset reached during the financial year.
• Closing Balance: The asset’s value at the end of the financial year.

It’s essential to report these values in the original foreign currency and its equivalent in Indian rupees (INR).

Step 4: Report Income and Proceeds

This step involves reporting any income or revenue from your foreign assets during the financial year. This could include:

• Income Earned: Interest, dividends, or any other income derived from the asset.
• Sale/Redemption Proceeds: Any proceeds from selling or redeeming the asset.

Like the investment values, report these figures in foreign currency and INR.

Step 5: Claim DTAA Relief (if applicable)

Double Taxation Avoidance Agreements (DTAAs) exist between India and many countries. You’ll need to report the details here if you have claimed any tax relief under a DTAA for income earned on your foreign assets.

Schedule FA in ITR-2 – Sample Format

Here’s the section in the ITR-2 form related to the Schedule FA as a reference for you,

schedule FA in ITR2 form filing

Consequences of Not Disclosing the Foreign Assets

Disclosing your foreign assets accurately in Schedule FA is mandatory. Failing to do so can lead to severe consequences, including:

• Financial Penalty: The most common penalty for non-disclosure or misrepresentation of foreign assets is a flat penalty of ₹10 lakhs for each year of non-compliance. This can significantly impact your finances.
• Imprisonment Risk: In severe cases, non-reporting foreign assets can be considered willful tax evasion. This is a criminal offense and could result in imprisonment of up to 7 years.
• Loss of DTAA Benefits: Double Taxation Avoidance Agreements (DTAAs) help avoid paying taxes on the same income in two countries. If you fail to disclose your foreign assets, you lose the right to claim relief under any applicable DTAA, potentially leading to double taxation on your foreign income.

Conclusion

Schedule FA in ITR-2 plays a vital role in ensuring transparency and preventing tax evasion on foreign assets held by Indian residents. This includes financial accounts, financial investments, immovable property, foreign trusts, and other capital assets. By accurately disclosing your foreign assets and income in Schedule FA, you can avoid hefty penalties, potential imprisonment, and loss of benefits under Double Taxation Avoidance Agreements.

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