Foreign assets include foreign depository accounts, foreign equity and debt interest, foreign cash value insurance contract or financial interest in any entity outside India.
The Income Tax Act casts an obligation on persons who are ‘ordinarily resident in India’ to file ITR if they, at any time during the previous year, hold any asset located outside India. A person is said to be ‘ordinarily resident in India’ if he has resided in India for at least two out of 10 financial years or for 730 days or more in the preceding seven financial years. Therefore, if you are ordinarily resident in India and beneficially own or are a beneficiary of foreign assets, then you must disclose the particulars in respect of such foreign assets in ‘Schedule FA’ of ITR.
Notably, a ‘beneficial owner’ in respect of a foreign asset is someone who has provided the consideration for the foreign asset, whether directly or indirectly, for immediate or future benefit of himself or any other person. Separately, a ‘beneficiary’ is someone who, although, has not paid for the asset, but derives the benefit from the asset during the financial year.
What are foreign assets?
Foreign assets include foreign depository accounts, foreign custodian accounts, foreign equity and debt interest, foreign cash value insurance contract or annuity contract, financial interest in any entity outside India. Any immovable property or capital asset held outside India or any other account located outside India, in which one has signing authority, also falls within this criteria. In fact, any trust created abroad, in which a person is a trustee, beneficiary or settlor is also classified as a ‘foreign asset’ for the purpose of ITR. Such assets must be reported under the specific head of Schedule FA.
Any income derived from a foreign source not enlisted above shall also have to be disclosed in the said Schedule. For instance, a sum of money received from a friend residing outside India in your foreign bank account shall form a part of income from foreign source. Likewise, rent received from property located abroad is also income from foreign source.
What does this disclosure mean?
The details sought by the tax department, pertaining to foreign assets, include the peak balance of account/ investment during the accounting period, closing balance/ closing value of investment at the end of year, interest paid or credited in foreign bank account, gross proceeds from sale of investment in Indian currency, cost of immovable property, income derived therefrom etc.
One must note that Schedule FA merely seeks disclosure pertaining to the foreign assets; the income therefrom has to be offered to tax under the relevant head/ schedule of the ITR (i.e. capital gain, house property, other sources, etc.)
What should you do?
Conclusively, if an individual does not have income exceeding the basic exemption limit, but owns foreign assets, he shall have to file ITR to disclose the particulars of such assets and related income. Thus, even senior citizens who do not have taxable income but are beneficiaries of assets situated outside India purchased by their relatives, shall have to make the prescribed disclosures in the applicable income tax return.
To avoid legal hassles, it is in the best interest of resident individuals to disclose their global assets and global income, even if it is not received in India.
The writer is director, Nangia Andersen LLP. Inputs from Vasudha Arora