How to report foreign exchange transactions, foreign incomes or foreign assets under ITR

Every individual dream of having a highly paid job or a successful business profit situation. To expand this journey, many people leave their country to earn a higher income. However, resident individuals in India may have certain incomes from assets situated in foreign countries or income from foreign companies while residing in India. This income can be from numerous sources like, investments in foreign assets, employment in foreign companies or providing services to a foreign client etc.
Individuals earning foreign income are required to report the same in ITR form 2 or 3.

Section 5 of the Income Tax Act, 1961, provides the scope of total income for the purpose of taxation in India.

Section 5:
Section 5 talks about the provisions to determine total income of a resident individual, where any income accrues or arises to him outside India is also to be included. However, if a person is a person not ordinarily resident in India, his income derived from a business controlled in or a profession set up only in India is to be included in his total income.

How to report foreign income in ITR?

Two schedules come into picture when foreign income related transactions are to be reported in the ITR. Schedule FA and Schedule FSI.

• Firstly, the residential status of the person reporting the income is to be determined. This is important to choose correct applicable ITR Form.
• The assessee must report the details of all the incomes, which are already included in total income, accruing or arising from any source outside India. It is important to note that such income should also be separately reported in the head wise computation of total income.
• To make the accurate reporting, maintaining detailed records of all overseas earnings is crucial. Assessee should collect documentation such as salary slips, bank statements, and investment reports from foreign institutions.
• Fill the required information in Schedule FA (Schedule Foreign Assets).

Under Schedule FA, it is required to furnish the details of the foreign assets, such as shares of company, bonds or mutual funds of a foreign company etc. ESOPs of foreign companies are also reported under this Schedule only. As per the Income Tax Act of 1961, residents and ordinarily resident Indians should report their foreign income, assets, accounts, and shares in the FA schedule in ITR in a given format irrespective of the taxability in India.

In case of foreign income, the reporting to be done in Schedule FA includes details like bank accounts held outside, investments in equities or mutual funds, financial interest in any entity, trust in which the person is a beneficiary,  details of immovable assets held, other capital assets, details of any other income etc.              

• Reporting in Schedule FSI (Schedule Foreign Source Income):

In Schedule Foreign Source Income (FSI), you need to report the details of income, which is accruing or arising from any source outside India. This schedule is available for residents only.

Under FSI Schedule, an income head wise bifurcation is done to report the income and tax provisions upon the same. It includes details like name of the country from where the income is derived, tax identification number of the person reporting the income, taxes paid outside India, provisions of Double Taxation Avoidance Agreement(DTAA) to claim relief from taxes in India etc.

Taxability of gains or losses arising from foreign exchange fluctuations:

Taxability of foreign exchange fluctuations gains or losses depend upon their capital or revenue nature.

Such gains or losses are taxable if they are of revenue nature arising from a trade and are realised. However, the capital nature transactions gains or losses are not taxable if the same are unrealised and are arising out of non-trade activities. If such gains or losses are due to translation of foreign currency into present currency using spot rate at the reporting date, even then such gains or losses are not to be taxed as it is mere the translation activity and is not a trading or speculative in nature.

Conclusion:
Schedule FA and FSI in ITR are the schedules where all the foreign assets and incomes are reported. Various details of incomes outside India like bank accounts, details of immovable assets, nature of income etc. are mandatory for disclosure. ITR-2 and ITR-3 is to be selected for reporting this information. Taxability of foreign exchange gains or losses depends on the revenue or capital nature of the transaction or business or non-business nature of the transaction.