Important Keyword: Foreign Asset, Foreign tax credit, Income Tax Filing

Schedule FSI and TR in Income Tax Return

Investors are increasingly diversifying their investment portfolios globally, taking advantage of simplified regulations aimed at facilitating investment in assets tailored to individual preferences. However, when investors sell these foreign holdings, they are subject to tax liabilities in both their country of residence and the country where the assets are located. As a result, it’s essential for investors to understand the disclosure requirements associated with foreign incomes to ensure compliance with tax laws.

What is Schedule FSI and TR?

Schedule FSI (Foreign Source Income)

For resident Indians, the scope of taxation extends to global incomes, meaning any earnings acquired from sources outside India are subject to taxation within the country. To ensure compliance with tax laws, resident Indians earning income from foreign sources must report such earnings under Schedule FSI when filing their Indian income tax returns. However, losses incurred outside India do not need to be reported under this schedule.

Schedule TR (Tax Relief)

When a resident Indian earns income from a foreign country, they become subject to taxation in both their resident country and the foreign country, resulting in potential double taxation. To mitigate this issue, India has established double taxation avoidance agreements (DTAA) with various nations. Under these agreements, taxpayers have two options to seek relief from double taxation:

1. Exemption Method: This approach entails taxing the income in only one of the two countries.
2. Tax Credit: Under this method, the income is taxed in both countries, and the taxpayer can claim a credit for the taxes paid in the foreign country against their tax liability in their resident country.

India typically follows the tax credit method, allowing residents to claim credit for taxes paid abroad when filing their Indian tax returns. Such foreign tax credits claimed must be disclosed under Schedule TR.

Note: Taxpayers are required to report foreign income and taxes paid outside India in Indian Rupees. According to Section 115, for currency conversion, taxpayers should use the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India on the last day of the month preceding the month in which the income becomes due.

Who is liable to file Schedule FSI and TR?

If a resident individual earns income from a foreign source, it is mandatory to disclose the details in Schedule FSI, irrespective of whether they intend to claim any credit for taxes paid outside India. Additionally, if a resident individual seeks to claim a credit for taxes paid outside India, they must provide the particulars of the relief claimed in Schedule TR.

Let’s illustrate this with an example:

Ms. Diya, a resident of India, has received dividend income from her foreign shareholdings in the USA. Additionally, she has paid taxes on the dividends received in the USA. However, being an Indian resident, she is obligated to report her global income in her Indian income tax return. Consequently, she can claim a credit for the tax paid in the USA by submitting Form 67 and must pay taxes on this income in India.

When filing her return, Ms. Diya must first complete Schedule FSI. In this schedule, she should enter the dividend received in Indian Rupees under the head “Income from Other Sources” and also disclose any taxes paid outside India, if applicable.

After completing the reporting in Schedule FSI, if Ms. Diya has paid taxes outside India and claimed the credit for such taxes, the relevant details will automatically appear in Schedule TR.

Relevant period for Reporting

It’s crucial for taxpayers to report their foreign incomes for the applicable financial year, which spans from April 1st to March 31st.

For instance, if a taxpayer is filing their return for the Financial Year 2022-23, they should report any foreign incomes earned during the period from April 1st, 2022, to March 31st, 2023. This ensures accurate and comprehensive reporting of all income earned globally within the specified financial year.

Key points to keep in mind while filing these schedules

When filing their taxes, taxpayers must adhere to several important guidelines regarding their foreign incomes:

1. Accuracy of Income and Taxes: The reported income and taxes should align accurately with the details provided in Form 67 submitted by the taxpayer. This ensures consistency and reliability in the reported figures.
2. Disclosure of Foreign Assets: Taxpayers are required to disclose any foreign assets held in Schedule FA, from which the income is derived. This disclosure is mandatory and helps ensure transparency in reporting foreign income sources.
3. Accurate Categorization of Incomes: Taxpayers must categorize their earned incomes correctly, distinguishing between various sources such as salaries, dividends (other source income), capital gains, and more. Proper categorization ensures clarity and compliance with tax regulations.
4. Correct Entry of DTAA Article Number: If taxpayers are claiming tax credit under the Double Taxation Avoidance Agreement (DTAA), they need to correctly enter the relevant article number in their tax filings. This ensures that the tax credit is claimed in accordance with the provisions of the DTAA, facilitating smoother tax compliance.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/