Many worldwide funds/ETFs, comparable to Motilal Oswal S&P 500 Index Fund or Nippon India Taiwan Fairness Fund, are home mutual funds that make investments solely in overseas fairness shares. Another funds, like Parag Parikh Flexi Cap Fund, make investments a sure portion of their AUM in overseas fairness shares.
The query now could be whether or not an Indian resident (solely residents are required to report) who invests in such funds is liable to reveal the funding in Schedule FA and report any revenue from them in Schedule FSI of the revenue tax return.
In regards to the writer: Manmohan Sethumadhavan is a freelancer, investor, and private finance fanatic “seeking absolutely the reality.” You may comply with Manu on Twitter @ManuTsr. He’s the writer of the favored Revised Capital Beneficial properties Taxation Guidelines Prepared Reckoner for FY 2025-2026.
The disclosure requirement: Part 2(11) of the Black Cash Act (The Black Cash (Undisclosed International Revenue And Property) And Imposition of Tax Act, 2015) defines an “undisclosed asset situated outdoors India” as an asset situated outdoors India, held by the assessee in his identify or in respect of which he’s a helpful proprietor.
Part 2(12) defines “undisclosed overseas revenue and asset”. Part 43, 49, 50, and many others., prescribes the disclosure of such data within the Revenue-Tax returns and penalties of default past a sure threshold.
The thresholds are for penalties and never for the disclosure requirement itself, and therefore not mentioned right here. The ITR directions for Schedule FA make it express {that a} resident should disclose any overseas asset or monetary curiosity “in respect of which he’s a helpful proprietor, a beneficiary or the authorized proprietor”.
What does “helpful proprietor” imply? Clarification 4 to Part 139(1) of the Revenue-Tax act defines “helpful proprietor” as a person who has offered, immediately or not directly, consideration for the asset for the fast or future profit, direct or oblique, of himself or every other individual. That “immediately or not directly” language creates the authorized foundation for treating oblique chains of funding as making somebody a helpful proprietor.
Applicability within the case of Mutual Funds. In Mutual Funds, models are issued by a belief; the trustees (and the custodian) maintain scheme property for the good thing about the unitholders and the investor is the helpful proprietor of the models (and, economically, of the scheme’s portfolio to the extent of his models). SEBI / NISM documentation and normal mutual-fund texts describe buyers as helpful homeowners / beneficiaries of the scheme belongings.
The asset (overseas shares) is bodily/registrar-wise situated outdoors India (custodian/registry overseas). The investor offered consideration not directly. The investor is economically a helpful proprietor/beneficiary of the scheme which holds these overseas securities for the investor’s profit.
Taken actually, that satisfies the statutory parts: an asset situated outdoors India in respect of which the individual is a helpful proprietor – due to this fact the requirement to reveal in Schedule FA is triggered.
The regulation makes use of “immediately or not directly” and identifies “helpful proprietor” and “beneficiary” in phrases that seize oblique funding chains; mutual-fund belief regulation helps the notion that unitholders are helpful homeowners/beneficiaries of scheme property.
So a convincing authorized argument exists that such buyers are helpful homeowners of the overseas belongings held by the scheme and due to this fact fall inside the attain of Schedule FA / Black Cash Act wording.
Sensible impossibility. From a sensible standpoint, reporting the underlying overseas securities held not directly by means of an Indian mutual fund or ETF is sort of not possible – each in idea and in execution. The portfolio composition of such schemes modifications repeatedly as fund managers rebalance or realign holdings to trace an index or funding technique.
For example, a S&P 500–monitoring fund could maintain publicity to 500 or extra overseas firms, every with weight modifications occurring virtually day by day on account of market motion and reinvested dividends. The investor has no management over these transactions and infrequently has no granular visibility into which securities are literally held at any given second.
Additional, Schedule FA requires the disclosure of the overseas asset itself – that’s, the fairness shares or pursuits in overseas firms – not merely the NAV of a home fund. Strict compliance would due to this fact require the investor to determine every overseas firm, compute the preliminary price, peak worth, and shutting worth in its native forex, after which convert every to Indian rupees utilizing prescribed change charges, and all these for the accounting interval of that nation.
This isn’t solely administratively unfeasible but in addition factually not possible, since such detailed data is neither obtainable to nor ascertainable by a unitholder. The investor receives solely a fund assertion exhibiting the variety of models and their rupee worth, not the portfolio composition or transaction particulars of the underlying securities.
Furthermore, mutual fund portfolios embrace transient money balances, futures, ADRs, ETFs, and different by-product exposures whose geographic and authorized character change dynamically. Treating every of these as a “overseas asset” would render compliance conceptually absurd. Your complete design of Schedule FA presupposes direct possession or traceable helpful curiosity – one thing a unitholder in an Indian fund merely doesn’t have.
In essence, the reporting obligation can’t virtually or logically lengthen to overseas belongings held inside a professionally managed home pooling car, each due to the sheer scale of data concerned and since the taxpayer has neither the information nor the authorized relationship crucial to satisfy it.
Arguments in opposition to strict legal responsibility for non-reporting. Tribunals have emphasised that “helpful proprietor” is a fact-intensive take a look at and that mere point out/signature /nominal involvement doesn’t suffice. These choices present the division should show on info that the taxpayer offered consideration or exercised management or had dominion/rights over the overseas asset – not a mere tracing by financial publicity alone.
These are immediately related, persuasive tribunal precedents for the mutual-fund context: if the taxpayer can’t be proven to have offered consideration that purchased these particular overseas shares (or to train management), then helpful possession is absent.
It may be argued {that a} retail investor who buys models of an Indian mutual fund acquires models of home devices; the mutual fund’s trustees/custodian maintain the portfolio securities within the scheme’s identify, and locations authorized title of scheme property with trustees/custodian; models signify a proportionate declare within the scheme, not a registered curiosity in every overseas share. 139(1) requires provision of consideration (direct/oblique) for the asset to make one a helpful proprietor of that asset.
If the investor buys models, and the scheme’s pooled corpus (not the person investor) gives consideration to the overseas issuer/custodian to purchase the overseas shares, there’s a principled textual argument that the unitholder didn’t present consideration for these explicit overseas shares.
Conclusion – Limitations/danger factors. The statute’s “immediately or not directly” phrase has been used to say that pooled funds / oblique flows nonetheless make taxpayers helpful homeowners; some tribunals attain the alternative conclusion on the info. So the result is fact-sensitive. There isn’t a single, binding Supreme Courtroom choice squarely on home MF unitholders, and Schedule FA – tribunal choices are persuasive however not universally binding. You due to this fact settle for some litigation/enquiry danger.
In fact, there’s a dependable interpretation beneath which a unitholder of an Indian-domiciled mutual fund/ETF that itself holds overseas shares needn’t report the underlying overseas shares in Schedule FA, however that’s not a bullet-proof immunity; that’s not an absolute exemption created by a rule, it’s a fact-sensitive authorized defence. The division can problem on info, if the AO can present successfully funded/acquired explicit overseas securities or exercised management.
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