How to Report Foreign Remittance Receipts in ITR

Every business and individual in India must report their income each year by filing an Income Tax Return (ITR). An important part of this process is declaring income earned from outside the country. The money that you receive from anywhere outside Indian borders is called a foreign remittance. 

As a business, you need to know how to report your foreign remittances accurately.  Errors or omissions can lead to penalties such as interest on unpaid tax, disallowance of foreign tax credits, penalties for misreporting under the Income Tax Act, or even scrutiny under FEMA regulations.

In this article, we cover everything you need to know about reporting foreign remittances in ITR.

A foreign remittance is simply money received from a source outside of India. For a business like yours, this would be the payment from your international clients for goods or services rendered.

The Income Tax Department of India mandates that all resident taxpayers, including businesses, must accurately disclose all foreign income and assets in their ITR. This is for tax transparency and compliance.

Failure to report this income can lead to severe penalties, including a penalty of up to ₹10 lakh and even imprisonment.

Since reporting your foreign remittances in ITR is a mandatory requirement, let's begin by understanding how the reporting process works: 

Step 1: Pre-Filing Requirements and Documentation

Before you even begin filing your ITR, you must have the following documents ready for every foreign remittance you received during the financial year.

• Foreign Inward Remittance Certificate (FIRC): It is a certificate issued by your bank as proof of the inward remittance. It contains key details like the remitter's name, the amount in both foreign currency and INR, the purpose of the remittance, and the date of the transfer.

• Invoice: Issued to your foreign client with transaction details.

• Bank Statements: Showing the credit of funds in your account.

Step 2: Choose the Correct ITR Form for Your Business

The ITR form you use depends on your business structure and other sources of income. 

• ITR-3: Proprietorships
• ITR-5: Firms and LLPs
• ITR-6: Companies
• ITR-4: Presumptive taxation (not applicable if you have foreign income)

Step 3: Report the Income in the Business Schedules

Once you have chosen the correct form, the foreign remittance must be included in your business income section.

In ITR-3, ITR-5, and ITR-6, you will enter the total income from your business or profession. This is where you include the foreign remittance amount, converted into INR using the exchange rate on the date of receipt.

The system may pre-fill some information based on your Annual Information Statement (AIS), but it is your responsibility to verify that the foreign remittance amounts are correctly included in your total business receipts or turnover.

Step 4: Mandatory Disclosure in Schedule FA (Foreign Assets)

This is a separate but mandatory step for all Indian residents receiving income from abroad. The Income Tax Department requires you to specifically declare any foreign assets you hold, which includes the bank account where the remittance was received.

• Access Schedule FA: This schedule is available in ITR-2, ITR-3, ITR-5, and ITR-6. You will need to access it within the ITR form.

• Declare Your Foreign Bank Account: You must provide details of the foreign bank account(s) you hold for receiving payments. This includes the country, bank name, account number, and the peak balance in the account during the relevant calendar year.

• Report Foreign Income: Within Schedule FA, there are tables to specifically report income from foreign sources.

Step 5: Claiming Double Taxation Relief (If Applicable)

If you have already paid taxes on your foreign income in the customer's country, you can claim a Foreign Tax Credit in India to avoid paying tax on the same income twice. We'll discuss this in more detail in the upcoming sections. 

When reporting foreign remittance in your Income Tax Return (ITR), you need to include the information in multiple sections to ensure full compliance. Here are the key forms, sections and schedule for foreign remittance reporting: 

1. Core ITR Form

The money you receive from abroad as a business is considered a part of your total income. Therefore, it must be reported in the main income schedule of your ITR. You must fill out the appropriate ITR form based on your business type. 

The amount should be converted from foreign currency to Indian Rupees (INR) using the exchange rate on the date of receipt.

2. Foreign Assets and Income Schedules

Even if you've already included the amount in your business income, you must separately and mandatorily disclose it in the schedules below.

• Schedule FA (Foreign Assets): This schedule is for disclosing all foreign assets held during the financial year. This includes the foreign bank account where you received the remittance. You must provide details like the account number, bank name, country, and the peak balance at any time during the relevant calendar year.

• Schedule FSI (Foreign Source Income): This schedule requires a country-wise breakdown of all income from sources outside India. You must report the gross amount of foreign remittance here, specifying its nature. 

• Schedule TR (Tax Relief): If you've paid taxes on this income in the foreign country, you can claim a credit to avoid double taxation. Schedule TR summarizes the tax relief claimed, which is cross-referenced with your Form 67, a separate form you must file online before your ITR due date to claim the foreign tax credit.

3. FIRC vs. FIRS

The terms FIRC (Foreign Inward Remittance Certificate) and FIRS (Foreign Inward Remittance Statement) are often used interchangeably, but there's a slight difference. 

FIRC is an official document from your bank that certifies an inward remittance. FIRS is a consolidated statement that includes all inward remittances for a specific period. For tax purposes, the FIRC is your official proof of the transaction.

While the income from foreign remittances is generally taxable, there are certain exemptions and situations where you don't need to pay tax or are exempt from specific reporting forms.

The most common relief from taxation is to avoid being taxed on the same income twice. Here's how you can achieve this:

1. Double Taxation Avoidance Agreement (DTAA)

India has signed DTAAs with over 90 countries. These treaties specify how income will be taxed between the two countries. Depending on the DTAA, the income may be taxed in only one of the countries (exemption method) or, more commonly, you can claim a Foreign Tax Credit for the tax paid in the source country. 

You can do this by filing Form 67 and reporting the income in Schedule FSI and Schedule TR of your ITR.

2. Unilateral Relief (Section 91)

If there is no DTAA with the country from which you received the payment, you can still claim a credit for the tax paid abroad under Section 91 of the Income Tax Act.

As an Indian business receiving payments from abroad, you have to actively plan your taxes and use available legal provisions to reduce your final tax liability. 

1. Maximize Business Expense Deductions

The most fundamental way to reduce your tax liability is to ensure you are only paying tax on your net profit, not your gross revenue. Your foreign remittance is a business receipt, and all eligible business expenses incurred to earn that income are tax-deductible.

2. Leverage Double Taxation Avoidance Agreements (DTAAs)

This is the easiest way to save on taxes on foreign remittances. A DTAA is a treaty between India and another country that ensures the same income is not taxed twice. India has DTAAs with over 90 countries.

Most DTAAs use the "credit method." This means that if you have paid tax on your income in the source country (the country where your client is located), you can claim that amount as a credit against your tax liability in India. For this, you'd have to receive proof of tax and file Form 67. 

3. Take Advantage of GST Rules for Exports

If your business is a service provider or an exporter of goods, you may be eligible for benefits under GST laws, which can indirectly help you save on taxes.

4. Proper Documentation and Compliance

Always request an e-FIRC from your bank for every foreign payment. This is your most important document, as it proves that the payment you received is a legitimate foreign remittance.

Maintain a complete record of all invoices, agreements, bank statements, and other documents related to your foreign transactions. This will be invaluable in case of a tax audit.

While it may seem like an extra step, accurately declaring your foreign remittances in your ITR provides significant benefits and helps you avoid severe penalties.

1. Avoids Heavy Penalties and Prosecution

The most compelling reason is to avoid the severe consequences of non-compliance. Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, failure to disclose foreign income or assets can lead to a penalty of up to ₹10 lakh, a flat 30% tax on the undisclosed income, and even imprisonment for up to 7 years.

2. Allows for Double Taxation Relief

When you declare foreign remittance, you can claim a Foreign Tax Credit under a Double Taxation Avoidance Agreement (DTAA). If you have already paid tax on that income in the foreign country, this allows you to offset that tax against your tax liability in India. 

3. Aligns with Global Reporting Standards

India is a signatory to global agreements like the Common Reporting Standard (CRS) and FATCA. Under these agreements, India receives financial information about its residents' foreign assets and income from other countries. Since the Income Tax Department already has data about your foreign income, reporting it helps you avoid scrutiny. 

Foreign Remittance in ITR and Foreign Income Disclosure are closely related. However, here's how they differ: 

Foreign Remittance in ITR refers to the physical flow of money from a foreign country into your Indian bank account. For a business, this is a business receipt. When you report this, you are including the remittance amount in your business's gross turnover or receipts in the "Profits and Gains of Business or Profession" section of your ITR. 

Foreign Income Disclosure is the act of specifically detailing the source and nature of that income in a separate schedule. This is mandatory for all resident and ordinarily resident (ROR) taxpayers. 

The tax department views foreign remittances and foreign assets as two separate but connected aspects of international financial reporting.

Foreign Remittance in ITR is the reporting of the money you received as a business receipt.

Foreign Asset Reporting (Schedule FA) is a mandatory and comprehensive schedule in ITR forms (like ITR-3, ITR-5, or ITR-6). It is used to declare all foreign assets you hold, including:

1. Foreign Bank Accounts: The account into which you received the foreign remittance is considered a foreign asset, even if the balance is low or zero at the end of the year. 

2. Other Assets: If your business has any other foreign assets, such as shares in a foreign company, immovable property, or a financial interest in an overseas entity, you must report these as well.

Here are some challenges you may face when disclosing foreign remittances: 

1. Reconciling Information with the Tax Department

The tax department receives information about your foreign transactions from your bank (e-FIRC), as well as from foreign tax authorities via global agreements. Discrepancies between the data you report and the data they have can trigger a scrutiny notice.

2. Incorrect ITR Form

Using the wrong ITR form (e.g., using ITR-4 instead of ITR-3) is a common mistake that can lead to a defective return and penalties, as the simpler forms lack the required schedules for foreign income and assets.

3. Complex Exchange Rate Conversions

The remittance must be converted to INR using the exchange rate on the date of receipt. Tracking the correct exchange rate for numerous small transactions can be a tedious and error-prone process.

4. Missing Mandatory Disclosures

Many businesses report the income in their main business schedules but forget to fill out Schedule FA and Schedule FSI. This is considered a serious offense under the Black Money Act and can lead to prosecution, even if the income was already taxed.

5. Claiming Foreign Tax Credit

The process for claiming a foreign tax credit is complex and requires the timely filing of Form 67 and proper documentation. Any errors can result in the loss of the tax credit.

For an Indian business, the disclosure of foreign remittances involves strict regulatory compliance. The primary regulatory body is the Reserve Bank of India (RBI), which operates under the framework of the Foreign Exchange Management Act, 1999 (FEMA).

1. FEMA and Purpose Codes

Under FEMA, every international transaction, inward or outward, must be assigned a specific "purpose code." This code tells the RBI the exact nature of the transaction.

The bank where you receive your remittance will require this purpose code to issue the Foreign Inward Remittance Certificate (FIRC). 

2. RBI Reporting

The banks (known as Authorized Dealers or ADs) that handle your foreign exchange transactions are obligated to report these to the RBI. Your accurate documentation, especially the FIRC, is what enables them to do this.

3. Global Transparency Frameworks (CRS & FATCA)

As we had discussed previously, India is a signatory to the OECD's Common Reporting Standard (CRS) and has an agreement with the U.S. under FATCA. These frameworks allow for the automatic exchange of financial information between tax authorities globally. 

This means the Indian Income Tax Department already receives information about your foreign bank accounts and assets from partner countries. Your ITR must be consistent with this data to avoid scrutiny.

4. Income Tax Act, 1961

The Income Tax Act mandates the disclosure of all foreign income and assets for "resident and ordinarily resident" (ROR) taxpayers in the ITR, specifically in Schedule FA and Schedule FSI.

Xflow offers a suite of features that address the main challenges of foreign remittance reporting for businesses.

1. Automated FIRC/FIRA Generation

FIRC (Foreign Inward Remittance Certificate) is the most crucial document for tax and audit purposes. Xflow automatically generates a digital eFIRA for every transaction. So, you have the proper documentation to prove the source of your income and fulfill regulatory requirements without hassle.

2. RBI Purpose Code Guidance

The RBI requires every international transaction to have a specific purpose code. Xflow guides you to select the correct code and prevents common errors that can lead to transaction rejections and compliance penalties. 

This built-in validation ensures that all your remittances are aligned with FEMA regulations.

3. Lower FX Rates and Transparent Fees

Unlike traditional banks that use a wide spread on exchange rates, at Xflow, we provide a near mid-market rate with minimal markup. We also offer a clear, transparent fee structure, which helps you know the exact INR amount you will receive upfront. 

4. Faster and Predictable Settlements

While traditional wire transfers can take several days to settle, Xflow can reduce this to one business day. We achieve this by using local payment networks and pre-funded accounts, giving you quicker access to your funds to manage cash flow.

Simplify your international payment process. Get the best exchange rates and automate compliance with Xflow. Sign up for an Xflow account today!