Many international funds/ETFs, such as Motilal Oswal S&P 500 Index Fund or Nippon India Taiwan Equity Fund, are domestic mutual funds that invest solely in foreign equity shares. Some other funds, like Parag Parikh Flexi Cap Fund, invest a certain portion of their AUM in foreign equity shares.
The question now is whether an Indian resident (only residents are required to report) who invests in such funds is liable to disclose the investment in Schedule FA and report any income from them in Schedule FSI of the income tax return.
About the author: Manmohan Sethumadhavan is a freelancer, investor, and personal finance enthusiast “in search of the absolute truth.” You can follow Manu on Twitter @ManuTsr. He is the author of the popular Revised Capital Gains Taxation Rules Ready Reckoner for FY 2025-2026.
The disclosure requirement: Section 2(11) of the Black Money Act (The Black Money (Undisclosed Foreign Income And Assets) And Imposition of Tax Act, 2015) defines an “undisclosed asset located outside India” as an asset located outside India, held by the assessee in his name or in respect of which he is a beneficial owner.
Section 2(12) defines “undisclosed foreign income and asset”. Section 43, 49, 50, etc., prescribes the disclosure of such information in the Income-Tax returns and penalties of default beyond a certain threshold.
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The thresholds are for penalties and not for the disclosure requirement itself, and hence not discussed here. The ITR instructions for Schedule FA make it explicit that a resident must disclose any foreign asset or financial interest “in respect of which he is a beneficial owner, a beneficiary or the legal owner”.
What does “beneficial owner” mean? Explanation 4 to Section 139(1) of the Income-Tax act defines “beneficial owner” as an individual who has provided, directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person. That “directly or indirectly” language creates the legal basis for treating indirect chains of funding as making someone a beneficial owner.
Applicability in the case of Mutual Funds. In Mutual Funds, units are issued by a trust; the trustees (and the custodian) hold scheme property for the benefit of the unitholders and the investor is the beneficial owner of the units (and, economically, of the scheme’s portfolio to the extent of his units). SEBI / NISM documentation and standard mutual-fund texts describe investors as beneficial owners / beneficiaries of the scheme assets.
The asset (foreign shares) is physically/registrar-wise located outside India (custodian/registry abroad). The investor provided consideration indirectly. The investor is economically a beneficial owner/beneficiary of the scheme which holds those foreign securities for the investor’s benefit.
Taken literally, that satisfies the statutory elements: an asset located outside India in respect of which the person is a beneficial owner – therefore the requirement to disclose in Schedule FA is triggered.
The law uses “directly or indirectly” and identifies “beneficial owner” and “beneficiary” in terms that capture indirect funding chains; mutual-fund trust law supports the notion that unitholders are beneficial owners/beneficiaries of scheme property.
So a convincing legal argument exists that such investors are beneficial owners of the foreign assets held by the scheme and therefore fall within the reach of Schedule FA / Black Money Act wording.
Practical impossibility. From a practical standpoint, reporting the underlying foreign securities held indirectly through an Indian mutual fund or ETF is nearly impossible – both in concept and in execution. The portfolio composition of such schemes changes continuously as fund managers rebalance or realign holdings to track an index or investment strategy.
For instance, a S&P 500–tracking fund may hold exposure to 500 or more foreign companies, each with weight changes occurring almost daily due to market movement and reinvested dividends. The investor has no control over these transactions and often has no granular visibility into which securities are actually held at any given moment.
Further, Schedule FA requires the disclosure of the foreign asset itself – that is, the equity shares or interests in foreign companies – not simply the NAV of a domestic fund. Strict compliance would therefore require the investor to identify each foreign company, compute the initial cost, peak value, and closing value in its native currency, and then convert each to Indian rupees using prescribed exchange rates, and all those for the accounting period of that country.
This is not only administratively unfeasible but also factually impossible, since such detailed information is neither available to nor ascertainable by a unitholder. The investor receives only a fund statement showing the number of units and their rupee value, not the portfolio composition or transaction details of the underlying securities.
Moreover, mutual fund portfolios include transient cash balances, futures, ADRs, ETFs, and other derivative exposures whose geographic and legal character change dynamically. Treating each of those as a “foreign asset” would render compliance conceptually absurd. The entire design of Schedule FA presupposes direct ownership or traceable beneficial interest – something a unitholder in an Indian fund simply does not have.
In essence, the reporting obligation cannot practically or logically extend to foreign assets held within a professionally managed domestic pooling vehicle, both because of the sheer scale of information involved and because the taxpayer has neither the data nor the legal relationship necessary to fulfill it.
Arguments against strict liability for non-reporting. Tribunals have emphasised that “beneficial owner” is a fact-intensive test and that mere mention/signature /nominal involvement does not suffice. Those decisions show the department must prove on facts that the taxpayer provided consideration or exercised control or had dominion/rights over the foreign asset – not a mere tracing by economic exposure alone.
These are directly relevant, persuasive tribunal precedents for the mutual-fund context: if the taxpayer cannot be shown to have provided consideration that bought those specific foreign shares (or to exercise control), then beneficial ownership is absent.
- In ACIT v. Jatinder Mehra (Delhi), the scope of “beneficial ownership” is discussed in a broad angle.
- In Krishna Das Agarwal (Jaipur), it was concluded that an individual can’t be held as a Beneficial Owner of investments made by a foreign company.
- Though in a different context, tribunals have recognised that mutual-fund units are a separate class of asset and not the same as company shares for treaty and tax purposes and treat domestic mutual fund units as domestic instruments. That supports the interpretive view that the relevant “asset” you hold (for Schedule FA) is the domestic unit, not the underlying foreign equity.
It can be argued that a retail investor who buys units of an Indian mutual fund acquires units of domestic instruments; the mutual fund’s trustees/custodian hold the portfolio securities in the scheme’s name, and places legal title of scheme property with trustees/custodian; units represent a proportionate claim in the scheme, not a registered interest in each foreign share. 139(1) requires provision of consideration (direct/indirect) for the asset to make one a beneficial owner of that asset.
If the investor buys units, and the scheme’s pooled corpus (not the individual investor) provides consideration to the foreign issuer/custodian to buy the foreign shares, there is a principled textual argument that the unitholder did not provide consideration for those particular foreign shares.
Conclusion – Limitations/risk points. The statute’s “directly or indirectly” phrase has been used to assert that pooled funds / indirect flows still make taxpayers beneficial owners; some tribunals reach the opposite conclusion on the facts. So the outcome is fact-sensitive. There is no single, binding Supreme Court decision squarely on domestic MF unitholders, and Schedule FA – tribunal decisions are persuasive but not universally binding. You therefore accept some litigation/enquiry risk.
Of course, there is a reliable interpretation under which a unitholder of an Indian-domiciled mutual fund/ETF that itself holds foreign shares need not report the underlying foreign shares in Schedule FA, but that is not a bullet-proof immunity; that is not an absolute exemption created by a rule, it is a fact-sensitive legal defence. The department can challenge on facts, if the AO can show effectively funded/acquired particular foreign securities or exercised control.
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