Summary: The article explains the statutory framework, applicability, reporting requirements, and recent clarifications relating to the Annual Return on Foreign Liabilities and Assets (FLA Return) under FEMA. The FLA Return is a position-based annual compliance applicable to Indian resident entities having outstanding inward FDI or outward ODI as on the end of March, irrespective of whether any transaction occurred during the year. It must generally be filed by 15 July through the FLAIR portal, with provisional figures if audited accounts are unavailable, followed by revision after RBI approval where necessary. The article discusses entities exempt from filing, reporting architecture, valuation principles, treatment of CCDs, country-wise reporting, reverse investment, and consequences of delayed filing, including Late Submission Fee and FEMA penalties. It also highlights the RBI’s July 2026 FAQs providing significant clarity on IFSC/GIFT City structures, confirming that IFSC entities comply with IFSCA requirements, while Indian counterparties continue to have RBI FLA reporting obligations.
Annual Return on Foreign Liabilities and Assets (FLA)
GENESIS AND STATUTORY UNDERPINNING
The Annual Return on Foreign Liabilities and Assets, universally abbreviated as the FLA Return, traces its statutory origin to A.P. (Dir Series) Circular No. 45 dated March 15, 2011, issued by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999 (FEMA). Unlike most FEMA compliances that are transaction-specific FC-GPR for FDI, FC-TRS for transfer of shares, ODI forms for outbound investments, the FLA return is a position-based annual return. It captures a balance sheet snapshot of a resident entity’s outstanding foreign assets and foreign liabilities as on end-March of the previous and current financial year, and is not triggered by a specific transaction but by the mere existence of such positions on the reporting date.
SCOPE- WHO MUST FILE AND WHEN
The filing obligation is casted on all Indian-resident entities companies under the Companies Act, 2013; Limited Liability Partnerships under the LLP Act, 2008; SEBI-registered Alternative Investment Funds (AIFs); Partnership Firms; Proprietary Firms; and Public Private Partnerships that hold outstanding inward FDI and/or outward ODI as on end-March of the previous or current financial year. The critical phrase is “outstanding as on end-March”, the obligation is not discharge-based but position-based, meaning it endures so long as the foreign investment position (either inward or outward) exists on the reference date.
The form simultaneously captures data as on end-March of the previous year and end-March of the current reporting year. As a consequence, an entity that had outstanding FDI or ODI as on end-March of the previous year but has fully divested or repaid such investment during the current year is still required to file, it must report the previous year position and reflect the disinvestment in the appropriate fields of Section III of the return.
The following situations do not attract the FLA obligation:
(a) entities that have received only share application money from non-residents but where actual FDI allotment is pending and no outstanding FDI position exists as on the reference date;
(b) shares issued to non-residents on a non-repatriable basis, which are statutorily excluded from the definition of “foreign investment” and therefore not reportable; and
(c) entities where there is no outstanding inward FDI or outward ODI on either reference date.
A practical situation that the July 2026 FAQ’s address and which often creates confusion is where a resident shareholder becomes a non-resident by shifting to a foreign country. In such a case, the Indian entity must file the FLA return if the shares held by the erstwhile resident/now-non-resident were issued on a repatriable basis. If the shares were issued on non-repatriable basis only, the FLA obligation does not arise, since non-repatriable holdings are not characterised as foreign investment.
DUE DATE, FILING MECHANISM AND THE PROVISIONAL FILING FRAMEWORK
The due date for filing the FLA return is July 15 of the reporting year, and this deadline is absolute, it generally admits no extension and does not differentiate between entities whose accounts are audited and those whose accounts remain unaudited as on the due date. The RBI has expressly provided that where audited financials are unavailable by July 15, the entity must file on the basis of provisional or unaudited financial statements and subsequently revise the return once audited accounts are finalised. There is no minimum threshold of variation that permits an entity to avoid the revision, even marginal differences between provisional and audited figures require the filing of a revised return after obtaining prior RBI approval through the FLAIR portal.
The filing is made through the FLAIR (Foreign Liabilities and Assets Information Reporting) portal at https://flair.rbi.org.in/. Entities must first complete registration on the portal, following which login credentials are issued to the authorised person. For AIFs specifically, an online filing module has not yet been made available on the FLAIR portal. AIFs must register on the portal and thereafter send an email to flareturn@rbi.org.in to obtain the latest Excel-based format. The completed format is to be returned to the same email address, and the FLA team issues email-based acknowledgement upon receipt and validation.
The reference period for FLA filling is always end-March, regardless of the entity’s own accounting year. An entity following a January-December accounting cycle must still report as on end-March, based on internal assessment. The same principle applies to overseas subsidiaries and JVs where their accounting period differs from the Indian reference period, the Indian reporting entity must furnish figures for end-March of the relevant years on internal assessment basis.
CONSEQUENCES OF NON-FILING AND THE LATE SUBMISSION FEE FRAMEWORK
Non-filing of the FLA return by July 15 constitutes a violation of FEMA, 1999, attracting penal consequences under the applicable provisions. The regulatory framework governing such consequences is set out in Notification No. FEMA.395/2019-RB dated October 17, 2019 and A.P. (DIR Series) Circular No. 16 dated September 30, 2022. Under this framework, a Late Submission Fee (LSF) is applicable for delayed filings amounting to Rs.7,500 and the entity must contact the Foreign Exchange Department (FED) of the Regional Office of the RBI within whose jurisdiction the entity’s Registered Office is situated, for payment of the LSF. Reference may also be made to the FIRMS portal at https://firms.rbi.org.in for procedural guidance.
Entities that have defaulted in filing for prior years can take prior RBI’s approval for such fillings. However, the penalty clause may still be invoked for the period of non-compliance even if the belated filing is subsequently made.
REPORTING ARCHITECTURE- WHAT GETS REPORTED WHERE
The FLA return is structured across four principal sections. Section I captures entity identification and general information. Section II captures financial data of Indian Entity such as paid-up capital, net worth, and revenue from operations. Sections III and IV are the substantive foreign investment reporting sections. Section III for inward FDI liabilities (foreign investment received in India) and Section IV for outward ODI assets (overseas direct investment made by the Indian entity).
Under Section III (Inward FDI), the reporting follows the 10% threshold principle drawn from international standards for direct investment. Where a non-resident entity holds 10% or more of the equity plus participating preference shares of the Indian reporting entity, the investment is reported under 1.b FDI. Where the non-resident holding is less than 10%, the investment is reported under 2.b DI. The ‘Other Capital’ component comprising loans, trade credit, debentures, non-participating preference shares, and other inter-company accounts with the direct investor is also reported under the respective block at nominal value.
A critical clarification that the RBI FAQ’s provide on Section III reporting relates to the country of reporting: FDI must be reported based on the country of the immediate investor, not the ultimate beneficial owner or the ultimate holding entity. However, where the Indian entity has receivables or payables with the non-resident ultimate holding entity, fellow enterprise, or other indirect related parties, those must also be reported under the ‘Other Capital’ component of 2.b DI of Section III. This dual-reporting obligation- immediate investor under 1.b FDI and related-party balances under 2.b DI — is frequently missed in practice and represents a significant compliance gap in many FLA filings.
Under Section IV (Outward ODI), the mirror principle applies. Where the Indian entity holds 10% or more of the equity plus participating preference shares of the overseas entity, the investment is reported under 1.b ODI. Where the holding is less than 10%, it falls under 2.b DI of Section IV. Other capital comprising inter-company debt, trade credit, and other instruments between the Indian entity and its overseas DIE is reported at nominal value under the respective block.
The concept of reverse investment, where a DIE holds shares in its own Direct Investor also requires reporting. Where the Indian DIE holds equity in its non-resident Direct Investor entity and the holding is less than 10% of the DI entity’s equity, this constitutes reverse investment and must be disclosed under item 1.2 (‘claims on direct investor’) of the respective blocks in Section III.
DEFINITIONAL NUANCES CRITICAL TO CORRECT REPORTING
The FLA return employs several definitional concepts that have specific meanings distinct from their everyday commercial usage, and misapplication of these definitions is one of the most common sources of reporting errors.
Participating preference shares are defined as those carrying rights either to share in surplus profits after payment of dividend to equity shareholders, or to participate in surplus assets on winding up. Non-participating preference shares do not carry either right. This distinction is significant because only equity plus participating preference shares are counted toward the 10% threshold test for determining whether an investment qualifies as FDI (1.b) or portfolio/direct investment below threshold (2.b). Non-participating preference shares like CCDs are treated as ‘Other Capital’, not equity.
The treatment of Compulsorily Convertible Debentures (CCDs) deserves particular attention. CCDs are not included in paid-up capital for the purposes of Section II of the FLA return. Their treatment in Section III depends on the investor’s profile: if the non-resident investor also holds equity in the Indian entity, the CCDs are reported as ‘Other Capital’ under 1.b FDI or 2.b DI depending on the equity holding percentage. If the non-resident investor holds only CCDs and no equity as on end-March, the CCDs are reported under Portfolio Investment item 2.2 of Section III. The same treatment logic applies to Compulsorily Convertible Preference Shares (CCPS).
For valuation of equity held by non-residents, the FLA return adopts the IMF’s Own Funds at Book Value (OFBV) method for unlisted entities computed as net worth (paid-up equity and participating preference share capital plus reserves and surplus, less accumulated losses) multiplied by the percentage of non-resident equity holding. For listed entities, the closing share price as on the relevant end-March is used. Both computations are auto-populated on the FLAIR portal and do not require separate calculation by the reporting entity. However, entities must ensure that the underlying inputs net worth figures and shareholding percentages are correctly entered, since the automated computation is entirely dependent on the accuracy of the inputs.
The FAQ’s also address what constitutes ‘Sales’ and ‘Purchases’ for Section II reporting purposes. Only revenue from regular business operations qualifies that is, revenue from operations in the P&L account sense. Items specifically excluded include: interest income on fixed deposits, profit on sale of fixed assets, foreign exchange fluctuation gains, capital expenditure, tax payments (income tax, GST), goodwill, amortisation of intangibles, non-cash adjustments, revaluations, and intra-group transfers not involving cash outflows. For entities whose primary revenue is from interest, commission, or forex-related operations such as NBFCs, leasing companies, hiring companies, or money-changing entities such income constitutes their primary revenue from operations and must be reported accordingly. Pre-paid expenses paid in a prior year but booked in the current year are to be excluded; only expenses incurred during the year in question for regular business operations are reportable.
The FAQ’s also make explicit that domestic assets and liabilities even if denominated in foreign currency are not to be reported in the FLA return. The FLA return is concerned only with cross-border positions foreign assets held by Indian entities and foreign liabilities owed to non-resident investors.
THE IFSC/GIFT CITY DIMENSION- NEW CLARITY IN THE JULY 2026 FAQ’s
The July 2026 FAQ’s issued by the RBI represent the first comprehensive articulation by the RBI of FLA reporting obligations in the IFSC/GIFT City context, addressing a question that had generated significant uncertainty among practitioners advising entities operating through or investing in GIFT City. The treatment rests on a foundational FEMA fiction: for the limited purposes of FEMA, 1999, a unit in the IFSC is treated as a person resident outside India, even though GIFT City is physically located within Indian territory. This deeming fiction has far-reaching consequences for FLA reporting, and the July 2026 FAQ’s address it across three distinct fact patterns.
In the first scenario a foreign entity (Entity X) investing into an IFSC-regulated entity (Entity Y), the RBI clarifies that while such investment is classified as inward foreign direct investment, Entity Y, being regulated by the International Financial Services Centre Authority (IFSCA), is not required to file the FLA return with the RBI. Instead, Entity Y must comply with such instructions as IFSCA may issue for submission of the FLA return. This represents a clear jurisdictional delineation that IFSCA governs IFSC entities’ reporting obligations; the RBI’s FLA regime does not apply to them directly.
The second scenario arguably the one with the most practical significance involves an Indian resident entity (Entity A) investing into an IFSC entity (Entity B). Since Entity B, by FEMA fiction, is a person resident outside India, Entity A’s investment in Entity B is treated as an outbound ODI under FEMA. The RBI has now expressly confirmed that Entity A, being a person resident in India, continues to bear all applicable FEMA reporting obligations, including the FLA filing obligation, in respect of its investment in Entity B. Such investment must be disclosed under Section IV of the FLA return as outward ODI. Entity B, conversely, is not required to file the FLA return with the RBI specifically for the investment received from Entity A, it follows IFSCA instructions. This position has a significant practical impact on Indian holding companies, private equity funds, and operating companies that have set up treasury or holding structures in GIFT City, their FLA obligations in respect of such IFSC subsidiaries or associates cannot be overlooked.
The third scenario addresses downstream investment by an IFSC entity (Entity Y) into an Indian entity (Entity Z), where Entity Y has itself received foreign investment from abroad (Entity X). In this chain, Entity Y’s FLA obligation for the inward investment it receives from Entity X is governed by IFSCA instructions, not the RBI. However, Entity Z being a person resident in India must comply with all applicable FEMA reporting obligations issued by the RBI, including filing the FLA return in respect of the inbound FDI received from Entity Y. The fact that Entity Y is an IFSC entity effectively a deemed non-resident under FEMA does not in any manner dilute or extinguish Entity Z’s FLA filing obligation. Entity Z must report the investment received from Entity Y as inward FDI in Section III of the FLA return.
The governing principle that synthesises all three scenarios is elegant in its simplicity: IFSC entities file with IFSCA; Indian counterparties to IFSC entities file with the RBI. The FEMA resident/non-resident deeming fiction for IFSC units divides the compliance universe cleanly that IFSC entities step out of the RBI’s FLA framework, but every Indian entity that either invests into or receives investment from an IFSC entity remains fully within the RBI’s FEMA reporting universe. Practitioners advising GIFT City structures must now map each entity in the chain and determine the applicable regulator’s FLA instruction set accordingly.
REVISION, ADMINISTRATIVE CHANGES, AND OTHER PROCEDURAL MATTERS
The procedure for revision of a filed FLA return is strictly portal-governed. An entity wishing to file a revised return whether due to transition from provisional to audited figures, or for any other reason must first obtain prior RBI approval through the FLAIR portal (Menu → Multiple Year CIN Enable Screen → select year → submit). Without such approval, the system does not permit the filing of a revised return. If the entity encounters difficulty raising the revision request through the portal, it may share the error screenshot with flareturn@rbi.org.in for assistance. There is no minimum variation threshold any difference, however marginal, between the previously filed figures and the revised figures requires this approval-based revision process.
The FLA return’s treatment of Ind AS transition is straightforward: where the current year balance sheet is prepared under Ind AS but the previous year was under Indian GAAP, variations in the FLAIR portal’s variation report that arise purely from the change in accounting standard may be ignored. The FLA data must be reported as per the latest balance sheet under the applicable accounting standard, not by restating previous year figures.
For changes in entity name, registered address, email ID, or authorised person details, there is no in-portal mechanism. The entity must send a de-activation request to flareturn@rbi.org.in, specifying the entity CIN and username. De-activation typically takes one to two working days. Thereafter, the entity re-registers on the FLAIR portal with the updated details. Where the re-registration uses the same CIN/LLPIN/UIN as the old account, all previously filed FLA data is retained and migrated to the new account.
Where an entity’s CIN changes after the close of a reporting year for instance, consequent to a change in company type or reincorporation the FLA return for the relevant reporting period (and any subsequent revision for that period) must be filed using the old CIN. The new CIN is used prospectively.
CONCLUDING OBSERVATIONS
The FLA return, despite its annual periodicity, is one of the more substantively demanding compliances under FEMA, requiring a thorough understanding of international investment position concepts, FEMA’s resident/non-resident taxonomy, and the entity’s own corporate structure across jurisdictions. The July 2026 FAQ’s, while presented in a Q&A format, carry significant interpretive weight particularly the IFSC clarifications, which now put beyond doubt the bifurcated compliance universe for GIFT City structures.
For practitioners, the key takeaways are: the obligation is position-based, not transaction-based; the two-year data structure means exit from FDI/ODI during the year does not extinguish the current year filing obligation; the immediate investor (not the UBO) governs the Section III FDI reporting head, but related-party balances with indirect parties must still be disclosed under 2.b DI; and Indian entities investing into or receiving investment from IFSC entities remain fully subject to RBI FLA obligations, irrespective of the IFSCA-governed status of the IFSC entity itself. Non-filing is a FEMA violation and the July 15 deadline deserves to be tracked with the same rigour as any other statutory due date.
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Disclaimer: This article has been prepared solely for general knowledge and educational purposes and represents the author’s understanding thereof. It does not constitute legal, regulatory, or professional advice of any nature, and should not be relied upon as such. Readers are advised to seek independent professional advice before taking any action or decision based on the contents of this article. The author has expressly disclaimed any liability arising out of the use of or reliance placed on this article.
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