FDI & ODI Census 2025-26: Tax Impact for Indian Direct Investment Entities

What Happened?

The Reserve Bank of India has released provisional results of the 2025-26 annual census on Foreign Liabilities and Assets (FLA) covering 43,123 Indian entities including companies, limited liability partnerships (LLPs), alternative investment funds (AIFs), and partnership firms engaged in cross-border direct investment activities. The census captured data as of March 31, 2026, revealing inward FDI of ₹70.71 lakh crore (₹70,71,945 crore) and outward direct investment of ₹16.71 lakh crore (₹16,71,463 crore).

Background & Legal Context

Why This Matters for Income Tax Compliance:

Under the Income Tax Act 2025, Indian entities receiving foreign direct investment or making overseas investments must comply with multiple tax obligations:

• Section 192 (TDS on Foreign Remittances): Obligations to deduct and report tax on payments to non-residents
• Section 285 (FEMA Compliance): Foreign Liabilities and Assets must be reported as per Foreign Exchange Management Act, 1999
• Transfer Pricing Documentation: Section 92 requires Indian companies to maintain Arm's Length Price documentation for cross-border transactions with associated enterprises
• Schedule FA (Foreign Assets): Listed in Form ITR showing foreign bank accounts, investments, and liabilities
• Section 195 (Payments to Non-Residents): TDS requirements on dividends, interest, and other payments to foreign entities

This RBI census data is critical because tax authorities use it to cross-verify reported foreign investment figures in individual tax returns and corporate assessments. The data covers three categories: direct investment (FDI/ODI), portfolio investment, and other investments including trade credit and loans.

Key Findings & Tax Implications

Structure of Foreign Investment (as on March 31, 2026):

• 97% of reporting entities were unlisted companies, yet held major share in total FDI equity capital
• Non-financial companies accounted for 90.1% of FDI equity at face value (₹10,05,971 crore out of ₹11,08,415 crore)
• Manufacturing sector dominated with 50.1% share of total outstanding FDI equity at market value (₹35,49,558 crore)
• Services sector held 44.8% share of FDI (₹31,71,195 crore)

Inward FDI Growth: Total inward FDI grew 8.5% year-on-year in rupee terms, from ₹65.17 lakh crore (FY 2024-25) to ₹70.71 lakh crore (FY 2025-26). Equity component contributed ₹68.45 lakh crore (8.6% growth).

Source Countries: Top sources of FDI were USA (16.5%), Mauritius (14.5%), Singapore (13.7%), and UK (10.8%). This is significant for transfer pricing analysis, as transactions with entities from these countries will face intense scrutiny under TP documentation requirements.

Outward ODI Growth: Indian entities invested ₹16.71 lakh crore overseas, with primary destinations being Singapore (21.1%), UAE (16.2%), USA (13.9%), and UK (12.4%). The FDI-to-ODI ratio moderated to 4.2 times from 5.5 times year-on-year.

Foreign Liabilities & Assets: Other investment liabilities (trade credit, loans, currency & deposits) with unrelated non-residents recorded growth of 11.9% y-o-y to ₹34.33 lakh crore. Other investment assets with unrelated parties rose 16.1% to ₹17.26 lakh crore.

What Does This Mean for You?

For Companies with FDI (Inward Foreign Investment):

If your company received foreign direct investment and is part of this census, you must ensure:

• Accurate Tax Return Filing: Schedule FA in your ITR-4 or ITR-5 (for companies) must match the data reported to RBI in the FLA census. Any discrepancy will be flagged during assessment
• Transfer Pricing Documentation: Since 90% of FDI is held by non-financial companies in manufacturing and services, you must maintain contemporaneous TP documentation showing your cross-border transactions are at Arm's Length Price. The tax department now has benchmark data to compare
• Interest Deduction Limitations: Section 192 of IT Act 2025 restricts interest deduction on foreign borrowings. With other investment liabilities growing 11.9% y-o-y, ensure your loans from foreign parent companies comply with the interest limitation rules
• TDS Compliance: Any dividend, interest, or royalty payment to foreign shareholders/lenders requires TDS under Section 195. The census data shows 36,168 entities reported inward FDI—all must be compliant

For Companies with ODI (Outward Investments):

If your company has invested ₹1 crore or more overseas:

• Report all foreign subsidiaries, associates, and branch offices in Schedule FA of your income tax return
• Maintain separate TP documentation for transactions with these overseas entities
• Foreign exchange earnings/losses on these investments must be accounted for in your P&L
• If your overseas subsidiary has losses, ensure you claim no benefit under Section 80 of IT Act 2025 (losses from foreign sources cannot be set-off against Indian income)

Valuation Impact: The RBI census noted that variations in outstanding foreign assets/liabilities differ from Balance of Payments flows due to valuation changes from price and exchange rate movements. This affects your annual profit calculation, especially if you hold foreign currency accounts or derivative positions.

What Should You Do Now?

Immediate Action Items (by November 2026):

1. Reconcile FLA Data: If your company is large (FDI > ₹1 crore), check whether you were part of the RBI census. Obtain a copy of the data filed and verify accuracy
2. Review ITR-4/5 Schedule FA: Update your foreign investment schedules to reflect the RBI census. Any discrepancy must be explained in Form 3CEB (Audit Report) if applicable
3. Update TP Study: If you have FDI or transactions with foreign associated enterprises, your transfer pricing documentation should reference benchmarking data now available from the census. Engage a TP specialist to revise your study
4. Audit Your TDS Payments: Review all payments made to foreign shareholders, lenders, and service providers in FY 2025-26. Ensure proper TDS was deducted and deposited on time
5. Reassess Interest Deductions: Calculate your total interest paid on foreign loans. Under Section 192 of IT Act 2025, interest deduction may be limited to 30% of tax EBITDA for specified large businesses
6. Check Exchange Rate Fluctuations: Review your foreign currency accounts and investments for MTM (mark-to-market) gains/losses that must be reported in AY 2026-27 returns

For Assessment Year 2026-27: When the Income Tax Department begins assessments of FY 2025-26 returns (AY 2026-27), they will cross-match your reported foreign investment data with this RBI census. If your return shows ₹50 crore FDI but the census shows ₹60 crore, the Department will issue a notice asking for the discrepancy.

Key Takeaways

• Scale of FDI: At ₹70.71 lakh crore (8.5% YoY growth), inward FDI is substantial and heavily scrutinized by tax authorities who now have RBI benchmark data for verification
• Unlisted Dominance: 97% of reporting entities are unlisted but hold 97.9% of FDI equity capital, making small/medium enterprises with foreign investment high-audit-risk entities
• Transfer Pricing Scrutiny: With manufacturing accounting for 50.1% of FDI, transfer pricing investigations will intensify for companies importing goods/services from foreign parent companies
• TDS & Interest Compliance: 11.9% YoY growth in foreign liabilities means more companies are borrowing from abroad; ensure Section 195 TDS and Section 192 interest limitation rules are followed
• Return Reconciliation Critical: Your ITR Schedule FA must match RBI census data; discrepancies trigger immediate assessment notices and penalties under Section 271E of IT Act 2025 for incorrect/incomplete reporting

Bottom Line: The 2025-26 FLA Census is not just statistical data—it's a tax compliance checklist. If your company received or sent foreign investment, your tax return must align with this RBI data. Any mismatch is a red flag for the Income Tax Department. Review your foreign investment schedules, TP documentation, and TDS payments immediately. Non-compliance can result in assessments, interest penalties, and prosecution under Section 276 of IT Act 2025.

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