Offshore Tax Compliance for Investments in India

FATCA India Compliance for Investments in India

For US residents with investments in India, compliance with FATCA and the US tax code can be burdensome. Here are some of the stumbling blocks that one may encounter.

Worldwide Tax Reporting Requirements for U.S. Persons

U.S. Persons

The United States taxes the worldwide income of all persons who are considered “U.S. Persons”.

There are three classes of persons that are considered U.S. persons and are required to report worldwide income and assets above certain thresholds.

  1. U.S. Citizens
  2. Green Card holders
  3. Anyone who meets the substantial presence test.

In addition, a person can become a tax resident by making a first-year election under IRC 7701(b)(4), or making a 6013(g) or 6013(h) election by filing a joint tax return with a U.S. tax resident.

FinCEN 114 “FBAR”

If you fall into one of the above classes and have foreign financial accounts such as bank accounts, mutual funds, life insurance, and pensions, and the maximum total balance of all these accounts exceeds $10,000, you must file FinCEN Form 114, also known as FBAR. Read more about FBARs.

Form 8938 “FATCA”

If you are a U.S. person and the value of your specified foreign financial assets exceed the following thresholds,  you must file a Form 8938 with your tax return. Read more about Form 8938.

  • Unmarried taxpayers living in the U.S. and married taxpayers filing separate returns living in the U.S. – $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • Married taxpayers filing a joint return and living in the U.S. – $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
  • Unmarried taxpayers living outside the U.S. –  $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
  • Married taxpayers living outside the U.S. and married taxpayers filing separate returns living outside the U.S. – $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year

Form 8621 “PFICs”

If you own Indian stocks or mutual funds, you may have to report these investments on Form 8621. There is a special tax for such investments that are considered Passive Foreign Investment Companies or “PFIC”. Read more about PFICs.

Types of Indian Investments and Potential Reporting Requirements

Fixed Deposit Accounts

Those owning “fixed deposit” or savings accounts in India usually have an NRE or NRO account which is available for non-residents of India. Fixed deposit accounts are similar to CDs in the US.

Any interest accrued in such accounts, even if they are not yet distributed, are taxed in the US.

Public Provident Funds (PPF) and Employee Provident Funds (EPF)

A public provident fund (PPF) is a long-term investment option that is backed by the Government of India.

Even if they may be tax-free in India, the U.S. does not recognize PPFs as tax-free investments. PPFs are much like government bonds. Accrued earnings should be reportable.

An Employee Provident Fund (EPF) is a fund to which both a salaried employee the and employer may contribute a portion (12%) of the salary as a tax-deferred investment (tax-deferred in India).

The only types of employee pensions that can grow tax-free are those that are recognized under Section 401(k) of the Internal Revenue Code. A foreign employer sponsored deferred compensation plan is usually “non-qualified” and falls under the provisions of IRC 402(b). Income may be taxable.

Mutual Funds

Any interest, dividends, or capital gains from foreign mutual funds are taxable in the US. Additionally, they are likely also to be subject to the PFIC rules.

Demat Accounts

A demat account (short for dematerialized account) are shares and securities held electronically. These are paper stocks that have been dematerialized into electronic form. Additionally, they may be subject to PFIC reporting requirements.

Penalties for Failing to Report Foreign Income and/or Assets

Maximum Penalties

There are penalties for failing to file foreign information reporting forms. For those out of compliance, these penalties can be avoided through a voluntary disclosure.

FormMaximum Penalty AmountStatutory Authority
FinCEN 114 (FBAR)$10,000 penalty for each non-willful violation (each year).
The greater of $100,000 or 50 percent of the account’s highest balance for willful violations.
31 U.S.C. sec. 5321
Form 8938$10,000 penalty for each violation (per year).

The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
IRC 6038D(d)
Form 35205 percent of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date of the reporting U.S. person’s income tax return (not to exceed 25% of such amount in the aggregate.IRC 6677(a)

What should non-compliant taxpayers do?

If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

Why hire us?

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.