Offshore Tax Compliance for Investments in India

Foreign Nationals & Expats

Houston Tax Attorney

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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. Indian clients often receive incorrect information from friends, family, and sometimes even their tax advisors. Since we receive a large number of Indian clients, I’ve create a short guide that may assist such individuals in properly reporting their foreign income and assets.

Worldwide Tax Reporting Requirements for U.S. Persons

U.S. Persons

The U.S. is one of the few countries in the world that taxes its residents on worldwide income and requires reporting of foreign assets. Immigrants from countries such as India may not understand or even know about these reporting requirements. In fact, many clients have come to us after having assumed that all U.S. income is reported in India and all Indian income is reported in India. While this may seem intuitive, it is not correct and can lead to major tax penalties if the IRS catches on. We’ll go over some of the penalties associated with unreported foreign income and assets later.

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

  1. U.S. Citizens
  2. Green Card holders
  3. Anyone who is present in the U.S. for at least 183 days in a given 1 to 3 year period. Read more about the substantial presence test and how it is calculated.

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 tthe 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 mutual funds and the total value of such funds exceeds $25,000, 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

This is probably the most common type of unreported income in our streamlined cases involving Indian nationals. 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. Such accounts may be held at any number of Indian banks such as:

  • ICICI Bank
  • HDFC Bank
  • State Bank of India (SBI)
  • Bank of Baroda
  • HSBC Bank
  • Canara Bank
  • Punjab National Bank

Myth: Because the account holder will not receive the interest income until maturity, it is not reported on the US tax return.

Fact: 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. A PPF is a public pension system that is similar to the US Social Security system.

Myth: Because these are long-term investments that cannot be withdrawn until maturity (15 years), the income is not taxable in the US. In addition because it exempt from tax under 80C of the Indian tax code, that it is not taxable under the Internal Revenue Code.

Fact: The US does not recognize PPFs as tax-free investments. Therefore the earnings from a PPF are reported each year on the US tax return as they accrue.

Those with investments in PPFs are required to report all interest, dividends, and capital gains, even if they are “reinvestments”, and regardless of whether the account has matured or not. Additionally, the account holder may have a PFIC requirement.

An Employee Provident Fund (EPF) is similar to a PPF, but it’s more like a 401(k) or IRA in the US. An 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).

Myth: If the account holder does not withdraw any money from an EPF, it is not taxable in the US.

Fact: 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. Any income earned in a EPF is reported on the US tax return, regardless of whether there has been a withdrawal.

Life Insurance

Term life insurance plans are not reported on the US tax return or the FBAR. However, if the plan has cash value, such as a Unit Linked Insurance Plan (ULIP), there may be taxable income.

Myth: Life insurance is not taxable until the policy has been surrendered.

Fact: A ULIP is an investment portfolio. Any interest, “bonuses,” or dividends, including reinvestments are taxable. Additionally, you may have a PFIC filing requirement since this is a securities-based investment.

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.

Myth: Because stocks held directly are not reportable on the FBAR, demat accounts are not reported either.

Fact: A demat account is considered a financial account and must be reported on the FBAR.

Penalties for Failing to Report Foreign Income and/or Assets

Maximum Penalties

Penalties for failing to report foreign income or any one of the foreign information reporting forms such as FinCEN 114, Form 8938, Form 8621, Form 5471, or Form 3520 can be enormous.

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)

These are maximum penalties per occurrence (i.e. per year). However, there are mitigating factors that the IRS will consider when assessing penalties.

IRS Tax Amnesty Programs

In order to encourage individuals who are non-compliant with their foreign reporting obligations, the IRS offers two primary tax amnesty programs. These programs assess an automatic penalty in exchange for the IRS not pursuing non-willful or willful penalties (depending on the program) against the taxpayer. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Offshore Program (Streamlined). By entering into one of these programs, the taxpayer cures all previous noncompliance. Read about OVDP vs. Streamlined.

Who Should you Hire if you Need Help?

If you’ve made it this far through the article, then you probably have unreported foreign accounts and are looking into entering into one of the IRS tax amnesty programs. You have a choice of many professionals to chose from. Cost may be an important factor for you. Read about OVDP attorney fees.

Hopefully a factor equally important to you as cost is finding someone that is qualified to handle your offshore compliance matter. Clients across the U.S. and even internationally have come to us for our expertise in handling their cases. Recently an attorney in California came to us for help because the professional her mother hired bungled the streamlined application. The proper forms were not filled out and the non-willfulness certification was haphazardly drafted. Here’s a copy of the letter the IRS sent back. Fortunately for them, they were given another chance to submit the streamlined application, even though it clearly states on the certification that “You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.”

We have had numerous clients with assets located in India ranging in the millions and have successfully represented each one of them. We would be happy to provide references.