« What are the best options to invest post retirement in 2023 in India? What is the latest Cost Inflation Index (CII) value in 2023? »

Should US-based NRIs sell off their mutual funds and stocks in India?

Posted on 12 Apr 2023
Author: Sayan Sircar

Tags: NRI

5 mins read

This article makes US-based NRIs aware of the taxation on the unrealised gain rule if they invest in Indian stocks, ETFs and mutual funds.

Should US-based NRIs sell off their mutual funds and stocks in India?

Disclaimer: Taxation is a dynamic concept, and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.

📚 Topics covered:

How are US-based NRIs taxed on their investments in India
How much tax should be paid on Indian mutual funds and ETFs?
- Which investments fall under the PFIC category?
- Which investments do not fall under the PFIC category?
What should NRIs do about existing PFIC-impacted investments?

How are US-based NRIs taxed on their investments in India

The IRS requires US tax residents to pay tax at their highest slab rate on investments in PFICs for every tax year (1st Jan to 31st Dec).

🛈 Who is a US tax resident?

Under the US Internal Revenue Code (Code), all US citizens and US residents are treated as US tax residents. For a non-U.S. citizen (alien individual) to be treated as a resident alien, they must satisfy either the green card test or the substantial presence test.

Source: OECD Website

Any NRI planning to stay in the US for some time will become a US tax resident after 183 days. The same rule applies to Green card holders as well.

🛈 What Is a Passive Foreign Investment Company (PFIC)?

A Passive foreign investment company (PFIC) is a foreign corporation for which either 75 percent or more of the gross income of the corporation for the taxable year is passive income, or the average percentage of assets held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.

Source: Cornell Law School

If we combine the above two definitions, any US-based NRI who is either a green-card holder or has stayed longer than 183 days in the US in a calendar year has to pay tax on Indian mutual funds, ETFs and AIFs (Cat 1 and Cat 3 only which do not have pass-through taxation). Direct stocks, real estate and provident fund (PPF/EPF) are not considered as a PFIC.

Recent articles:

1 / 3

<p>This article explains if Indian investors should consider investing in gilt or government securities mutual funds for their goals.</p>

2 / 3

<p>This article compiles an exhaustive list of FAQs on the concept of NRE Fixed Deposits (NRE FD).</p>

3 / 3

<p>This article gives you a glimpse of how the power of compounding creates a multi-crore portfolio in retirement.</p>

❮ ❯

Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

How much tax should be paid on Indian mutual funds and ETFs?

This tax is paid on unrealised gains. If your portfolio goes up by 10 lakhs a year, you pay 3 lakhs tax even if you did not sell anything

Let us assume that the NRI holds ₹10 lakhs in Indian mutual funds and ETFs on 1st January. On the following 31st December, the market value is ₹12 lakhs. Therefore, ₹2 lakhs are added to the income of the NRI and taxed at the ordinary tax rates. This tax is paid even though these investments are not sold.

If instead of ₹12 lakhs, the market value went down to ₹8 lakhs, there is no tax to be paid. But the notional loss is not allowed to offset that year’s income. Therefore if your investments go up, you pay tax, but if they go up, you don’t get the opposite benefit of lowering taxes.

Value destruction due to US taxation on PFIC

As the chart shows, a portfolio of ₹10 lakhs invested in a Nifty 50 index fund on 31st December 2012 would be worth, after 1st Jan 2023, ₹33.29 lakhs without tax and only ₹23 lakhs after paying tax under the PFIC rule at a 32% tax bracket.

US tax residents must fill out the cumbersome Form 8621 while tax filing to stay within the PFIC compliance rule.

Which investments fall under the PFIC category?

Mutual funds investing in equity or debt or both
Exchange-traded funds (ETFs) listed in India
Alternative Investment funds (AIFs) in the CAT1 and CAT3 categories
Unit Linked Insurance Plan (ULIPs) since they invest using a mutual fund-like structure
Real Estate Investment Trusts (REITs) may be PFICs if they do not perform any active business activities

Which investments do not fall under the PFIC category?

Direct stocks: if you buy shares directly, that does not fall under the PFIC rule. Baskets like Smallcase or Portfolio Management (PMS), which invest only in stocks, are also PFIC-exempt. Such baskets must not have ETFs in them
Indian corporate or government bonds: if you invest in bonds, say using the RBI Retail Direct portal
NRE or NRO FDs: these are exempt under the PFIC rule, but the income is anyway taxable at your slab rate in the US
Real estate: Rent from real estate as well as capital gains from a sale, are exempt from the PFIC classification
Provident fund/NPS: NPS, PPF, EPF and Sukanya Samriddhi are also exempt from PFIC since they are considered a variation of a foreign pension plan under a particular tax treaty with India
Alternative Investment funds (AIFs) in the CAT2 category

What should NRIs do about existing PFIC-impacted investments?

The PFIC rule typically applies above a threshold of ₹25,000 unsold assets. Therefore, NRIs should check the latest value of this exemption while filing tax returns.

Before shifting abroad, to-be NRIs can gift assets to a family member. The gifting is tax-free for immediate family members like parents, a resident Indian spouse, or siblings. Mutual funds should be dematerialised and transferred via the on or off-market transfer process.

Warning: Gifting is a transfer of ownership. Assets gifted to parents automatically become the inheritance of all legal heirs, including siblings. A will should be made in such cases, and signatures of the other legal heirs should be taken on the gift deed to avoid future hassles.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

<p>This article discusses various options for investors looking at investing in a post-retirement portfolio in 2023.</p>

Choosing Investments

What are the best options to invest post retirement in 2023 in India?

This article discusses various options for investors looking at investing in a post-retirement portfolio in 2023.

Published: 9 April 2023

10 MIN READ

<p>This article shows the latest Cost Inflation Index (CII) value for FY 2023-24. A table of historical values is also available.</p>

Tax

What is the latest Cost Inflation Index (CII) value in 2023?

This article shows the latest Cost Inflation Index (CII) value for FY 2023-24. A table of historical values is also available.

Published: 13 April 2023

1 MIN READ

Latest articles:

<p>This article shows the historical performance of this fund as an example of a long-running gilt fund to demonstrate the risk and return in a gilt fund.</p>

Mutual Funds Review

Mutual fund report card: Kotak Gilt Fund

This article shows the historical performance of this fund as an example of a long-running gilt fund to demonstrate the risk and return in a gilt fund.

Published: 7 June 2023

3 MIN READ

Mutual Funds

Gilt funds do not always go up in value. Should you invest in gilt funds?

This article explains if Indian investors should consider investing in gilt or government securities mutual funds for their goals.

Published: 4 June 2023

4 MIN READ

Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (10) Budgeting (11) Calculator (16) Case Study (5) Children (12) Choosing Investments (35) FAQ (5) FIRE (13) Gold (6) Health Insurance (4) House Purchase (14) Insurance (14) International Investing (9) Life Stages (2) Loans (9) Market Movements (11) Mutual Funds (28) NPS (5) NRI (8) News (6) Pension (8) Portfolio Construction (42) Portfolio Review (24) Real Estate (4) Retirement (35) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (10) Tax (25)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.