Should US-based NRIs sell off their mutual funds and stocks in India?
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.
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.
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.
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?
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)?
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
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. This tax is paid on notional gains though you have not sold anything.
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.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.
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.
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.
We have covered this concept in detail here: Who should invest in the name of parents to save tax? Who should not?.
We have discussed this concept in a lot of detail here: Wall Street or Dalal Street: which is the best option for US NRIs to invest in Indian stocks based on PFIC rule?.
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This post titled Should US-based NRIs sell off their mutual funds and stocks in India? first appeared on 12 Apr 2023 at https://arthgyaan.com