What NRIs Must Do With Indian Investments Before the Year-End? PFIC, FATCA, DTAA and ITR rules Simplified
This article simplifies compliance for US, Canada, UK, and Australia-based NRIs, covering FBAR, FATCA, PFIC, and T1135 requirements.
What NRIs Must Do With Indian Investments Before the Year-End? PFIC, FATCA, DTAA and ITR rules Simplified
Posted on 18 Dec 2024
Author: Sayan Sircar
9 mins read
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This article simplifies compliance for US, Canada, UK, and Australia-based NRIs, covering FBAR, FATCA, PFIC, and T1135 requirements.
This article is a part of our detailed article series on the concept of taxation rules applicable to NRIs. Ensure you have read the other parts here:
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What should an US NRI do to become compliant with PFIC and FBAR rules on their Indian investments?
This article advises on the steps a US-based Non-Resident Indian (NRI) should take regarding unreported mutual funds in India under FBAR and PFIC rules.
-
Wall Street or Dalal Street: which is the best option for US NRIs to invest in Indian stocks based on PFIC rule?
The article compares various investment options for US-based NRIs intending to invest in the Indian stock market.
-
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.
📚 Topics covered:
- What should US-based NRIs do regarding their Indian investments at the year-end?
- What should Canada-based NRIs do regarding their Indian investments at the year-end?
- What should NRIs outside the US and Canada do regarding their Indian investments at the year-end?
- Which are the common tax-related activities for all NRIs irrespective of their country of residence for India tax law compliance?
What should US-based NRIs do regarding their Indian investments at the year-end?
The US tax year is from January to December while the Indian assessment year is from April to March. You need to follow the US calendar for declarations, transactions and account balances (e.g. FBAR and Forms 8938/8621). In this article, we are covering US citizens, residents (which includes NRIs), and Green Card holders
Declaring Foreign Bank and Financial Accounts (FBAR)
Ideally, this form must be filled by 15 April with an extension up to 15 October. Any aggregate foreign account balances, if exceeding $10,000 at any time during the year, must be reported via FBAR (FinCEN Form 114). If you have two bank or demat accounts in India for example, and the total in them exceeds $10,000 then you need to report both.
FBAR is related to the U.S. Treasury Department’s Financial Crimes and Enforcement Network (hence called a FinCEN Form) and is not related to tax filing which is under the IRS.
Declaring Statement of Specified Foreign Financial Assets via Form 8938 for the IRS
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets.
Any holding, in non-US assets, more than $50,000 on the last day of the year or exceeding $75,000 during the year must be reported. These limits are doubled for those filing tax returns jointly. This form becomes a part of the tax return.
In scope for reporting: maximum value of the account and associated assets including Indian and foreign bank accounts, mutual funds, shares and bonds in a demat account and life insurance policies (including ULIP, whole life and endowment and excluding term plans).
There is no need to report real estate held outside the US if you hold it directly as an Individual. If you hold it via a foreign entity that you control, then it is reportable.
Declaring Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund via Form 8621 for the IRS
A Passive foreign investment company (PFIC) is a foreign corporation for which either 75 per cent 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 per cent.
The PFIC rule applies to:
- Indian mutual funds, ETFs, and ULIPs fall under these rules. The same applies to similar assets domiciled in other countries like European SICAV or UCIT funds
- Indian stocks, bonds, NRE/NRO FDs, Real estate, PPF/EPF/NPS and CAT2 AIFs do not fall under PFIC
The PFIC rule typically applies above a threshold of USD 25,000 (double the amount when filing jointly) for unsold assets. Therefore, NRIs should check the latest value of this exemption while filing tax returns using Form 8621. Form 8621 has to be filed yearly along with your normal tax return.
The tax on PFIC holding is paid on unrealised gains. If your MF portfolio in India goes up by 10 lakhs a year, you pay a 3 lakhs tax to the IRS even if you did not sell anything.
Related:
What should an US NRI do to become compliant with PFIC and FBAR rules on their Indian investments?
What should Canada-based NRIs do regarding their Indian investments at the year-end?
For Canadian NRIs, reporting and taxation is a lot simpler since the PFIC concept does not exist, but FATCA does.
Indian Mutuals funds, ETFs, bank accounts etc. above CAD100,000 are to be reported in the T1135 Foreign Income Verification Statement which is to be furnished along with the annual tax return:
- below CAD 100,000 there is no reporting obligation and T1135 is not needed
- above CAD 100,00 and up to CAD 250,000, only an acknowledgement (via tick mark) is needed for these foreign assets without breakup
- above CAD 250,000, a detailed breakup is to be provided in Part B of the T1135 form
Any real estate in India deemed for personal use can be left off the T1135 but should be included at cost price otherwise.
US PFIC-like tax on unrealised gains is not there for Canada.
What should NRIs outside the US and Canada do regarding their Indian investments at the year-end?
In general, your home country income tax authorities might receive reports about your Indian holdings under CRS (Common Reporting Standard) reporting.
NRIs in the UK
- Reporting income: Report Indian income and accounts on your UK self-assessment if you are taxed on the arising basis. Failure to do so might lead to a Nudge letter from the HMRC which you can respond to using the Worldwide Disclosure Facility (WDF)
- Inheritance tax: Review gifting opportunities within the £3,000 annual gift allowance to reduce the inheritance tax (IHT) exposure
NRIs in Australia
- Reporting income: Report Indian income and accounts if you worldwide income exceeds AUD 250,000 for CRS compliance
Which are the common tax-related activities for all NRIs irrespective of their country of residence for India tax law compliance?
- File tax return by 31st July: If you have any Indian income in your NRO account, any TDS or plan to sell property in the future, then filing a tax return (ITR) in India is mandatory. If you don’t have anything, filing a NIL return takes a few minutes but builds your history in the tax system
- Check for DTAA: Under the Double Taxation Avoidance Agreement (DTAA), you need to pay tax only once for any income in India by filing Form 67. For example, if you have a 30% tax liability for income in India in your home country, and 20% TDS is deducted in India, you need to file an ITR for this TDS, in case that is lower than the due tax, and also pay the remaining 10% abroad if the offset is applicable
- Pay advance tax: To avoid interest, you should pay advance tax for Indian income by these due dates: June 15, Sept 15, Dec 15, and March 15
Related Articles
- What should an US NRI do to become compliant with PFIC and FBAR rules on their Indian investments?
- Should US-based NRIs sell off their mutual funds and stocks in India?
- 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 What NRIs Must Do With Indian Investments Before the Year-End? PFIC, FATCA, DTAA and ITR rules Simplified first appeared on 18 Dec 2024 at https://arthgyaan.com
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