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
13 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.

What NRIs Must Do With Indian Investments Before the Year-End? PFIC, FATCA, DTAA and ITR rules Simplified

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:

📚 Table of Contents

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.


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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.

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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 will 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

Here is a table summarising reporting requirements:

Country Regulation(s) Reporting Threshold Forms/Declarations Required Trigger Events
United States FATCA, FBAR (FinCEN), PFIC $10,000 (FBAR), $50,000+ (FATCA/Form 8938) FBAR (FinCEN 114), Form 8938, Form 8621 (PFIC) Holding foreign accounts/assets > threshold
United Kingdom CRS £50,000+ (varies) Self-assessment with foreign income declaration Interest/dividends from Indian accounts/investments
Canada CRS CAD 100,000+ T1135 Foreign Income Verification Statement Holding specified foreign property
Australia CRS, ATO Foreign Income Reporting AUD 50,000+ (aggregate) Foreign income section in tax return Bank accounts, property, or investments abroad
Germany CRS No official threshold; all offshore assets Declaration during annual tax filing Any foreign income or asset ownership
Singapore CRS All foreign income taxable unless specifically exempt Must declare global income in tax returns Transfer or interest from Indian accounts
UAE CRS No personal income tax; banks report under CRS No self-reporting, but banks share with foreign governments Passive income from India (e.g., interest/dividends)
France CRS No official threshold Foreign bank account declaration in annual filing Holding Indian accounts or property
Switzerland CRS Thresholds set by banks Automatic bank reporting to tax authorities Transfers to/from India through Swiss accounts
New Zealand CRS NZD 50,000+ (aggregate) Declare foreign income in IR3 or IR3NR Bank interest, shares or real estate abroad

Note: CRS countries automatically exchange information on financial accounts with each other. If you’re a tax resident in one CRS country and hold Indian bank/investment accounts, Indian institutions will report this to your home country’s tax authority.

📕 What is Double Taxation Avoidance Agreement (DTAA)?

India has a Double Taxation Avoidance Agreement (DTAA) with most of the countries/regions where an NRI is expected to reside including the US, UK, Canada, Australia, Eurozon and the Middle East. DTAA provides mechanisms to prevent double taxation with credits available in one country (say India) against the tax paid in the other (NRI's home country) to avoid paying double tax on the same income.

DTAA offers two methods to offset tax: Exemption method when the income is exempt from tax in one of the countries or the Credit Method where tax paid in one country is allowed as a credit against the tax liability in the other country.

So, under DTAA, tax paid in India can be used as a Foreign Tax Credit (FTC e.g via Form 1040 in the US) against US/EU/UK etc. tax liability (as applicable) and vice-versa.

DTAA does not prevent TDS or tax withholding since income tax is to be paid over and above any tax withheld. If the withholding tax is higher than the income tax, then a tax refund will be due.
  • 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

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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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