Indian Foreign Assets & Accounts & the IRS
India & IRS Tax and Reporting Guide 2020: The India & IRS tax and reporting rules are complex, and the IRS has pursued aggressive enforcement of foreign accounts and assets compliance. The India and U.S. entered into a FATCA Agreement in July, 2015.
FATCA is the Foreign Account Tax and Compliance Act). It applies to U.S. Persons (Residents and NRI) as well foreign banks and financial institutions in India. Taxpayers comply with FATCA on Form 8938, but typically have to also file other international reporting forms, such as the FBAR.
How does FATCA Impact India?
The India reporting rules involve many different types of foreign assets. There are many aspects to the FATCA India agreement. Most important is that the U.S. and India have agreed to the exchange of information regarding U.S. account and asset holders with Indian investments. The requires reporting and disclosure compliance for:
- Bank accounts
- Life Insurance
- Mutual Funds
- Demat and more.
The rules involving FATCA and India are complex. The Foreign Account agreement places a large burden on U.S. persons with Indian Assets. Under the FATCA India agreement, U.S. (and Indian) reporting and compliance requirements apply to both NRIs and Indian Citizens & Residents with U.S. Status. and IRS enforcement is at an all-time high.
India entered into a FATCA (Foreign Account Tax Compliance Act) agreement in 2015. The goal of FATCA India is for Indian citizens and NRI to declare foreign accounts and assets from Indian banks and other financial institutions (FFI) such as ICICI, Axis, SBI, Citibank and HDFC.
There are may different filing and threshold requirements. And, if the Indian Bank is also complying with CRS, there may be double-reporting required.
Reportable assets and account typically include:
- Bank Accounts
- Fixed Deposits (FD)
- Mutual & Equity Funds,
- Life Insurance and more the IRS.
The FATCA guidelines between the U.S. & India contained in the IGA requires Indian Foreign Financial Institutions to report U.S. Account Holders.
FATCA & CRS In India
Many banks in India report to the IRS, including: ICICI, SBI, BOI, HDFC, Axis and HSBC.
Therefore, if you have U.S. status (H-1B, L-1, Green Card or other U.S. status, and you have foreign accounts, assets, or income — it is important you have a basic idea of your FATCA reporting requirements.
*CRS is not a “U.S.” requirement.
FATCA India Threshold for Reporting
The FATCA India Threshold for Account Holders vary, but it ranges from $50,000 to $600,000 depending on filing status and residency.
Who Has a FATCA India Reporting Requirement?
Under the concept of Citizen-Based Taxation, a person files taxes in the United States each year if they are considered a U.S. person. It is important to note the distinction in the prior sentence: even though it is called Citizen-Based Taxation, it is not limited to U.S.Citizens; rather, it includes US persons.
Who is a U.S. person?
There are actually many categories and subcategories of U.S. persons. For the most part, excluding corporations and other businesses, the following individuals are considered to be a US person:
- U.S. Citizen.
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence Test (L-1, H-1B, etc.)
- Former Legal Permanent Resident who did not properly expatriate
NRI & FATCA – Do Non-Resident Indians File FATCA?
Yes. The mere fact that an Indian Citizen does not reside in India, does not absolve him or her from liability. In other words, FATCA applies to U.S. Persons, whether or not the Indian Citizen resides in the U.S. or outside the U.S. as a Legal Permanent Resident, dual U.S. and Indian Citizen — or meets the Substantial Presence Test.
Foreign Asset Reporting Requirements
There are multiple components to FATCA India.
From the Financial Institution perspective, more than 2,500 FATCA India reporting institutions must report to the U.S. They include banks such as SBI, Axis, ICICI, HDFC, BOI and more.
From the U.S. Account Holder perspective, U.S. persons (Residents and NRI) are required to report foreign accounts and investments, including:
- Bank Accounts (NRO and NRE)
- Fixed Deposits
- Mutual Funds
- Life Insurance
Generally, if the Indian Bank believes you are a U.S. Person, the institution will send you a FATCA Form for compliance purposes.
Indian Investments & FATCA
Various Investment from India subject to FATCA reporting, include:Fixed Deposits, Demat, Mutual Funds, Life Insurance, and other assets are reportable and taxable.
Indian Passive Income & FATCA
The income generated (Dividends, Interest, Royalties and Capital Gains) is included on the tax return, and again on the FATCA Form 8938.
Indian FATCA Reporting Institutions
Most banks such as ICICI, SBI, BOI, Axis, HDFC and many more report U.S. Account Holders to the IRS.
Examples of FATCA Compliance India
In order to properly evaluate your reporting requirements, it is important that you understand what investments are reportable:
A. Bank and Investment Interest is Taxable
Unfortunately, it does not matter who is using the interest income. In the above referenced example, the U.S. Resident is responsible for reporting the interest income on his or her US tax return because they earned the interest. Since it is the relatives of the U.S. Resident who receives the interest (unless beneficial ownership may be argued), the interest is still the responsibility of the US resident. the transfer from the US person to the relatives back in India is considered a “Gift.”
**In other words, merely giving your parents or other relatives money back in India from an account that you own does not mean you are not responsible for US tax on that money
B. Fixed Deposits or Term Deposits
While the fixed deposit is not taxable in India, the same rules do not apply to the United States. In other words, the United States taxes Fixed Deposit interest income as it accrues.
But the Money is Re-invested?
The IRS does not care if the money is re-deposited, reinvested, or transferred into a new fixed deposit account (it is very common for a person to have one “customer number” and numerous fixed deposit accounts per customer number) – it is still taxable.
If you have not paid US tax on the earnings, or reported the accounts on an FBAR (Report of Foreign Bank and Financial Accounts), you could be subjected to very high Texas fines and penalties.
India NRO Accounts
The NRO account is a “Non-Resident Ordinary Rupee Account.” This is the preferred account for individuals who do not reside in India (even if they are still Indian citizens).
The main purpose for an Indian citizen/nonresident of India for opening an NRO account is to manage income earned in India such as passive income or rental income. Therefore, the Non-Resident Indian can operate their NRO from outside of India (including depositing non-INR currency into the account) and provide access to the money to relatives and family in India.
Unfortunately, the U.S taxes NRO income, even if it never transferred to the U.S.
India NRE Accounts
The NRE account is a very popular tax savings account. The earned interest is not TDS (Not Tax Deducted at Source) — unlike and NRO in which the Indian Bank withholds taxes.
*The U.S taxes NRE income, even if it never touches U.S. soil.
C. Demat Accounts
Demat accounts are very popular in India. The account is used to transition the physical share certificates into electronic securities, with the value being credited to the owner’s “Demat” account.
There are many benefits to Dematerialization, including:
- Reduced Risk of Fraud
- Reduced Risk of “Losing” the Shares
- Increased Ease of the Transaction Process
- Reduced Cost (no “Stamp Duty”)
- Lack of “Risk” of having Paper Shares.
Are DEMAT accounts Reportable?
Yes. The reason why, is that a dematerialized account is an “Account.” In other words, when a person has a foreign account, the account has to be reported on an annual FBAR statement (Report of Foreign Bank and Financial Accounts) and/or 8938 (Statement of Specific Foreign Assets).
Share certificates (the “actual” certificates, which are not held in an account) are not reported on an FBAR, but they do have to be reported on the 8938 – if the threshold requirement is met).
- FBAR – Share Certificates Not Held in an Account are NOT reported
- 8938 – Share Certificates Not Held in an Account ARE reported.
Is my DEMAT a PFIC (Passive Foreign Investment Company)?
Generally, PFICs are highly frowned upon by the US, and the IRS will seize any opportunity it can to reclassify a foreign account as a PFIC — since it is a chance for the IRS to levy very high taxes and penalties against the individual.
The Taxpayer must use the “look-through rules” to asses PFIC status.
D. Public Provident Funds (PPF)
With a PPF, the money grows tax exempt for usually a period of 15 years. After 15 years has expired, that money has earned significant interest, and the account holder can withdraw the money.
Since it is accrued, non-distributed income, it is taxable in the U.S.
*This is distinct from accrued gains in EPF.
What International IRS Forms do I File?
Here is a list of common forms. including FATCA form 8938 and others:
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- First Category : U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Second Category: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Third Category: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Fourth Category: Control of a foreign corporation for at least 30 days during the accounting period.
- Fifth Category: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
Tax Treaty & FATCA Agreement
We have a separate, detailed summary on the U.S. India Tax Treaty.
There are many misconceptions about how tax treaties work. We have developed primer on how to effectively read a tax treaty. The tax treaty does not directly impact “FATCA” reporting, but there is a FATCA India Agreement, which describes the reporting requirements.
A few key takeaways from the FATCA and U.S. IGA (Intergovernmental Agreement):
– While the PPF Institution may not need to report the PPF, the Taxpayer does have to report.
– The Reporting Indian Financial Institution must review electronically searchable data maintained by the Reporting Indian Financial Institution for any of the following U.S. indicia:
a) Identification of the Account Holder as a U.S. citizen or resident;
b) Unambiguous indication of a U.S. place of birth;
c) Current U.S. mailing or residence address (including a U.S. post office box);
d) Current U.S. telephone number;
e) Standing instructions to transfer funds to an account maintained in the United States;
f) Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or
g) An “in-care-of” or “hold mail” address that is the sole address the Reporting Indian Financial Institution has on file for the Account Holder.
In the case of a Preexisting Individual Account that is a Lower Value Account, an “in-care-of” address outside the United States or “hold mail” address shall not be treated as U.S. indicia.
Golding & Golding: International Tax Law Firm
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