FATCA India: When an Indian National is a U.S. person, they are subject to worldwide Tax and reporting. If the person has Indian assets, they may become subject to IRS FATCA India rules and requirements. FATCA is the Foreign Account Tax Compliance Act. It requires Indians who are either U.S. Citizens, Legal Permanent Residents or Foreign Nationals who meet the substantial presence test to report each year on IRS Form 8938.
The FATCA India banks and investment analysis is complex.
Each year, we are approached by hundreds of individuals with unreported income, assets, accounts, and investments from India.
Indian Banks such as ICICI, SBI, HDFC, Axis, and more routinely issue FATCA letters to customers and report to the IRS. These letters require the asset or account holder to disclose their citizenship or residence status to determine if they are a U.S. person or not.
In recent years, the IRS has taken an aggressive approach to foreign accounts compliance. Non-compliance with offshore account and income reporting may result in significant offshore fines and penalties.
These penalties can be reduced or avoided through the IRS Amnesty programs, such as FBAR Amnesty — these programs are collectively referred to as Offshore Voluntary Disclosure.
Do You Have Indian Foreign Accounts?
If you are a U.S. person (living in the U.S. or abroad) and have accounts in India, it is important you remain in IRS Tax, FBAR, and FATCA Compliance. Why? Because Indian Banks are reporting U.S. Account Holders to the IRS.
Some of the more prevalent institutions that report to the IRS, include:
- Punjab Bank
- Bank of Baroda
- Union Bank
India Complies with the Foreign Account Tax Compliance Act
If you are a dual or multinational citizen, you may receive one or various CRS, FATCA and related correspondence that require your annual compliance. And, the requirements are not uniform amongst the different programs. (The U.S. currently has not signed onto CRS).
Other facts complicating tax issues, include:
- FATCA compliance for U.S Persons (U.S. is not a member of CRS)
- CRS reporting to non-U.S. countries
- Many tax-free investments in India are Taxable in the U.S., such as PPF
- Specific India Tax rules for Indian Citizen Resident vs. Non-Residents
- FBAR Filing requirements for Citizens and Non-Citizens
- Mutual Fund discrepancies in U.S. and India
- Different Capital Gain rules
Worldwide Income & Reporting
Worldwide income and reporting is just as bad as it sounds.
The U.S. tax laws require U.S. person to report all of their investments and income worldwide. It does not matter if you owned the accounts or assets before you came to the U.S.
It also doesn’t matter if you pay tax and/or are TDS in India – or if it tax-free in India. Just because it is tax-free in India does not make it tax-free in the U.S.
Common Indian Investments Subject to U.S. Tax & Reporting
We have represented clients worldwide with all types of Indian Assets.
Here are the most common:
1. Fixed Deposits
Even though the FD does not distribute income during the growth period, it is earning income. While you may not touch or access the money during the growth phase (or be penalized), it is still taxable and reportable in the U.S as it accrues and not just the payment at end.
2. PPF Accruals
Just as with the FDs, if your PPF is accruing income, which is not being distributed, it is still “earning income” and is still taxable and reportable in the U.S.
3. Stock Certificates/Demat
Whether or not you have actual stock certificates, or Demat, the values of the accounts have to be reported. Since Demat is an “Account” and the actual stock certificates are not in an account, the reporting requirements are different.
Generally, the account is reported on the FBAR, and usually the Form 8938 “FATCA.” The certificates are reported on the 8938 but not the FBAR (since it is not in an “account.”) The thresholds for the 8938 vary extensively based on your U.S. Residence and marital status. You may have to file one form and not another form — it all depends.
* The stock earnings such as dividends and capital gains are also taxed and reported in the U.S. but Foreign Tax Credits may apply.
4. Mutual Funds
Mutual Funds are reported on the FBAR. The Mutual Fund is considered a PFIC which you may need to file on Form 8621.
The rules for PFIC are very, very complex. You may have additional reporting (unless you qualify for an exclusion/exception) and you may have additional tax (unless you made an election).
5. Bank Interest
Even if your bank interest is not in an FD, the interest is still taxable and reportable, since income is being earned on the money. This is true of your NRE account growing tax-free in India.
Dividends are taxable in the U.S., even if they qualify for tax exempt treatment in India. Whether or not they are taxed now, or in the future will depend on whether the income is also PFIC income or not, and if so – if any elections have been made.
7. Capital Gains
Capital Gains are taxable in the U.S. for U.S. residents and citizens.
Certain exclusions for primary residence and other exceptions may apply to limit, reduce or avoid tax.
The Long-Term Capital Gain (LTCG) rules in the U.S. are different than India, so even though a sale may not qualify for LTCG in India, it may qualify for LTCG under U.S. investment tax rules.
8. Rental Income in India
This is a common misconception:
Let’s say you earned $10,000 in rental income, but had $11,000 in expenses and taxes – no income to report, right?
Yes and No. Yes, you earned gross rent income, but no, you will have no net income. Nevertheless, the income and expenses have to be parsed out, and reported annually on a 1040 Schedule E.
9. Interest Earned on Future Property Development
This is very common in India. A client will have paid an up-front fee to a developer for a property(s) in India. During the time the property is being constructed, the investor (you) receive interest on the money you invested.
This ROI interest income must be included with your taxes.
10. Retirement Contributions
There is a Tax Treaty between the U.S. and India. Therefore, while the growth within a retirement fund may escape U.S. Tax (until distributed, unless exceptions apply), income contributions being diverted to the retirement does not usually escape U.S. tax.
10 Tax Tips (and Misconceptions) to be aware of:
1. Foreign Tax Credit
If you already paid tax on the income in India, you may be able to receive a Foreign Tax Credit in the U.S.
2. Foreign Tax Credit Refund
If the tax money you paid in India was refunded to you, it may not be worth the headache to claim the credit, since you will have to adjust your tax returns in the future.
If your parents are managing your accounts, and you let them keep the income (what a nice son/daughter you are), that does not default to income assignment. Rather, it generally means you report the income and you gave them a gift.
EPFs are through employment, and you may be able to defer tax on the growth, per the India-U.S. Tax Treaty
Just because the FATCA Agreement may exempt certain foreign institutions from having to report accounts, does not mean you (as the individual investor) are exempt.
If you have to file an FBAR you may also have to file a Form 8938 (or vice versa) – in other words, just because you file, does not mean you can avoid filing the other, if you meet the requirements for having to file both.
7. Foreign Earned Income Exclusion
You may be able to exclude certain earned (not investment) income if you meet either the Physical Presence Test or Bona-Fide Residence Test.
8. Transferring Account Ownership
Once you learn about reporting, the knee-jerk reaction is to consider transferring the accounts to another person. This only makes matters worse, because not only will you be out-of-compliance – but it will look bad to the IRS.
9. Calling the IRS Before Getting Into Compliance (Place Holder)
If you are considering getting into compliance, another knee-jerk reaction is to call the IRS to let them know you plan on getting into compliance. The problem is you may not even be on their radar. By calling them, you have now put yourself on their radar.
10. Be Cautions of Inexperienced Counsel
The most important requirements for successful representation is experience, credentials, dual-licensing and a Board-Certified Specialization in tax law.
Out of India FATCA Compliance?
If you are out of compliance and seeking to get back into compliance-or in the compliance for the first time – one of the best and safest methods is through IRS offshore voluntary disclosure.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced IRS 3520 Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.