FATCA India: U.S. persons are required to report their global assets to the U.S. government when the threshold requirements for reporting are met. When a person is a citizen of India, but is also a U.S. Citizen, Legal Permanent Resident, or otherwise meets the substantial presence test, they are considered a U.S. person for tax purposes. As a U.S. person, the taxpayer must report their foreign assets, accounts, investments, and income to the IRS and FinCEN on a myriad of different international information reporting forms, such as FBAR and FATCA Form 8938.
Several years ago, India and the U.S. entered into a FATCA Agreement (IGA). The IGA requires Foreign Financial Institutions (FFI) in India to report U.S. account holder information to the IRS, and vice versa.
Indian Banks such as ICICI, SBI, HDFC, and Axis routinely issue FATCA letters to customers. These letters require the asset or account holder to disclose their U.S. citizenship or residence status, which is then forwarded to the U.S. government.
FATCA and other international tax penalties can be reduced or avoided through offshore tax amnesty programs.
India FATCA Reporting
If you are a U.S. person (living in the U.S. or abroad) and have accounts in India, the IRS may require you to report the maximum balances of each account on annual basis.
Some of the more prevalent foreign financial institutions (FFIs) that report to the IRS, include:
- Punjab Bank
- Bank of Baroda
- Union Bank
Common Indian Investments Subject to FATCA
There are many different types of Indian assets that may be reportable to the IRS.
Here are 10 of the most common types of reportable assets:
1. Fixed Deposits
Even though the FD does not distribute income during the growth period, it is earning income.
While you may not access the money during the growth phase (or be penalized if you do so), it is still taxable and reportable in the U.S as it accrues and not just the final year payout amount.
2. PPF Accruals
Just as with the FDs, if your PPF (Public Provident Fund) 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 shares have to be reported. This is true, even if the Demat is dormant and no recent activity has taken place.
Since Demat is an account, and the actual stock certificates are not an account, the reporting requirements for demat vs. stock certificates are different.
A stock account is reported on the FBAR, and usually the Form 8938 “FATCA.”
Stock certificates that are not in a demat are reported on the 8938 but not the FBAR (since a stock certificate is not in an “account.”).
* 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 (ETF, SICAV, and more)
Mutual Funds are reported on the FBAR and Form 8938.
Most mutual funds are considered a PFIC, and will also have to be reported on Form 8621.
The rules for PFIC are 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.
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.
8. Rental Income in India
Rental income is taxable and reportable on Schedule E — even when it nets a loss.
Example: Let’s say you earned $10,000 in rental income, but had $11,000 in expenses and taxes.
Even though you netted a loss, you still had reportable income.
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.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.