U.S. Taxation of Indian Income, Accounts, Assets & Income

U.S. Taxation of Indian Income, Accounts, Assets & Income

U.S. Taxation of Indian Income, Accounts & Assets

U.S. Taxation of Indian Income, Accounts, Assets & Income: When it comes to IRS offshore reporting, FBAR filing, and FATCA compliance for assets, accounts, investments, and income from India, it can get very complicated. Oftentimes, taxpayers aren’t sure:

  • when their reporting requirement kicks in,
  • which assets are reportable, and
  • which income is taxable.

With 2021 right around the corner and tax return and international information return reporting coming due, we thought we’d get a jump on the new year and provide a summary about how the reporting requirements work for taxpayers from India.

U.S. Visa vs. Legal Permanent Resident

If a person is in the United States as a US Visa Holder such as an O-1, L-1 or H-1B, and they meet the substantial presence test — but do not qualify for the closer connection exception — they will be taxed on their worldwide income and required to disclose their foreign assets to the IRS. If the person is a Legal Permanent Resident, then they are subject to US tax on their worldwide income and are required to disclose their foreign assets — even if they reside outside of the United States, unless they otherwise meet a treaty tiebreaker rule.

Elections for U.S. Status 

When a taxpayer makes an election to be treated as a US person for tax purposes, they may or may not also have an FBAR filing requirement as well. It depends on which election the taxpayer made — and if the taxpayer qualifies as a dual-status taxpayer. One example is that if a US person with a non-US person spouse elects to treat the non US person spouse as a US person for tax return purposes, the non US person is not required to file the FBAR (6013(g)).

*Sometimes it is better to file it anyway and something to discuss with your tax professional.

Assets Pre-Dating US Person Status

When a person files their U.S. tax return or FBAR and is required to disclose foreign assets and accounts, they are required to disclose all of those assets and accounts that they had during the year. This is true even if the assets or accounts predate US person status. In other words, for any year the FBAR or other informational return is due, the Taxpayer is still required to be disclosed in the current tax year if they are owned by the taxpayer in the current year (despite the fact that they were owned before the taxpayer became a US person).

Dormant Accounts

It is a common practice for Indian financial institutions to not formally close an account. Rather, the account sits dormant with zero value.

For US Taxpayers, even if the account is dormant, it is technically not closed and thus, required to be included on the US person’s tax return or FBAR — even if it has a zero balance.

Fixed Deposits (FD)

A fixed deposit is similar to a certificate of deposit or CD in the United States.

Generally, interest income will accrue for a few years and then pay out in the final year. Under US tax law, since the fixed deposit accrues income each year — the accrued income is required to be disclosed on the US tax return.

PPF vs EPF

A PPF is a Public Provident Fund and is often used as a supplement to pension or retirement. An EPF is an Employees Provident Fund which is generated from wages through employment.

Since the PPF is not technically considered a retirement account, the accrued non-distributed income is taxable.

Conversely, EPF is a pension and under the treaty rules, generally a pension is not taxable until it is distributed.

Indian Mutual Funds

It is very common for US taxpayers with accounts in India to have mutual funds. Sometimes the funds will be linked to an ICICI or SBI account, and other times it will not. Even if the mutual funds are not distributing income, if the threshold requirement is met for filing a Form 8621, then the mutual funds must be reported.

One common issue with Indian mutual funds that are linked to a bank account is that they are distributed out of the mutual fund and into the bank account — if even momentarily — before being transferred back into the mutual fund portfolio and used to purchase more units.

This may result in an excess distribution.

Demat is an Account

The Demat is used in lieu of share certificates.

Technically, the Demat is an account. Therefore, while physical stock certificates that you might hold in your drawer at home is not reportable on the FBAR – the Demat is an account and therefore reportable on both the FBAR and Form 8938, while stock certificates are reported on the Form 8938 and not the FBAR.

Foreign Life Insurance

When a foreign life insurance policy such as ICICI or Prudential has a surrender value (which it almost always does), it is required to be included on the FBAR and Form 8938.

In addition, depending on what the premium amount is vs surrender value and other complicated nonsense – the increased value may be taxable. There are various tests to determine whether it is taxable or not.

There is also a 1% excise tax on premiums, which is filed on Form 720.

No 1099-Issued

It is very common for foreign banks to not issue a 1099 even if income such as interest, dividends, or capital gain was earned. Even if a 1099 was not issued, a person is still required to disclose the income on their tax return and pay tax.

If they already had taxes withheld in India (TDS), they can apply those credits to their US tax liability BUT if the credits were refunded in India then it will impact the applicability of the  credit.

In conclusion, there are many taxpayers worldwide who are considered US persons and have assets, accounts, investments, and income in India. With the introduction of FATCA and continued enforcement of FBAR and offshore compliance in general — it is important to stay in or get into compliance with the IRS.

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