- 1 Offshore Tax Compliance for Investments in India
- 2 Fixed Deposit Accounts
- 3 Public Provident Funds (PPF) and Employee Provident Funds (EPF)
- 4 Life Insurance
- 5 Mutual Funds
- 6 Demat Accounts
- 7 FBAR, FATCA, and PFIC
- 8 Foreign Tax Credits and the US-India Tax Treaty
- 9 What makes us the best for Reporting Indian Investments?
Offshore Tax Compliance for Investments in India
For US residents with investments in India, compliance with FATCA and the US tax code can be burdensome. We’ll discuss the types of Indian investments that we’ve come across in our Streamlined and OVDP cases.
Fixed Deposit Accounts
This is probably the most common type of unreported income in our streamlined cases involving Indian nationals. Those owning “fixed deposit” or savings accounts in India usually have an NRE or NRO account which is available for non-residents of India. Fixed deposit accounts are similar to CDs in the US. Such accounts may be held at any number of Indian banks such as:
- ICICI Bank
- HDFC Bank
- State Bank of India (SBI)
- Bank of Baroda
- HSBC Bank
- Canara Bank
- Punjab National Bank
Myth: Because the account holder will not receive the interest income until maturity, it is not reported on the US tax return.
Fact: Any interest accrued in such accounts, even if they are not yet distributed, are taxed in the US.
Public Provident Funds (PPF) and Employee Provident Funds (EPF)
A public provident fund (PPF) is a long-term investment option that is backed by the Government of India. A PPF is a public pension system that is similar to the US Social Security system.
Myth: Because these are long-term investments that cannot be withdrawn until maturity (15 years), the income is not taxable in the US. In addition because it exempt from tax under 80C of the Indian tax code, that it is not taxable under the Internal Revenue Code.
Fact: The US does not recognize PPFs as tax-free investments. Therefore the earnings from a PPF are reported each year on the US tax return as they accrue.
Those with investments in PPFs are required to report all interest, dividends, and capital gains, even if they are “reinvestments”, and regardless of whether the account has matured or not. Additionally, the account holder may have a PFIC requirement.
An Employee Provident Fund (EPF) is similar to a PPF, but it’s more like a 401(k) or IRA in the US. An EPF is a fund to which both a salaried employee the and employer may contribute a portion (12%) of the salary as a tax-deferred investment (tax-deferred in India).
Myth: If the account holder does not withdraw any money from an EPF, it is not taxable in the US.
Fact: The only types of employee pensions that can grow tax-free are those that are recognized under Section 401(k) of the Internal Revenue Code. Any income earned in a EPF is reported on the US tax return, regardless of whether there has been a withdrawal.
Term life insurance plans are not reported on the US tax return or the FBAR. However, if the plan has cash value, such as a Unit Linked Insurance Plan (ULIP), there may be taxable income.
Myth: Life insurance is not taxable until the policy has been surrendered.
Fact: A ULIP is an investment portfolio. Any interest, “bonuses,” or dividends, including reinvestments are taxable. Additionally, you will likely have a PFIC filing requirement since this is a securities based investment.
Any interest, dividends, or capital gains from foreign mutual funds are taxable in the US. Additionally, they are likely also to be subject to the PFIC rules.
A demat account (short for dematerialized account) are shares and securities held electronically. These are paper stocks that have been dematerialized into electronic form.
Myth: Because stocks held directly are not reportable on the FBAR, demat accounts are not reported either.
Fact: A demat account is considered a financial account and must be reported on the FBAR.
FBAR, FATCA, and PFIC
In addition to reporting the income from any of the above investments, you may also have a FBAR (finCEN 114), Form 8938 (“FATCA”), and Form 8621 (“PFIC”) filing requirement, depending on the amounts and types of investments.
Foreign Tax Credits and the US-India Tax Treaty
The good news for those with investments in India is that there may be some relief from US taxation in the form of foreign tax credits and/or from the US-India Tax Treaty, especially Article 20 which provides tax relief for periodic payments or annuities. This may exempt certain types of PPF and EPF distributions.
What makes us the best for Reporting Indian Investments?
If you have investments in India and have not accurately reported them in the past, or failed to report them, contact us to help you become FATCA compliant through the various offshore compliance procedures available to you. Indian investment products are complex. We work closely with chartered accountants in India to ensure accurate reporting. We are also in the unique position to provide you with a “one stop” for both your US and Indian tax returns. We work on your US tax returns, and if you also have a filing requirement in India, our chartered accountants in India can prepare your ITR.