FATCA India Compliance Requirements

FATCA India Compliance Requirements

FATCA India Compliance Requirements: There are many complexities involving Indian accounts, assets & income reporting to the IRS. The interplay between Indian Money and the U.S. tax system and IRS offshore compliance has many components to it. First, India and the U.S. entered into a FATCA Agreement and India is part of CRS — but the U.S. is not. So when it comes to India and offshore compliance reporting with the U.S., it is limited FATCA (and other U.S. reporting such as FBAR & PFIC). Complicating the matter further is that many of the tax rules in India are different than the rules in the United States. In general, the tax rules on passive assets and interest are much more forgiving in India than they are in the United States. And, with the IRS taking an aggressive position on matters involving account and asset compliance, and foreign income reporting, it is important to stay compliant with US tax rules. Let’s go through some of the basics involving India and FATCA Compliance.

India & U.S. Tax Treaties

The United States and India have entered into both a double tax treaty agreement along with a FATCA agreement.

Therefore, when it comes to the tax portion of Indian income generating assets accounts there is some wiggle room for interpretation – but when it comes to the reporting it is (relatively) straight-forward.

India FATCA & CRS Compliance by Asset

FATCA is the Foreign Account Tax Compliance Act.

Since 2012 (for 2011 tax returns), U.S. person with foreign assets in India and other countries are required to report to the IRS on FATCA Form 8938.

International Information Return reporting goes far beyond FATCA, but FATCA India has become a shorthand method for identifying the general requirement to report Indian assets, accounts, investments and income to the U.S. government.

Here are some of the more common assets and accounts:

Bank Accounts

Indian bank accounts are reportable in the United States.

The two main forms on which foreign accounts have to be reported are the FBAR (Foreign Bank and Financial Account Form aka FinCEN Form 114) and Form 8938 (FATCA or “Foreign Account Tax Compliance Act”)

Taxpayers also have to include a schedule B to report any interest income (and dividends), as well as complete the bottom portion of the form involving ownership or signature authority over foreign accounts.

Investment Accounts

Investment accounts are also reported on the FBAR and Form 8938, but it may become infinitely more complicated if it turns out that the accounts qualify as PFIC.

A PFIC is it Passive Foreign Investment Company and even fractional ownership in a foreign mutual fund requires the taxpayer to include form 8621 for each fund — presuming the reporting threshold is met.

Demat

A Demat Account is essentially a type of stock account. 

Since a Demat is a type of investment account, the investment account rules identified above would also apply for a Demat.

Stock Certificates

Stock certificates are treated different then investment accounts for Demat.

That is because stock certificates are not technically in an account and therefore are not required to be disclosed on the FBAR.  Instead, the stock certificates are reported as a specified foreign financial assets on form 8938.

Indian Entity Ownership

Having an interest in an Indian entity may require disclosing ownership on various international information reporting forms.

Some of the more common forms are the form 5471 for foreign corporations (5471 is the most common), form 8865 for foreign partnerships, and sometimes form 926 for transfers to a foreign entity.

There are different categories of filers depending on the specific form, and some categories of fathers have a much more comprehensive reporting requirement than others.

Life Insurance

Life insurance is reported to the IRS when there is a surrender value.

For example, if a person has a life insurance policy in India from Prudential or LIC, then the current surrender value is reported just as the maximum balance is reported in a bank account.

In addition, if premiums are being paid for the foreign-policy, a Form 720 is also required to be filed.

There may also be more complex PFIC requirements when a ULIP (unit linked insurance policy) is involved.

PPF

The PPF or Public Provident fund is a type of investment that receives tax-deferred status in India.

The reporting requirements are generally similar to the investment account reporting requirements identified above. 

Since technically the PPF is not retirement (even if it is oftentimes used as a component of a retirement plan), the accrued but non-distributed growth is generally taxable in the US.

EPF

The EPF or employee Provident fund is a type of occupational pension in India. 

Even though certain agreements may limit the reporting requirements of the institution housing the fund in India, U.S. persons still have to report the fund on the FBAR and Form 8938.

Rental Property

Unless the rental property is owned in an entity in India, the general rule is that the ownership value is not reported on the FBAR or FATCA. 

If property generates income, then the income is reported on the tax return, schedule E. One common misconception is that the income must turn a profit in order to be reportable – but that is incorrect.

In other words, if you have a rental property in India that generates $10,000 dollars a year, but you have $12,000 worth of expenses, you still report the income along with the expenses on the schedule E.

U.S. Tax of India Assets

The taxation rules involving many of these different types of income are very complicated and beyond the scope of this introduction to FATCA India and the U.S. reporting requirements.

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