- Wealth PMS (50L+)
India has become a popular investment destination for domestic and international investors thanks to its strong economy, robust growth potential, and diverse investment opportunities. For US citizens living in India, understanding the nuances of investing in India is crucial to maximizing their returns while staying compliant with US tax laws. One such regulation that US citizens must be aware of is the Passive Foreign Investment Company (PFIC) rules. In this article, we will explore the concept of PFIC, the types of investments that fall under its purview, and those that do not. We will also discuss the pros and cons of various investment vehicles like equity mutual funds, debt mutual funds, ETFs, and direct equity investments for US citizens investing in India.
The PFIC rules were introduced in the United States in 1986 to discourage US taxpayers from investing in passive foreign investments that could potentially defer or reduce their US tax liabilities. A PFIC is a foreign corporation that meets one of the following criteria:
PFIC investments, if held on the end of the year, are taxed on unrealised gains. That means they are taxed as if they were sold and bought back on December 31 each year. The gains are included as “ordinary income”, and do not get a capital gains benefit. Losses are disregarded until actually realized. Meaning, if you have one fund that has lost value and another that has gained value, you’ll pay tax on the gains but are not allowed to offset the losses.
Remember, US citizens (and green card holders) must file taxes in the US on worldwide income, regardless of whether they are resident in the US or not. That means even if a US Citizen lives in India, his investments in India may be classified as PFIC and taxed in the US accordingly.
Investments under the Ambit of PFIC
For US citizens investing in India, it is essential to understand which investments come under the ambit of PFIC to ensure compliance with US tax laws. The following investments are generally considered PFICs:
Investments not considered PFIC
The following investment vehicles are typically not considered PFICs:
You need to file form 8621 if you have any PFIC investments in the year, with a separate page for every single investment made (if investments were made in chunks, then for each day of investment, a new Part V of form 8621 needs to be filled)
This can be extremely painful and therefore, US citizens or residents should just avoid it completely.
Note that dividends and interest are taxable as income.
Not subject to PFIC rules, simplifying tax reporting.
For US citizens residing and investing in India, it is crucial to understand and navigate the complexities of PFIC regulations to ensure compliance with US tax laws while optimizing returns. While direct equity investments and real estate are generally not subject to PFIC rules, other investment vehicles like mutual funds, ETFs, and some AIFs may fall under the purview of PFIC, leading to tax complexities and potential liabilities.
In choosing the right investment vehicle, US citizens should carefully consider their risk appetite, investment goals, and the potential impact of PFIC rules on their tax liabilities.
Portfolio Management Services (PMS) are a viable investment option for US citizens investing in India, especially when opting for a PMS provider with an established track record and credibility. A PMS avoids PFIC classification if you tell the PMS to avoid investing in bonds or ETFs. A well-managed PMS offers personalized investment strategies, experienced portfolio management, and a more tailored approach, which can make it a preferred option for some investors.
Engaging a registered investment adviser with expertise in helping US citizens invest in India can provide valuable guidance in navigating the intricacies of PFIC regulations and selecting suitable investment options that align with the investor’s financial objectives. With their knowledge and experience, an investment adviser can help US citizens make informed decisions about PMS and other investment vehicles to build a diversified, tax-efficient portfolio that meets their financial goals.
Capitalmind Wealth is a PMS offering active equity investment portfolios to Indian-residend US Citizens looking to invest in India for long-term capital appreciation.
Click here to know more about us, and to schedule a call with our team to explore if we’re the right partner for your needs.
This post is for information and should not be considered tax-planning or investment advice.