Problem: Why Most Indian-Americans Get This Wrong
Indian mutual funds may seem like a smart investment. But for U.S. taxpayers especially Indian-Americans they come with a hidden trap: PFIC penalties. Many CPAs overlook these complex rules or misreport the funds entirely, resulting in crippling tax consequences and IRS audits.
At Kewal Krishan & Co., we help clients avoid these pitfalls and structure their Indian investments in a tax-compliant way. Getting this wrong could cost you thousands in unnecessary tax but handled correctly, you can stay compliant and avoid the PFIC nightmare.
What is a PFIC?
A Passive Foreign Investment Company (PFIC) under IRC §1297 is a non-U.S. corporation that:
- Derives 75% or more of its gross income from passive sources (e.g., interest, dividends), or
- Has 50% or more of its assets producing passive income.
Most Indian mutual funds, ETFs, ULIPs, and even PMS schemes fall into this category and the IRS treats them harshly.
IRS Forms & Reporting Obligations
If you own Indian mutual funds, you’re likely required to file:
- Form 8621 – Information Return by a Shareholder of a PFIC
- Form 8938 – Statement of Specified Foreign Financial Assets (if thresholds met)
- FinCEN Form 114 (FBAR) – For foreign account holdings over $10,000
Failure to file Form 8621 properly can cause your entire return to be considered incomplete and extend the IRS statute of limitations indefinitely.
Example: U.S. Resident with Indian Mutual Funds
Example:
Ravi, an Indian citizen living in New Jersey on a green card, holds ₹25 lakhs (~$30,000) in mutual funds with HDFC and SBI in India. He’s received ₹60,000 (~$720) in dividend payouts and also saw capital appreciation.
Incorrect reporting: Ravi only reports foreign interest on Schedule B and ignores PFIC reporting.
IRS risk: The IRS may treat the entire account as non-compliant, subject Ravi to 1291 default rules, and assess taxes at the highest rate with interest penalties going back to the original investment date.
Correct approach: Ravi files Form 8621, elects Mark-to-Market (MTM) or QEF, and reports the growth as per IRS rules.
Three PFIC Taxation Options
- Default (1291) Method:
- Gains treated as excess distributions
- Highest tax rate + interest back to original year
- Most punitive
- Mark-to-Market (IRC §1296) Election:
- Gains taxed annually as ordinary income
- Losses limited to prior-year gains
- Must be filed with timely election on Form 8621
- Qualified Electing Fund (QEF):
- Requires fund cooperation to provide annual PFIC statements
- Not practical for Indian mutual funds (most don’t comply)
Step-by-Step: How to Comply with the IRS
- Identify PFIC Assets
List all mutual funds held in India (including ULIPs, ETFs, PMS). - Determine PFIC status
Use IRS PFIC definition to evaluate each fund. - Calculate Fair Market Value (FMV) as of 12/31/2024
Convert NAV to USD using Treasury exchange rate. - Choose Taxation Method
Default, MTM, or QEF MTM is most commonly used. - File Form 8621 for Each Fund
Attach with your 1040. Ensure all election boxes are checked correctly. - Include Form 8938 and FBAR if thresholds are met.
- Keep PFIC Support Workpapers
Document how you calculated gain/loss and the election method used.
Conclusion: Don’t Let PFIC Rules Burn Your Return
If you’re an Indian-American investor holding mutual funds back home, PFIC compliance isn’t optional it’s a mandatory, high-stakes part of your U.S. tax return. Missteps can cost you thousands in tax and keep you under IRS scrutiny for years.
Call to Action
If you own Indian mutual funds, consult a cross-border CPA who understands PFIC, Form 8621, and U.S.-India tax coordination.
Anshul Goyal, CPA EA FCA is a U.S. licensed Certified Public Accountant, admitted to practice before the IRS as an Enrolled Agent, and specializes in assisting Indian-Americans with complex compliance like PFIC, 8938, and 5471.
About Our CPA
Anshul Goyal, CPA EA FCA is a cross-border tax expert representing clients with IRS reporting needs for Indian income, PFIC, FATCA, and global tax matters. With a unique focus on Indian-American taxpayers, his firm, Kewal Krishan & Co., offers in-depth guidance across PFIC elections, Form 8621 filings, and IRS audit defense.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. The PFIC rules are highly technical, and each taxpayer’s situation is different. You should consult a qualified tax professional like Anshul Goyal, CPA EA FCA before making any filing decisions related to foreign investments or IRS elections.
Top 5 High-Searched FAQs on PFIC for Indian Mutual Funds
1. Are Indian mutual funds considered PFICs by the IRS?
Yes, most Indian mutual funds fall under the PFIC definition per IRC §1297.
2. What is the penalty for not filing Form 8621?
Your tax return may be treated as incomplete, and IRS can assess interest and tax under the default method.
3. Can I avoid PFIC treatment with Indian ULIPs or PMS?
Not likely. ULIPs and PMS are also considered PFICs unless structured differently.
4. What if I missed PFIC reporting in earlier years?
You may consider amended returns or Streamlined Procedures if eligible.
5. Is QEF election possible for Indian mutual funds?
Rarely. Most Indian funds do not provide PFIC annual information statements required for QEF.