Indian mutual funds may feel safe and familiar to investors, but for U.S. taxpayers, they’re a PFIC landmine. Thousands of Indian-Americans investing in ICICI, HDFC, SBI, or Nippon funds don’t realize that these funds trigger harsh IRS tax treatment-and most CPAs miss the mark.
Many Indian-Americans discover too late that their CPA never warned them about PFICs, Form 8621, or excess distribution rules, resulting in penalties, back taxes, and painful IRS audits.
At Kewal Krishan & Co, we specialize in helping clients avoid PFIC penalties, properly file Form 8621, and clean up past non-compliance using the right IRS programs. Our PFIC cleanup strategies have saved clients up to $100,000+ in back taxes and penalties.
What is a PFIC?
A Passive Foreign Investment Company (PFIC) is defined under IRC §1297 as a foreign corporation that meets one of the following:
- Income Test: 75% or more of gross income is passive (dividends, interest, capital gains)
- Asset Test: 50% or more of assets produce passive income
Nearly all Indian mutual funds-whether equity, debt, hybrid, or ELSS-fall under this definition.
Why Are Indian Mutual Funds Considered PFICs?
Indian mutual funds are structured as trusts or corporations under Indian law, and:
- Generate mostly passive income (dividends, interest, capital gains)
- Do not qualify as U.S. mutual funds or REITs
- Are not “look-through” transparent entities under U.S. tax law
Therefore, they trigger PFIC rules for any U.S. taxpayer holding them, even if your investments are in SIPs or lump sums.
PFIC Tax Consequences (if Form 8621 is NOT Filed)
- Default Taxation (Excess Distribution Method – §1291):
- Any gain is treated as ordinary income, not capital gain
- Income is allocated over the holding period
- Interest charges are imposed on the deferred tax portion
- No benefit of capital loss offset or lower LTCG rates
Your 3 PFIC Reporting Options (All via Form 8621)
| Method | Description | Pros | Cons |
|---|---|---|---|
| 1. Excess Distribution (§1291) | Default if no election is made | None | Highest tax + interest |
| 2. Mark-to-Market Election (§1296) | Treat as sold at FMV each year | Avoids interest charges | Requires annual valuation |
| 3. QEF Election (§1295) | Report as pass-through | Lowest tax rate | Indian mutual funds don’t provide annual PFIC statements-QEF is rarely possible |
Example: HDFC Mutual Fund – $100K Invested, Sold in 2024
- Bought: ₹50 lakh in 2018 (~$75,000)
- Sold in 2024 for ₹75 lakh (~$100,000)
- Unrealized gain: $25,000
- No Form 8621 ever filed
Tax impact (PFIC rules – §1291):
- Treated as excess distribution
- $25,000 split across 6 years
- IRS applies maximum marginal rate (37%) + interest
- Final tax due can exceed $13,000+
Step-by-Step Compliance for PFIC Reporting (2025)
- Identify Indian PFICs Held
- HDFC, ICICI, SBI, Axis, Nippon, Kotak, etc.
- Gather NAV / transaction records
- Get cost basis, sale price, and holding period
- Elect MTM (if sold) or excess distribution method
- Election made on Form 8621
- File Form 8621 with your Form 1040 (attach each fund separately)
- If prior years missed, consider:
- Streamlined Foreign Offshore Program (if non-willful)
- Delinquent International Information Return Submission Procedures (DIIRSP)
- File amended returns (Form 1040X) if prior years need correction
When PFIC Traps Go Beyond Form 8621
PFICs can trigger additional complexity:
- Form 8938 (FATCA) if aggregate value > $50,000 ($100,000 MFJ)
- FBAR if account value > $10,000 at any time
- PFICs in Indian ULIPs or Portfolio Management Services (PMS) also count!
Conclusion
If you hold Indian mutual funds and are filing taxes in the U.S., you’re likely holding a PFIC time bomb. Most taxpayers don’t realize until the IRS knocks-and penalties start adding up. Avoid PFIC pitfalls by acting now: gather documents, make elections, and file Form 8621 correctly.
Call to Action
Anshul Goyal, CPA EA FCA is a U.S.-licensed tax expert who assists Indian-Americans with PFIC compliance, Form 8621 preparation, streamlined filings, and audit protection. If you’re concerned about your Indian mutual funds, we can help you file correctly and avoid IRS penalties.
About Our CPA
Anshul Goyal helps Indian-origin U.S. taxpayers navigate PFIC rules, IRS audits, international reporting forms, and clean-up strategies under IRS amnesty programs. His cross-border tax knowledge ensures compliance with both U.S. and Indian laws.
Disclaimer
This blog is for educational purposes only. U.S. tax laws on PFICs and international reporting are complex and subject to change. Please consult a licensed tax advisor before making decisions related to your investments.
Top 5 FAQs on Indian Mutual Funds & PFIC
1. Are Indian ELSS or SIPs considered PFICs?
Yes. All Indian mutual funds, including ELSS and SIP investments, are treated as PFICs.
2. Can I avoid PFIC by holding direct Indian stocks instead?
Yes. Direct equity investments do not trigger PFIC rules-only pooled investment vehicles do.
3. Is Form 8621 mandatory even if I made no sale?
Yes. Even if no gain is realized, PFIC reporting via Form 8621 is mandatory for all years held.
4. What if I forgot to file Form 8621 for previous years?
You may qualify for IRS Streamlined Filing Procedures if non-willful, or file amended returns via Form 1040X.
5. Can I report Indian mutual fund income on Schedule B instead?
No. Schedule B does not satisfy PFIC reporting-Form 8621 is mandatory.