Many Indian-origin taxpayers living in the U.S. invest in Indian mutual funds like HDFC, ICICI, or SBI schemes without realizing these may be classified as Passive Foreign Investment Companies (PFICs) under U.S. tax law. Most CPAs and tax preparers lack expertise in PFIC rules and skip Form 8621, putting the taxpayer at risk of IRS audits, penalties, and interest back-charges.
At Kewal Krishan & Co, we’ve helped Indian-American clients save over $50,000 in IRS penalties by correctly filing PFIC forms, choosing the best tax elections, and staying compliant with the IRS rules.
What Is a PFIC?
Under IRC §1297, a foreign corporation is considered a PFIC if it meets either:
- Income Test: 75%+ of its gross income is passive (e.g., interest, dividends)
- Asset Test: 50%+ of its assets produce or are held for producing passive income
Most Indian mutual funds qualify as PFICs, triggering Form 8621 filing for each fund, each year.
IRS Forms and Tax Code References
| Form | Purpose |
|---|---|
| Form 8621 | PFIC Information Return |
| Form 1040 | U.S. Individual Income Tax Return |
| Form 8938 | FATCA asset reporting (if thresholds met) |
| IRC §1291-1298 | PFIC tax regimes and rules |
| Rev. Proc. 2020-17 | Relief from PFIC for some government-sponsored pension plans (not mutual funds) |
PFIC Taxation Methods
| Method | Description | Pros | Cons |
|---|---|---|---|
| Excess Distribution (Default) | Taxes gains at highest rate + interest charges | No special elections needed | Hefty tax & complexity |
| QEF Election | Tax annual income like U.S. fund | Cleanest method | Needs annual PFIC statement from fund |
| Mark-to-Market (MTM) | Tax unrealized yearly gains as ordinary income | Easy for market-traded funds | Not available for all funds |
Most Indian mutual funds don’t provide PFIC statements, making QEF election nearly impossible. MTM is viable if the fund is publicly traded and reported on exchanges like BSE/NSE.
Example Case
Rahul, an Indian citizen on an H-1B visa, invested ₹10 lakhs (~$12,000) across 5 Indian mutual funds (SBI Bluechip, ICICI Prudential, HDFC Balanced Advantage, etc.).
- He didn’t report them in 2022
- IRS flagged the omission due to FATCA/FBAR mismatch
- He contacted Kewal Krishan & Co
→ We filed Form 8621 for each fund
→ Used default PFIC taxation (Excess Distribution)
→ Filed amended Form 1040X + FBAR + 8938
→ IRS accepted the return with no penalties due to voluntary correction
Step-by-Step Compliance Guide for Indian Mutual Fund Holders
Step 1: Identify if Your Investment Is a PFIC
- If it’s a non-U.S. mutual fund → it’s a PFIC
- Stocks of Indian companies ≠ PFIC
- ULIPs, NPS may also be PFICs depending on structure
Step 2: Gather Details for Each Mutual Fund
- Fund name, NAV history, number of units
- Investment and redemption dates
- Annual interest/dividends earned
Step 3: File Required Forms
| Form | When Required |
|---|---|
| Form 8621 | Each PFIC, each year held, regardless of income |
| Form 8938 | If total foreign financial assets > $50,000 (single) or $100,000 (MFJ) |
| FinCEN 114 (FBAR) | If aggregate balances > $10,000 anytime in the year |
Step 4: Choose the Taxation Method
- Default: Excess distribution method (highest tax + interest)
- MTM: Requires stock exchange trading
- QEF: Not viable for Indian funds unless you receive PFIC statement
Step 5: Consult a PFIC-Savvy CPA
- IRS scrutiny is high for unfiled 8621s
- Filing PFIC forms late? Consider Streamlined Procedures
Conclusion
Investing in Indian mutual funds while living in the U.S. triggers complex PFIC tax rules. Filing Form 8621 is mandatory-even if no income was earned. Avoiding this can lead to back taxes, interest, and even audits.
Take action today to avoid compounding issues in future years.
Call to Action
Anshul Goyal, CPA EA FCA is a licensed U.S. Certified Public Accountant and Enrolled Agent who represents clients before the IRS. He specializes in cross-border taxation, especially for Indian-Americans dealing with foreign accounts, PFICs, Form 8621, and FATCA compliance.
About Our CPA
Anshul Goyal advises clients on U.S.-India tax matters including FBAR, PFIC, foreign trusts, mutual fund taxation, and IRS notices. He has helped Indian-American taxpayers legally reduce taxes and stay fully compliant with U.S. laws.
Disclaimer
This article is for educational purposes only. PFIC reporting is highly nuanced. Always consult a qualified cross-border tax professional for your specific facts and filing needs.
Top 5 FAQs
1. Is it mandatory to file Form 8621 for each Indian mutual fund?
Yes, each fund must be reported individually, even if no income was generated.
2. Do I need to report unrealized gains in PFICs?
Yes, under Mark-to-Market method; not under default method unless excess distributions apply.
3. Can I avoid PFIC classification?
Only if you invest directly in Indian stocks (not mutual funds), or via U.S. ETFs that hold Indian assets.
4. What if I’ve never filed Form 8621 before?
You may be eligible for Streamlined Filing to avoid penalties if failure was non-willful.
5. Is SIP (Systematic Investment Plan) also PFIC?
Yes, it is considered PFIC as you’re buying mutual fund units over time.