FATCA and NRI Investment in India: Effects of US Tax Reporting

FATCA or Foreign Account Tax Compliance Act aims to bring transparency and curb tax evasion by monitoring the income of NRIs living in the USA from their non-US investments and assets. It is a tax law by the US Tax Department (IRS) as a part of the Hiring Incentive to Restore Employment (HIRE) Act (2010). The FATCA Act identifies and prevents a US citizen/tax resident from avoiding tax. The Act requires certain international financial institutions to report details of financial accounts held by US taxpayers to the Internal Revenue Service (IRS) along with instances of tax evasion. A financial institution is empowered to withhold tax if an individual does not comply with any document requirements.

FATCA and NRI Investment in India: Significance and Effects of US Tax Reporting
FATCA and NRI Investment in India: Significance and Effects of US Tax Reporting

FATCA Compliance: India-US Pact

In compliance with FATCA, GOI inserted Rules 114F to 114H and Form 61B in the Income Tax Act in 2014. Since January 2016, it was made mandatory for all investors to self-declare FATCA compliance. You need to submit the following details for the same: 

  • Name
  • Permanent Account Number (PAN)
  • Address
  • Place (city/state) of birth
  • Country of birth
  • Nationality
  • Gross Annual Income
  • Occupation
  • Whether one is a resident of another country? If yes, the details of the country of residence, Tax ID number, and type

The declaration requires the specific inclusion of US as a resident country if one is a US citizen. This is valid even if the individual has moved to India and is presently an Indian resident. As a result, the tax authorities have access to all the required information. Further, in case of any change in the above information, it is mandatory to inform the concerned financial institution within 30 days of the change.

The government of India agreed to implement the FATCA in 2015 as an inter-government agreement between India and the USA. As per the inter-government agreement, Indian tax officials need to obtain specific information from US investors. To achieve this, the Indian government made it mandatory for all NRI investors from the US to self-declare FATCA compliance through Form 61B, as per Rules 114F and 114H of the Income Tax Rules, 1962. In addition, the government of India also asks for tax residency numbers and Indian passports.

Did you know? The Inter-Governmental Agreement (IGA) with USA for implementation of FATCA came into force on 31st August 2015. 

How does FATCA effect NRI Investment in Mutual Funds

Investments and FATCA application

Indian investments that are subject to reporting and taxation in the US include:

  • Fixed deposits
  • PPF
  • Stocks 
  • Mutual Funds, 
  • Bank Interest
  • Other capital gains and retirement contributions.

Note: Failure to comply with FATCA can result in severe repercussions like freezing of bank accounts, suspension of mutual fund investments and blocking of NPS accounts.

Purview of FATCA for NRIs

  • House properties owned by NRIs in India do not fall under specified assets of FATCA. This means income earned from them is not subject to the act. However, this income is subject to taxation in India.
  • NRE, NRO and FCNR accounts held by NRIs come under the purview of FATCA.
  • Assets that do not come under the FATCA lens include antiques, jewellery, cars, art pieces and other collectables. Safety deposit boxes do not require to be reported. Foreign currency held by you but not in any financial institution also does not need to be reported under FATCA.

Difference between FATCA and CRS

Buoyed by the success of FATCA, the Organisation of Economic Cooperation and Development (OECD) introduced the CRS or Common Standard on Reporting and Due Diligence for Financial Account Information. The CRS was based on similar regulations as the FATCA, but there are notable differences between the two. While both legislations were introduced to combat tax evasion, CRS has a more considerable breadth of design. It covers 90 countries except the US. Reporting of all financial accounts is mandatory under the CRS, while it is not compulsory for FATCA. FATCA concerns only people living in the USA and has a limit that exempts US taxpayers with an aggregate value of foreign financial assets less than $50,000.  CRS does not have any such exemptions.

Note: The Foreign Account Tax Compliance Act is a concentrated effort to fight tax evasion in the US. NRIs may earn income from foreign assets but they should definitely declare them. So if you are an NRI in the USA, please remember to comply with FATCA rules before investing in assets in India.

NRI Investment in India

Investing money in India being an NRI needs knowledge and proper guidance if you are new to the turf. At SBNRI, we understand your struggle with inter-country compliances. You can get in touch with our expert to sort your NRI Banking, Investments, Taxation and much more in India.

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FAQs

How do I fill a FATCA CRS declaration form for NRI?

You need to submit the following details to fill a FATCA CRS declaration: 

– Name
– Permanent Account Number (PAN)
– Address
– Place (city/state) of birth
– Country of birth
– Nationality
– Gross Annual Income
– Occupation
– Whether one is a resident of another country? If yes, the details of the country of residence, Tax ID number, and type

Is FATCA only for US citizens?

Most of the details mandated under CRS self-declaration are similar to that of FATCA. However, CRS covers taxpayers from over 90 countries, as opposed to FATCA, which is applicable only for the US taxpayers.

Do NRI pay taxes in India?

If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free.

Is mutual fund tax free for NRI?

No. NRIs need to pay taxes on Mutual Fund investments in India at set TDS rates.

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