The full form of FATCA is Foreign Account Tax Compliance Act. FATCA is a tax law enacted by the US Government in 2010 to get information from foreign countries about the investment made by US citizens in these countries. The act requires certain international financial institutions to share the details of financial accounts held by US taxpayers to the Internal Revenue Service (IRS). The law was introduced to detect and prevent offshore tax evasion by US citizens.
Also Read: Mutual Funds for NRIs from USA/Canada to Invest in India
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:
- Permanent Account Number (PAN)
- Place (city/state) of birth
- Country of birth
- Gross Annual Income
- 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.
Investments and FATCA Application
Indian investments that are subject to reporting and taxation in the US include:
- Fixed deposits
- Mutual Funds,
- Bank Interest
- Other capital gains and retirement contributions.
Note: Failure to comply with Foreign Account Tax Compliance Act can result in severe repercussions like freezing of bank accounts, suspension of mutual fund investments and blocking of NPS accounts.
Purview of Foreign Account Tax Compliance Act 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 act 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.
FATCA impact on NRI mutual funds
Financial institutions are required to share the investment details of US citizens, including NRI based in the US. Thus the Asset Management Company (AMC) or the mutual fund company where US NRIs are investing must comply with FATCA regulations and report about their investments as per the process mentioned.
US based NRIs investing in mutual funds in India are expected to share details such as their country of residence, country of birth and citizenship, and tax identification number while applying for mutual funds.
What is CRS?
CRS (Common Standard on Reporting) is a rough international version of FATCA. Introduced by the Organisation of Economic Cooperation and Development (OECD), CRS CRS is applicable for citizens of every registered country.
Difference between FATCA and CRS
While both FATCA and CRS are to prevent overseas investors from avoiding taxes and cash hoarding overseas, FATCA and CRS have certain differences. Here are the notable differences between FATCA and CRS:
|FATCA concerns only people living in the USA||CRS covers 90 countries (excluding the US) – has a wider scope|
|Reporting of all financial accounts is not compulsory||Reporting your financial accounts is mandatory under the CRS|
|US taxpayers with an aggregate value of foreign financial assets less than $50,000 are exempted||No such exemptions are available|
|US taxpayers reported under FATCA are only a few thousands||Several millions of accounts are reported under CRS|
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
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You need to submit the following details to fill a FATCA CRS declaration:
– Permanent Account Number (PAN)
– Place (city/state) of birth
– Country of birth
– Gross Annual Income
– Whether one is a resident of another country? If yes, the details of the country of residence, Tax ID number, and type
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.
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.
No. NRIs need to pay taxes on Mutual Fund investments in India at set TDS rates.