- 1 India Offshore Tax Compliance
- 1.1 Who is Subject to U.S. Tax and Reporting?
- 1.2 Who is a U.S. Person (Individual)?
- 1.3 What is Worldwide Income & Reporting?
- 1.4 10 Indian Investments Subject to U.S. Tax & Reporting
- 1.5 10 Tax Tips (and Misconceptions) to be aware of:
- 1.6 What if You Have Unreported Income or Assets?
- 1.7 What Can You Do If You are Out of Compliance?
- 1.8 Krantz Attorneys, A PLC
India & U.S. Offshore Tax Compliance for Investments in India (2019): Whether it is the U.S. Taxation of an India Provident Fund, Mutual Fund, Demat, Fixed Deposits (FD), Life Insurance, and/or Real Estate Investments – don’t worry, we’ve got you covered!
India Offshore Tax Compliance
When it comes to U.S. Tax and India-based investments, both the tax and reporting aspects can be onerous for U.S. Persons.
While an NRE may grow tax-free in India, it is subject to U.S. Tax. So are the annual accruals but non-distributed income earned in an Indian Fixed Deposit.
Also, even though your PPF is accruing but not distributing income yet – the growth is taxable.
To complicate matters even more, due to the mismatch in tax years, and timing (36-month Indian long-term capital gain rule vs. U.S. 12-months rule) – there is a potential tax gap to be aware of.
We have helped hundreds of clients with assets, income, accounts, and investments abroad in India (and we can help you as well).
Who is Subject to U.S. Tax and Reporting?
Typically, a “U.S. Person” (not just U.S. citizens) are subject to U.S. Tax and Reporting.
Who is a U.S. Person (Individual)?
A U.S. Person individual is usually anyone who falls into the three (3) following categories:
- U.S. Citizen
- U.S. Legal Permanent Resident (Green Card)
- Most visa holders such B1/B2, H-1B, L-1, E-2, etc. (certain restrictions for F, J and other visas)
What is Worldwide Income & Reporting?
Worldwide income and reporting is just as bad as it sounds. You have to report ALL of your investments and income worldwide. It does not matter if you owned the accounts or assets before you came to the U.S.
It also doesn’t matter if you pay tax and/or are TDS in India – or if it tax-free in India. Just because it is tax-free in India does not make it tax-free in the U.S.
10 Indian Investments Subject to U.S. Tax & Reporting
1. Fixed Deposits
Even though the FD does not distribute income during the growth period, it is earning income. While you may not touch or access the money during the growth phase (or be penalized), it is still taxable and reportable in the U.S as it accrues and not just the payment at end.
2. U.S. Taxation of India Provident Funds
Just as with the FDs, if your PPF is accruing income, which is not being distributed, it is still “earning income” and is still taxable and reportable in the U.S.
3. Stock Certificates/Demat
Whether or not you have actual stock certificates, or Demat, the values have to be reported. Since Demat is an “Account” and the actual stock certificates are not in an account, the reporting requirements are different.
Generally, the account is reported on the FBAR, and usually the Form 8938 “FATCA.” The certificates are reported on the 8938 but not the FBAR (since it is not in an “account.”) The thresholds for the 8938 vary extensively based on your U.S. Residence and marital status. You may have to file one form and not another form — it all depends.
* The stock earnings such as dividends and capital gains are also taxed and reported in the U.S. but Foreign Tax Credits may apply.
4. Mutual Funds
Mutual Funds are reported on the FBAR. The Mutual Fund is considered a PFIC which you may need to file on Form 8621.
The rules for PFIC are very, very complex. You may have additional reporting (unless you qualify for an exclusion/exception) and you may have additional tax (unless you made an election).
5. Bank Interest
Even if your bank interest is not in an FD, the interest is still taxable and reportable, since income is being earned on the money. This is true of your NRE account growing tax-free in India.
Dividends are taxable in the U.S., even if they qualify for tax exempt treatment in India. Whether or not they are taxed now, or in the future will depend on whether the income is also PFIC income or not, and if so – if any elections have been made.
7. Capital Gains
Capital Gains are taxable in the U.S.
Certain exclusions for primary residence and other exceptions may apply to limit, reduce or avoid tax.
The Long-Term Capital Gain (LTCG) rules in the U.S. are different than India, so even though a sale may not qualify for LTCG in India, it may qualify for LTCG under U.S. investment tax rules.
8. Rental Income in India
This is a common misconception. Let’s say you earned $10,000 in rental income, but had $11,000 in expenses and taxes – no income to report, right?
Yes and No. Yes, you earned gross rent income, but no, you will have no net income. Nevertheless, the income and expenses have to be parsed out, and reported annually on a 1040 Schedule E.
9. Interest Earned on Future Property Development
This is very common in India. A client will have paid an up-front fee to a developer for a property(s) in India. During the time the property is being constructed, the investor (you) receive interest on the money you invested.
This ROI interest income must be included with your taxes.
10. Retirement Contributions
There is a Tax Treaty between the U.S. and India. Therefore, while the growth within a retirement fund may escape U.S. Tax (until distributed, unless exceptions apply), income contributions being diverted to the retirement does not usually escape U.S. tax.
10 Tax Tips (and Misconceptions) to be aware of:
1. Foreign Tax Credit
If you already paid tax on the income in India, you may be able to receive a Foreign Tax Credit in the U.S.
2. Foreign Tax Credit Refund
If the tax money you paid in India was refunded to you, it may not be worth the headache to claim the credit, since you will have to adjust your tax returns in the future.
If your parents are managing your accounts, and you let them keep the income (what a nice son/daughter you are), that does not default to income assignment. Rather, it generally means you report the income and you gave them a gift.
EPFs are through employment, and you may be able to defer tax on the growth, per the India-U.S. Tax Treaty
Just because the FATCA Agreement may exempt certain foreign institutions from having to report accounts, does not mean you (as the individual investor) are exempt.
If you have to file an FBAR you may also have to file a Form 8938 (or vice versa) – in other words, just because you file, does not mean you can avoid filing the other, if you meet the requirements for having to file both.
7. Foreign Earned Income Exclusion
You may be able to exclude certain earned (not investment) income if you meet either the Physical Presence Test or Bona-Fide Residence Test.
8. Transferring Account Ownership
Once you learn about reporting, the knee-jerk reaction is to consider transferring the accounts to another person. This only makes matters worse, because not only will you be out-of-compliance – but it will look bad to the IRS.
9. Calling the IRS Before Getting Into Compliance (Place Holder)
If you are considering getting into compliance, another knee-jerk reaction is to call the IRS to let them know you plan on getting into compliance. The problem is you may not even be on their radar. By calling them, you have now put yourself on their radar.
10. Be Cautions of Inexperienced Counsel
This has become an epidemic. Inexperienced attorneys tout experience they do not have, and puff their prior experience to make it seem like they have experience in this area of law, when they really do not.
Be sure to vet your attorney properly before retaining a firm.
What if You Have Unreported Income or Assets?
If you are out of compliance, the penalties can be severe. Therefore, you may consider entering IRS offshore voluntary disclosure/tax amnesty, before it is too late.
What Can You Do If You are Out of Compliance?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Krantz Attorneys, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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Ezra holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Krantz's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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