Indian Funds and Shares for a US Taxpayer

The question behind "can I keep my Indian mutual funds while living in the US?" has a split answer. For a US tax resident, an Indian mutual fund is taxed under the harshest rules in the code, those for passive foreign investment companies, while a share in an Indian operating company held directly is taxed like any other foreign stock. India taxes both in the same way regardless of what the US does. This chapter sets the two side by side and says what each means for how you invest. The visa-shelf chapter Foreign Mutual Funds and the PFIC Rules explains the mechanics in detail; this one is the Indian case.

Why a fund and a share are treated differently

A foreign corporation is a passive foreign investment company, a PFIC, if 75% or more of its gross income is passive, or at least 50% of its assets on average produce passive income (instructions for IRS Form 8621). A mutual fund holds shares and bonds, so its income and assets are almost entirely passive, and US advisers treat Indian mutual funds as PFICs. A listed Indian company that makes products or provides services is an operating company and is not. A holding company or an investment vehicle may be one, so check an unusual holding rather than assume. A fund organised in the US is not a PFIC even when it invests only in India.

The rules apply to you as a US person, not to the fund as such. A fund you bought before moving to the US is a PFIC for you only from the day you become a US person (Treasury Regulation 1.1291-9(j)(1)), and the earlier days count as pre-PFIC years; and a green card holder or citizen who returns to India keeps a US filing status, so the rules do not end at the Indian border.

What the default PFIC rules do

Unless you make an election, a gain on selling a PFIC, or an unusually large distribution, is an excess distribution. It is spread evenly over every day you held the investment. The part in the year of sale is taxed at your own ordinary rate, the part in each earlier year at the highest rate in force for that earlier year (37% for 2018 onward, including 2026), and an interest charge is added as if each year's tax had been paid late. No long-term capital gains rate applies.

An investment of $25,000 that grows 8.0% a year for 12 years reaches $62,954, a gain of $37,954. In a US fund held more than a year that gain would be a long-term capital gain. In a PFIC under the default rules, a resident for all 12 years has the gain cut into 12 equal yearly shares; one share is taxed at the holder's bracket and the rest at the top rate of each earlier year (37% for 2018 onward), with interest on each. A monthly plan is worse to document, because every instalment is a separate lot. The PFIC calculator runs the allocation, including a mode for selling before or after you move back.

Two elections can change this. Mark-to-market taxes the yearly rise in value as ordinary income, with no interest charge, but only for "marketable stock", and whether an Indian mutual fund qualifies is a technical question. A qualified electing fund election needs the fund to provide a PFIC annual information statement, which Indian funds generally do not, so it is usually unavailable. Whether a particular exchange-traded fund listed in India counts as marketable stock is also a technical question, so ask someone who files Form 8621 regularly.

Each PFIC is reported on its own Form 8621 in any year you sell, receive a distribution or are otherwise required to file. There is a narrow exception for a small holding: if all your PFIC stock is worth $25,000 or less at year end ($50,000 on a joint return) and you neither sold nor received an excess distribution, Part I is not required. A sale always needs the form.

Directly held Indian shares

A direct share in an Indian operating company is foreign stock, not a PFIC. On the US side:

• Dividends are income in the year received, converted to dollars at that day's rate. Whether they qualify for a lower rate is a question for your preparer, because it depends on the tests for qualified dividends.
• A gain or loss on a sale is figured in dollars: the cost at the rate on the day you bought and the price at the rate on the day you sold. If the rupee fell while you held the share, part of a large rupee gain can disappear in dollars.
• A holding over a year gets long-term capital gains rates. The net investment income tax of 3.8% applies above $200,000 of modified adjusted gross income for a single filer.
• Reporting: shares held through a demat account sit inside a foreign financial account for the FBAR, and the demat account, valued with its shares, counts toward Form 8938.

What India does

India taxes gains on Indian shares and equity funds whatever your residence. Under the Income-tax Act, 2025, a short-term gain on listed equity shares or units of an equity-oriented fund, where securities transaction tax is paid, is taxed at 20% (section 196). A long-term gain above ₹1.25 lakh in the year is taxed at 12.5% (section 198), subject to the conditions in that section. These are formerly sections 111A and 112A. Other funds, such as debt funds, follow different rules, and surcharge and cess are added, so get a Chartered Accountant's figure.

When a non-resident redeems units or sells shares, tax is deducted at source on the gain under section 393(2), Sl. No. 17, at the "rates in force". Over-deduction is settled on your Indian return.

For credit purposes, the treaty sets no cap on India's tax on gains (Article 13), so Indian tax on a gain can be claimed through the US foreign tax credit, within the limits explained in chapter 5. How that credit interacts with the PFIC calculation is a hard point; the PFIC calculator does not model it, and it is worth a preparer's time.

Practical points

• Which fund houses accept you. As reported in secondary sources, and to be confirmed with each fund house, some Indian fund houses decline fresh investments from residents of the US and Canada. We could not read an official rule, so ask the fund house before you plan around either answer.
• KYC and account route. Fund houses and brokers need a complete KYC record from an NRI and usually a payment route through an NRE or NRO account; ask which they require (chapter 7).
• Gifting a parent to invest. If you supply the money and expect the proceeds back, the US may treat you as the real owner, so the PFIC rules could follow. Ask a US preparer before relying on this route.
• Older holdings. A fund bought years ago does not stop being a PFIC when you stop adding. Ask what selling now costs against holding with Form 8621 each year; the plan for moving back to India covers timing a sale around a move.