What will I owe if I sell my Indian mutual fund as a U.S. taxpayer?
See the tax and interest a foreign mutual fund (a PFIC) costs on a sale under the default IRS rules, and how that compares with a U.S. fund and with a mark-to-market election.
Your tax rate on ordinary incomeApplied to the share of the gain that falls in the sale year. Prefilled from your Money Map (2026 single-filer brackets).
Your long-term gains rate, for a U.S. fundUsed only for the comparison with a U.S. fund.
PFIC TAX ON A SALE
$16,610
Selling a foreign mutual fund after 8 years with a $35,909 gain costs $16,610 of tax and interest, 46% of the gain, against $5,386 for a U.S. fund taxed as a long-term gain: $11,224 more. $11,626 is tax at 37% on the share allocated to earlier years and $3,907 is interest on it; $1,077 is tax on the share for the year of the sale.
Share of the gain
46%
U.S. fund would owe
$5,386
Extra vs a U.S. fund
$11,224
If mark-to-market
$10,791
UNDERSTAND YOUR RESULT
Tax on a sale, by the years you hold the fund
Default rules (section 1291)Mark-to-market, if available (year-end dollars)U.S. fund
After 5 years the default rules cost $8,085 against $3,019 for a U.S. fund; after 8 years, $16,610 against $5,386; after 15 years, $54,816 against $13,193. The gap widens with time because more of the gain is spread over earlier years, each taxed at 37% and each with more interest.
Where the gain goes under the default rules
The $35,909 gain is split into 8 equal shares of $4,489, one for each year. The share for the sale year is ordinary income at 24%, $1,077 of tax. Each earlier share is taxed at 37% ($1,661) with interest from that year's due date: $1,050 on the first year's, $120 on the last. You keep $19,299 of the gain, 54%.
The same sale under each treatment
| Treatment | Tax and interest | Cost in year-end dollars |
|---|---|---|
| Default rules (section 1291) | $16,610 | $16,610 |
| Mark-to-market, if the fund qualifies | $8,618 | $10,791 |
| A U.S. fund (long-term gain) | $5,386 | $5,386 |
Mark-to-market taxes each year's increase as ordinary income, paid as you go: $8,618 in all, or $10,791 counting what each payment could have earned at the fund's 7.0% return. It is open only for marketable stock, and whether a foreign mutual fund qualifies is for a tax professional. A qualified electing fund election depends on the fund providing a PFIC annual information statement; ask the fund whether it does.
What moves the needle
Each row re-runs the calculation with one change. Click to apply.How it's computed
FORMULA
Gain = amount × ((1 + return)^years − 1); share for each year = gain ÷ years
Earlier years: tax = share × 37%; interest = tax × ((1 + rate ÷ 365)^(365 × years to the sale year) − 1)
Sale year: tax = share × your ordinary rate
Total = earlier years’ tax + interest + sale-year tax; no long-term capital gain rate applies
U.S. fund = gain × your long-term rate; mark-to-market = your ordinary rate × each year’s increase, each payment grown at the fund’s return to the sale year
- The fund is treated as a PFIC under the default section 1291 rules. A foreign mutual fund usually meets the passive income or asset tests, but a tax professional should confirm it for your fund. Form 8621 is filed for each year you hold a PFIC.
- You invest $50,000 at the start of the first year and sell at the end of year 8; the fund grows 7.0% a year in dollars and pays no distributions. Real holding periods run by days, and a distribution above 125% of the prior three years’ average is an excess distribution taxed the same way; neither is modelled.
- Earlier years are taxed at 37%, the top rate in the 2026 tables; the law uses the highest rate in effect for each earlier year, so a different rate in an earlier year changes the amount. The interest uses one rate, 7.0% compounded daily, for every year; the IRS sets it each quarter (7% for the fourth quarter of 2026).
- The 3.8% net investment income tax, state tax, currency gains and losses on the rupee, and foreign tax credits are not modelled. Interest on the deferred tax is not deductible.
- Mark-to-market is shown as if it were available from the first year. It is open only for marketable stock, which is stock regularly traded on a qualified exchange and, to the extent regulations provide, certain foreign funds redeemable at net asset value. The qualified electing fund election is not modelled.
WORKED EXAMPLE · SAMPLE NUMBERS
Growth: $50,000 at 7.0% for 8 years is $85,909, a $35,909 gain, $4,489 a year. Earlier years: 7 shares × 37% is $11,626 of tax, plus $3,907 of interest. Sale year: $4,489 × 24% is $1,077. Total $16,610, 46% of the gain. A U.S. fund: $35,909 × 15% is $5,386.
SOURCES
[1]26 U.S. Code § 1291: Interest on tax deferral (excess distributions and dispositions)Legal Information Institute, Cornell Law School[2]26 U.S. Code § 1296: Election of mark to market for marketable stockLegal Information Institute, Cornell Law School[3]26 U.S. Code § 6622: Interest compounded dailyLegal Information Institute, Cornell Law School[4]Instructions for Form 8621 (12/2025), Information Return by a Shareholder of a PFIC or QEFInternal Revenue Service[5]Quarterly interest rates (underpayment rate 7% for the fourth quarter of 2026)Internal Revenue Service[6]Rev. Proc. 2025-32: 2026 inflation-adjusted tax items (top rate 37%)Internal Revenue Service, 2025HSBuilt by Hussain Sehorewala · checked against worked examples · Sep 29, 2026
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Questions about this result
A passive foreign investment company is a foreign corporation whose income or assets are mostly passive. A foreign mutual fund usually is one, so a U.S. taxpayer who holds it is under special rules and files Form 8621 each year. Without an election, a sale is taxed under section 1291, which is much harsher than the long-term capital gains tax on a U.S. fund.
All of the gain is treated as an excess distribution and spread evenly over every year you held the fund. The share for the sale year is ordinary income. The share for each earlier year is taxed at that year’s highest rate, 37% in the 2026 tables, and interest is added from that year’s return due date at the IRS underpayment rate. On the example on this page, $50,000 grown at 7% for 8 years, the $35,909 gain costs $16,610, which is 46% of the gain, against $5,386 for a U.S. fund.
More of the gain is allocated to earlier years, each taxed at the top rate, and each carries more years of interest. On the example, 15 years cost 62% of the gain. Holding a PFIC longer without an election is the expensive path.
There are two elections. A qualified electing fund election taxes you each year on your share of the fund’s earnings but depends on the fund providing a PFIC annual information statement, so ask the fund whether it does. A mark-to-market election taxes each year’s increase in value as ordinary income, but only for marketable stock, and whether a foreign mutual fund qualifies is for a tax professional. On the example, mark-to-market would cost $10,791 in year-end dollars. Neither is advice; ask a tax professional.
It is the IRS underpayment rate for the fourth quarter of 2026, from Internal Revenue Bulletin 2026-36, compounded daily. The rate changes every quarter, and the law applies the rate in effect during each period, so the page uses one rate as an approximation and lets you change it.
Distributions from the fund, holding periods that are not whole years, the 3.8% net investment income tax, state tax, currency effects on the rupee, foreign tax credits, and the qualified electing fund election. It prices a sale under the default rules and two alternatives, not the tax on your actual return.
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