NRIs guide to Indian Mutual Funds investing

Jatin Bansal
Jun 2
2 min read

A Guide for US-Based NRIs Investing in Indian Mutual Funds

Investing in Indian mutual funds can seem like an attractive option for US-based Non-Resident Indians (NRIs) looking to grow their wealth while maintaining ties to India. However, this path comes with a set of tax and compliance complications that must be navigated carefully. Here's a comprehensive guide to help you understand the key considerations. You can also talk to us to discuss your unique situation -

Schedule a call

1. Tax Complications: The PFIC Trap

For US tax purposes, most Indian mutual funds are classified as Passive Foreign Investment Companies (PFICs). This classification triggers highly unfavorable tax treatment:

Excessive Taxation: Gains are often taxed at the highest marginal rate regardless of your actual tax bracket.
Mark-to-Market Reporting: You may need to pay taxes on unrealized gains annually.
Complex Paperwork: Reporting requirements include IRS Form 8621 for each PFIC you hold, making tax filing extremely burdensome.

Because of these issues, many US-based NRIs choose to avoid mutual funds altogether or explore more tax-efficient alternatives.

2. Required Tax Declarations and Compliance

Investments in Indian mutual funds from the US come with dual tax reporting obligations:

In the United States:

FATCA Reporting: Foreign Account Tax Compliance Act (FATCA) rules require disclosure of foreign accounts.
FBAR (FinCEN Form 114): Must be filed if the aggregate value of your foreign accounts exceeds $10,000.
Form 8938 (Statement of Specified Foreign Financial Assets): Required under FATCA if you exceed certain thresholds.
Form 8621: Specific to PFICs and mandatory for each fund.

In India:

Indian mutual funds deduct TDS (Tax Deducted at Source) on capital gains (especially for NRO accounts).
You are also required to file ITR-2 or ITR-3, depending on the nature of your income.

3. NRO vs. NRE Accounts: What's the Difference for Investments?

NRO Account: You will be required to file both tax filing in India and US (as listed above)
- Fully taxable in India.
- TDS applies on gains.
- Repatriation of funds is subject to limits and additional documentation (Form 15CA/CB).
NRE Account: You will be required to file taxes in US only
- Tax-free in India if conditions are met.
- Limited mutual fund providers support investments through NRE accounts due to repatriation and compliance concerns.

Most NRIs invest via NRO accounts, which increases tax complexity.

4. Alternatives to Mutual Fund Investing

Due to the PFIC complications, many US-based NRIs explore alternative strategies:

a. Direct Stock Investment

Indian stocks are not treated as PFICs.
Easier to manage from a tax perspective.
Requires a Portfolio Investment Scheme (PIS) account.

b. Portfolio Management Services (PMS)

Managed professionally.
Minimum investment of ₹25 lakhs.
May offer better reporting and simplified taxation.

c. US-Based International ETFs with Indian Exposure

Traded on US exchanges.
Avoids PFIC classification.
Fully reported in USD and simpler for IRS filing.
Cons - Indian government directly taxes the ETF thus reducing the overall realized return

Final Thoughts

Investing in Indian mutual funds while residing in the US is fraught with tax and compliance challenges due to PFIC rules and dual reporting requirements. While it may still be viable for some, alternatives such as direct stock investments or PMS are often more tax-efficient and less administratively burdensome.