Investing in Indian alternatives from the United States

Yes, almost certainly. The trigger is US tax residency. Not citizenship, not a green card.

You are a US tax resident if you hold a green card. Or if you meet the substantial presence test: 31 days this year, and 183 days counting this year in full, a third of last year, and a sixth of the year before.

H-1B and L-1 holders cross that line quickly. Once you do, the PFIC, FBAR and Form 8938 rules all apply to you. Some students and teachers on F and J visas are excluded for a few years.

This catches people every year. It is the single most common reason a first Form 8621 arrives late.

A PFIC is a passive foreign investment company. Any foreign corporation where 75% or more of gross income is passive, or 50% or more of assets produce passive income.

Indian funds are not named in the US statute. They get there by default. A foreign vehicle whose investors all have limited liability is treated as a corporation for US tax purposes unless someone elects otherwise. Nobody does. So it is a foreign corporation earning passive income.

The cost is the point. Under the default regime your gain is spread back across the whole holding period. Each earlier year is taxed at that year's top marginal rate, 37% today. No capital-gains rate. No deductions. Then interest is added, compounding daily.

You also file a separate Form 8621 for each PFIC, and for each PFIC held inside another one.

And the clock never starts. A normal return closes after three years. A year with an unfiled PFIC form stays open indefinitely.

Yes to the first, and largely yes to the second. This is the most useful thing on this page and almost nobody says it.

Indian rules place no residency restriction on PMS clients. More importantly, SEBI requires that a portfolio manager must not hold client securities in its own name. So you hold listed Indian shares directly, in your own demat account. It is a managed account, not a fund.

The PFIC rules reach foreign corporations. An ordinary Indian operating company, a bank or a manufacturer, fails both tests. So its shares are not a PFIC.

That means a PMS invested in operating equities creates no PFIC exposure at all. You still report the account on the FBAR and Form 8938. Every sale the manager makes is still your own taxable disposal. But the punitive regime does not apply.

One exception. If the mandate holds mutual fund units or other pooled vehicles, PFIC comes back for those holdings. Ask for the mandate in writing.

Sometimes. And you cannot tell from the brochure.

PFIC rules apply only to foreign corporations. A vehicle that is genuinely a partnership, or one that has validly filed IRS Form 8832 to be taxed as a pass-through, is not itself a PFIC. Helpfully, no Indian trust, LLP or private limited company sits on the IRS list of automatic corporations. Only \'India, Public Limited Company\' is listed.

Three cautions matter more than that headline.

First, a Schedule K-1 does not end the analysis. You stay an indirect PFIC shareholder for any PFIC the fund itself holds, so a fund-of-funds can multiply your filings rather than remove them.

Second, if the vehicle is classified as a trust rather than a business entity, you land in the foreign non-grantor trust throwback rules. Those carry their own interest charge and their own forms, and are about as punitive as PFIC.

Third, the election belongs to the fund, not to you. One investor cannot make a fund check the box.

So ask three questions in writing before you subscribe. Have you filed Form 8832, and what did you elect? Will you issue me a K-1? Do you provide annual US tax reporting, for every underlying vehicle? If any answer is vague, price it as a PFIC.

On capital gains, no. This is the most widely repeated error in NRI content.

Article 13 of the India-US treaty says, in its entirety, that each country may tax capital gains under its own domestic law. No cap. No allocation. Relief comes afterwards, as a US foreign tax credit for Indian tax you actually paid.

The dividend article is misreported too. Its 15% cap applies to a company owning at least 10% of the voting stock. As an individual you fall under the 25% limit, which is above what India withholds anyway. So it does nothing for you.

That has a sharp consequence for GIFT City. India's IFSC exemptions are built for investors taxed nowhere else. If India exempts the income, there is no Indian tax for the US to credit. The whole burden lands on your US return.

So for a US person, an Indian exemption can leave you worse off than an Indian-taxed structure.

Add the 3.8% net investment income tax above $200,000 of modified AGI single, $250,000 joint. The foreign tax credit does not generally reach it.

Two US statutes, not one.

Taking your subscription pushes the offering outside the Regulation S safe harbour, because the rules count any natural person resident in the United States as a US person. More fundamentally, the Investment Company Act bars a foreign investment company from publicly offering securities into the United States without an SEC order that is essentially never granted.

So when an AMC says it does not accept US persons, it is not applying Indian law and it is not judging you. It is avoiding US registration.

That is also why the houses that do accept US persons often insist on offline paperwork and extra declarations.

Three regimes stack on the same assets, filed to two different agencies, at different thresholds. They are cumulative, not alternatives.

<b>FBAR</b> (FinCEN Form 114) is due once your foreign accounts together top $10,000 at any point in the year. That includes demat, PMS and brokerage accounts. Due 15 April, automatically extended to 15 October. The maximum non-wilful penalty is $16,536 per report, not per account, following the Supreme Court in Bittner.

<b>Form 8938</b> goes with your tax return once specified foreign financial assets pass $50,000 at year end, or $75,000 at any point, if you are single and living in the US. It is $100,000 and $150,000 filing jointly, and much higher if you live abroad.

<b>Form 8621</b> is separate again. One for each PFIC, and one for each PFIC held through another. A small-holdings exception exists at $25,000 aggregate, $50,000 jointly, but it disappears the moment you sell or take a distribution.

You are not unusual, and there is a defined route back.

The IRS Streamlined Filing Compliance Procedures exist for taxpayers whose failure was not wilful. Living in the US, that means three years of amended returns, six years of FBARs, a non-wilfulness certification, and a 5% penalty on the highest aggregate value of the foreign assets across the covered period. Living abroad, the penalty version differs.

Two things before you decide. The PFIC clock never started, so those years are still open however long ago they were. Waiting does not help.

And the certification is made under penalty of perjury. This is a conversation with a US tax professional, not something to self-file off a blog post. Bring the fund statements. The analysis is per fund, per year.