Indian Investments and Corresponding Reporting Requirements - Indian Expats Beware!

Sep 22, 2017

Indian expats living and/or working in the U.S., this blog post is for you! In this post, the FBAR Wiz will provide an overview of some of the most common Indian investments and explain their associated reporting requirements, if applicable. For starters, those owning 'fixed deposit' or savings accounts in India usually have an NRE or NRO account which is available for non-residents of India. Fixed deposit accounts are similar to CDs in the United States. These accounts can be held at any number of Indian banks such as ICICI Bank, Bank of Baroda, HSBC Bank, Punjab National Bank, and State Bank of India. It is a common myth that, because the account holder will not receive the interest income until maturity, that it is not reported on the holder's U.S. tax return. This is false! The truth of the matter is that any interest accrued in such accounts (even if they are not yet distributed) are taxable by the IRS. Life Insurance Term life insurance plans are not reported on the FBAR or the U.S. tax return. However, if the plan has a cash value, such as a Unit Linked Insurance Plan, there may well be taxable income. The common myth here is that life insurance is not taxable until the policy has been surrendered. This is false! A Unit Linked Insurance Plan is an investment portfolio. Thus, any interest, bonuses, or dividends, including reinvestments, are fully taxable. In addition, you may have a passive foreign investment company ("PFIC") filing requirement since this is a securities-based investment. Demat Accounts A dematerialized account ("demat") are shares and securities held electronically. These typically consist of paper stocks that have been dematerialized into electronic form. It is important to note that a demat account is considered a financial account and must be reported on the FBAR form. Public Provident Funds ("PPF") and Employee Provident Funds ("EPF") A public provident fund is a long term investment option that is backed by the Government of India. A PPF is a public pension system that is similar to the U.S. Social Security system. The U.S. does not recognize PPFs as tax-free investments. Thus, PPF earnings are reported each year on the U.S. tax return as they accrue. Those with investments in PPFs are required to report all interest dividends and capital gains, even if they are "reinvestments," and regardless of whether the account has matured or not. Furthermore, the account holder may have a PFIC requirement. An EPF is similar to a PPF, but it is more like a 401(k) or IRA in the United States. An EPF is a fund to which both a salaried employee and employer may contribute a portion (12%) of the salary as a tax-deferred investment - tax-deferred in India, that is. The only types of employee pensions that can grow tax-free are those that are recognized under Section 401(k) of the Internal Revenue Code. Any income earned in an EPF is reported on the U.S. tax return, regardless of whether there has been a withdrawal. Penalties Penalties for failing to report foreign income or any one of the foreign informational reporting forms such as the FBAR (FinCen Form 114), Form 8938, Form 8621, Form 5471, or Form 3520. FBAR: $10k penalty for each non-willful violation each year. The greater of $100k or 50% of the account's highest balance for willful violations. 31 U.S.C. § 5321. Form 8938: $10k penalty for each violation per year. The maximum additional penalty for a continuing failure to file Form 8938 is $50k. IRC § 6038D(d). Form 3520: 5% of the amount of such foreign gift or bequest for each month for which the failure continues after the due date of the reporting U.S. person's income tax return - not to exceed 25% of such amount in the aggregate. IRC § 6677(a). On a related note, check out this blog post covering some helpful FBAR tips for Indian expats living and/or working in the U.S. Check and see if you have an obligation to report foreign assets and/or foreign accounts to the IRS by using the free FBAR Wiz app.