What is FATCA? Everything you need to know about FATCA
US NRIs who plan to return to India post-retirement or those who want to participate in the Indian stock market can consider investing in mutual funds and numerous financial instruments available in this country. However, there are some initial procedures and paperwork that must be carried out. US NRIs have to mandatorily comply with the US Government’s FATCA regulations, before investing in India.
What is FATCA?
FATCA or Foreign Account Tax Compliance Act was introduced by the US Tax Department (IRS) in 2010 to ensure tax compliance and prevent tax evasion. If a US citizen or tax resident tries to attempt offshore tax avoidance, this Act will be able to identify and prevent this action. It monitors the income earned from international investments and assets and obtains information regarding US owners of non-US entities.
FATCA authorises financial institutions to suppress tax if the documentation requirements are not fulfilled by the US NRI investor. All financial institutions which have been registered under this act are required to immediately inform the tax department of the US in case a US person indulges in tax evasion. Individual and non-individual investors must provide FATCA self-declaration.
India-US pact to ensure FATCA compliance
To comply with FATCA, the Indian government inserted Rules 114F to 114H and Form 61B in the Income Tax Act in 2014. From January 2016 onwards, it was made mandatory for all Indian and NRI investors (existing and new) to self-declare FATCA compliance. Broadly the following details are sought:
- Permanent Account Number (PAN)
- Place (city/state) of birth
- Country of birth
- Gross Annual Income
- Whether one is a resident of another country? If yes, the details of the country of residence, Tax ID number, and type
The declaration specifically requires the inclusion of the US as a resident country if one is a US citizen or a green cardholder. This is valid even if one has moved to India and is presently an Indian resident. As a result of this disclosure, the tax authorities would have access to all the required information. Further, in case of any change in the above information, it is mandatory to inform the concerned financial institution within 30 days of the change.
Impact of FATCA on US NRIs
Failure to comply with FATCA can result in severe repercussions like freezing of bank accounts, blocking of NPS account and suspension of mutual fund investment. Let us consider some specific examples of investment avenues and the resultant impact of FATCA:
NRIs investing in Mutual Funds
All Indian mutual fund houses must adhere to the relevant regulations when they accept investment funds from NRI investors. Accordingly, they require a FATCA self-declaration by the NRIs and the resident country’s Tax Residency Number. Some MF houses mandate that NRIs carry out investments via the offline mode to ensure that the entire process is secure and transparent. The physical mode makes sure that either the NRI investor or the Power of Attorney is in attendance and complies with the FATCA guidelines. Owing to the detailed disclosure norms mandated by FATCA, some Indian MF houses have declined investments from US NRIs. However, this is an exception and not a rule.
NRIs buying life insurance
To buy life insurance policies in India, via the online route, a US NRI is required to have an Indian passport. They must also submit the FATCA self-declaration, as applicable.
National Pension Scheme Account
NPS account holders need to log onto www.cra-nsdl.com and submit their FATCA declaration online. In case of the offline mode, one needs to download and submit the self-declaration form NPS FATCA to the nearest branch of point of presence (PoP).
Tax evasion, being a universal problem, requires a global solution-based approach. FATCA emphasises on global transparency, disclosure and consistency in compliance norms. While a US NRI investor must keep the FATCA provisions in mind before investing, this requirement should not be deterrent for a US NRI to invest in assets and financial instruments in India. HDFC Bank's NRI program allows US NRIs to invest in India, across different investment instruments by making the process easier, more accessible and faster.
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You could also read more about the FEMA regulations for NRIs here.