Tax calculation in US for Indian Mutual Funds

POSTED BY PK ON July 24, 2012 1:47 am COMMENTS (6)

Hi,

I know that regular SIP into Mutual Funds is not taxable (as of now) in India is not taxable if not withdrawn. However, as per US tax, the income from all over world is taxable. So should I be paying tax in US for the Mutual Funds in India? This is under the assumption that I dont withdraw the funds during my tenure in US.

Regards,
PK

6 replies on this article “Tax calculation in US for Indian Mutual Funds”

  1. PK says:

    @BanyanFA,

    Thank you so much. That clarifies my doubt.

    Regards,
    PK

  2. PK says:

    Thanks all.

    I think I was not clear in my question. I meant tax to be paid in USA on the mutual funds a person holds in India. Its not about US mutual funds. Its about Indian mutual funds.

    @BanyanFA,

    If a person starts a SIP when he was in India, and then moves to US and keep continuing the SIP, then he need not pay any USA tax on the MF gains in India (assuming he will never sell the funds). However, he will have to disclose/declare the total MF fund value he holds as of Dec 31. And this is only declaration and no US tax paid. Is my understanding correct?

    Also, in the same scenario, if a person has a long term FD in India say 10 years. And then he moves to US for couple of years. So in such scenario, does he need to pay tax in US for the interest on FD for that year. Or is it just enough if he does a declaration.
    Assuming the FD never matures during his tenure in US.

    Regards,
    PK

    1. BanyanFA says:

      PK,
      Your understanding is correct for SIPs as they fall under capital gain and the US tax laws don’t consider a capital gain unless you sell the units.

      FD income is considered in US as an Income and hence you would need to pay tax on Income on your FDs in US, even though they are tax free in India.

  3. BanyanFA says:

    PK,
    As long as you don’t sell your mutual funds in India, you don’t attract tax liability (both in India & USA). If you sell your funds, then India would be tax free (as per current regulations), however it would be taxable as per US requirements.

    Further, you have to declare your fund values in US on an annual basis. Failure to declare them would attract penalty charges from US IRS.

  4. Gaurav says:

    you are liable for paying tax on Indian mutual funds even if you have not realized the gains so long as you are a tax resident of US. the reason is that US mutual funds are required to annually distribute gains (or losses) from portfolio churn back to investors as distributions and these are taxed in the hands of the investor. The PFIC rules came about to prevent “tax avoidance” by investing in international funds that do not have to follow the same rules.

    google “PFIC rules Indian mututal funds”

    http://articles.economictimes.indiatimes.com/2012-04-27/news/31411531_1_mutual-funds-long-term-capital-gains-capital-appreciation

    http://nrifinanceblog.blogspot.in/2012/04/pfic-taxes-on-mutual-funds-investments.html

  5. No , you should not be paying any tax on it , the investment is done in india and taken in india only , so no tax .

    Note that the rule for taxation is that if you take money out after 1 yr , then its not taxable , it has nothing to do with SIP , if you do 6 months SIP and take the money out of it in 7th month, there will be short term capital gains !

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