Still holding Indian mutual funds while living in the U.S.?

You moved to the United States for work or study, kept the SIPs running in India, filed a U.S. return — perhaps an FBAR too — and then someone mentioned Form 8621. This page is for that situation: you live in the U.S., you are a U.S. tax resident, and you hold schemes from SBI Mutual Fund, ICICI Prudential, HDFC, UTI, Nippon India, Aditya Birla Sun Life, Axis, Kotak, Quant or any other Indian fund house. The fund house is not what decides the answer. What each scheme is, does.

Why Indian mutual funds generally create PFIC reporting

A passive foreign investment company (PFIC) is a non-U.S. corporation that meets either the income test (75% or more of gross income is passive) or the asset test (50% or more of assets produce, or are held to produce, passive income). A mutual fund pools investors' money and earns passive income — dividends, interest and gains — which is why non-U.S. funds are generally treated as PFICs. Indian mutual fund schemes are non-U.S. pooled funds, so once you are a U.S. person they are generally treated as PFICs. Each scheme is classified on its own facts; a brand name settles nothing, in either direction.

Who this applies to

The PFIC rules apply to U.S. persons. For someone who is not a U.S. citizen, that means a U.S. tax resident — and residency for tax purposes comes from two tests, not from the visa type: the green card test (you were a lawful permanent resident at any time in the year) and the substantial presence test (at least 31 days in the current year and 183 days over three years, counting all of this year's days, a third of last year's and a sixth of the year before). The H-1B residency guide walks through both.

• H-1B, L-1 or O-1 worker — days on these visas count, so most people who live and work in the U.S. on them meet the substantial presence test for each full year, and often for the arrival year.
• Green card holder — resident under the green card test for any year in which you held permanent residence, wherever and whenever the funds were bought.
• Naturalized citizen — a U.S. citizen is a U.S. person wherever they live; the schemes kept in India stay in scope.
• F-1 student, OPT, then H-1B — days as an exempt student do not count for a limited number of years, so residency often starts later than arrival: when the exemption runs out or the status changes.
• The arrival year — can be dual-status: nonresident for part of it and resident for the rest. The PFIC rules reach the resident part.

What Form 8621 is

Form 8621 is the information return a U.S. person files for a PFIC. It reports the holding, any distribution or disposition in the year and any election, and where the default §1291 rules apply to a redemption or a large distribution it carries the computation of the tax and the interest charge. It is attached to your Form 1040 — or to a Form 1040-X when it is added later — not sent on its own. Mainstream consumer tax software generally does not prepare it; see why TurboTax can't file Form 8621.

One Form 8621 per scheme — not per folio, not per SIP instalment

The filing unit is the PFIC: generally one Form 8621 per PFIC, per year. For an Indian portfolio that means one form for each scheme, for each year a filing requirement applies. A folio is an account number at the fund house — one folio can hold several schemes, and one scheme can sit in several folios; neither changes the count. A SIP does not multiply forms either: each monthly instalment is a separate purchase lot of the same scheme, recorded on that scheme's form with its own date and cost, and it matters when those lots are later redeemed.

The small-holdings exception — and when it is lost

The Form 8621 instructions provide a limited exception from the annual report for a year with aggregate PFIC value of $25,000 or less on the last day of the year ($50,000 MFJ). Read its conditions before relying on it: Exception is narrow — it covers §1291 funds only (no QEF or mark-to-market election) and is lost in a year with an excess distribution or a gain on a disposition. The value is the aggregate of every PFIC you hold, not one scheme, measured on the last day of the U.S. tax year. So the exception may excuse a small SIP portfolio in a year nothing was sold — and it is lost for the year a scheme is redeemed or switched at a gain, or pays a large distribution.

Redemptions, switches, SWP and STP: each is a disposition

Selling units is a disposition, and so is a switch from one scheme to another: the fund house calls it a switch, U.S. tax treats it as a redemption of the first scheme and a purchase of the second. A systematic withdrawal plan (SWP) redeems units on a schedule; a systematic transfer plan (STP) redeems units of one scheme to buy another. Each of those redemptions is a disposition.

Under the default §1291 regime — the treatment that applies without a QEF or mark-to-market election — a gain on a disposition is an excess distribution, and the rule is: gain/excess distribution taxed at the highest ordinary rate for each allocated year, plus an interest charge. In practice the gain is spread over the time you held the units; the share allocated to the current year is ordinary income, and the share allocated to earlier years in the holding period carries that tax and interest. Whether a QEF or mark-to-market election is available for a particular scheme is a separate question; without one, §1291 is the default.

IDCW payouts — what Indian funds used to call dividend options — are distributions. A distribution is an excess distribution to the extent it is a distribution more than 125% of the average of the prior three years; that part goes through the same §1291 computation, and the rest is ordinary income.

Filing the FBAR is not reporting the PFIC

Many people in this situation filed an FBAR and assumed the funds were covered. They are different reports. The FBAR (FinCEN Form 114) reports foreign financial accounts when their combined peak exceeds $10,000 at any time in the year — and a mutual fund folio held directly with a fund house is itself a financial account for the FBAR, under 31 CFR 1010.350(c)(3)(iv)(A). Form 8621 reports the funds as investments, on the income tax return. Filing one does not file the other.

Form 8938 is a third report, attached to the return, with higher thresholds: for a single filer living in the U.S., more than $50,000 on the last day of the year or more than $75,000 at any time, with higher figures for joint filers. The FBAR, Form 8938 and Form 8621 can all apply in the same year; FBAR vs Form 8938 compares the first two.

Already filed your return without Form 8621?

Common, and fixable. If the return was otherwise complete — the income and any redemptions were reported, only the PFIC reporting is missing — the usual route is an amended return on Form 1040-X with the Forms 8621 attached, and the §1291 tax recomputed for any year with a redemption or a large distribution. If income or whole returns are missing too, a separate catch-up route is assessed first. Filed your return without Form 8621? explains which applies, the e-file rules for amended returns, and why the year can stay open until the form is filed.

The documents that make this work

• Consolidated account statement (CAS) from CAMS or KFintech — between them they list your folios, schemes and transactions across fund houses.
• Scheme-wise transaction history — every purchase, SIP instalment, switch, SWP or STP redemption and IDCW payout, with dates, units and NAV.
• NAV on December 31 for each scheme, for each U.S. tax year — the U.S. year-end value, not the March 31 figure.
• Purchase history back to the first unit for any scheme redeemed while you were a U.S. resident, because the §1291 allocation runs across the whole holding period.
• Your residency dates — arrival, status changes, the green card date — which decide the first U.S. year the funds are reportable.

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