Understanding FATCA Compliance & U.S. NRIs

As of November 2024, there are over 2.07 million Non-Resident Indians (NRIs) in the USA, which is one of the largest NRI populations globally. These NRIs often invest in financial instruments like Indian mutual funds and equities. However, these processes come with regulatory responsibilities, primarily under the Foreign Account Tax Compliance Act (FATCA).

FATCA, enacted by the U.S. in 2010, makes it mandatory for the U.S. taxpayers to report foreign financial assets to ensure transparency and prevent tax evasion.

Here’s what we’ll cover in this article:

The FATCA Act and what it entails
How to ensure FATCA compliance
Consequences NRIs face in case of non-compliance
How FATCA impacts NRI investments

Explaining FATCA: The Foreign Account Tax Compliance Act

Under the FATCA (Foreign Account Tax Compliance Act) – Indian banks and financial institutions must report the information on financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold substantial ownership.

To facilitate this, India signed an Inter-Governmental Agreement (IGA) with the U.S. on July 9, 2015. This agreement mandates Indian financial institutions to report relevant account information to the Indian tax authorities, who then share it with the U.S. Internal Revenue Service (IRS).

How to Navigate FATCA Compliance

The following are the key ways of FATCA compliance:

Complete the Compulsory Self-Declaration

NRIs investing in Indian mutual funds, real estate or other financial products are required to submit a FATCA self-declaration. This declaration holds their U.S. tax residency status and Taxpayer Identification Number (TIN). This is applicable to both new and existing investors. Non-compliance can result in investment restrictions and possible reporting to tax authorities.

The details asked on the self-declaration mostly include:

Name
Address
Permanent Account Number (PAN)
Place (city, state, and country) of birth
Nationality
Details of residence, Tax ID number, and type - if one is a resident of another country
Occupation
Gross Annual Income

Key factors to remember:

A U.S. citizen or one holding a green card is to report the U.S. as their country.
The declaration insists on customers confirming certain details used to ascertain their being reportable as per FATCA.
Any updates on such information need to be reported to the concerned financial institution within 30 days.

Understand the Reporting Requirements

Indian financial institutions must report information about financial accounts maintained by U.S. persons to the Indian tax authorities. This includes account balances, income, and transactions made, which are done to maintain transparency and compliance with FATCA requirements.

Stay on Top of Tax Responsibilities in the U.S.

U.S.-based NRIs must disclose their foreign financial assets, including investments in India, to the IRS.

Stay Updated on Regulatory Changes

One must always stay updated about the regulatory updates associated with financial transaction and NRI investment plans. NRIs must have the latest updates from the U.S. as well as Indian tax authorities to ensure complete compliance with FATCA regulations.

Understanding FATCA’s Effect on NRI Investment Opportunities

Because of the stringent reporting norms under FATCA, a few Indian financial institutions have levied restrictions on investments and other assets from U.S.-based NRIs. However, many institutions continue to accept investments from U.S. NRIs, primarily through offline channels, to ensure compliance. It's crucial for NRIs to consult with their financial advisors or the institutions directly to understand the available investment avenues and associated compliance requirements.

Acknowledging the Results of Non-Compliance

Non-compliance with FATCA may result in serious consequences, including:

Fines: The RBI and Income Tax authorities in India have mandated fines for any incorrect reporting done under FATCA, basis customer declaration.
Account Restrictions: Indian financial institutions may freeze or impose restrictions on an account if the enforcement of FATCA is not made certain.

Wrapping Up!

Many investment opportunities are available for NRIs based in the USA. Both countries have structured systems and clear regulations to ensure smooth transition and transparency of taxation. FATCA is essential in this regard, and NRIs can ensure compliance with a systematic approach.

Start your investment journey with Kotak Mahindra Bank’s NRI banking solutions, and stay tuned for more informative blogs on NRI investments!

FAQs

1. What are the SEBI guidelines regarding FATCA?

SEBI has instructed all investments must implement FACTS. This instruction comes for all financial institutions, including mutual funds, banks, insurance companies, and other financial institutions.