What is FATCA & How It Regulates US Account Holders Investing in India?

The Foreign Account Tax Compliance Act, (full form for FATCA), outlines one of the basic rules for NRIs living in the United States. All NRIs must follow global tax compliance systems.

When you relocated abroad, you most likely established new roots by renting an apartment, purchasing health insurance, or opening a bank account. The IRS wants to know if you opened a bank account or acquired any financial assets in another country.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) requires US citizens living in the United States or abroad to file annual reports on their foreign account holdings. FATCA's primary goal is to prevent tax evasion.

FATCA applies to everyone living in the United States, according to the law. These are some examples:

1. Permanent residents of the United States or holders of green cards

2. US citizens or NRIs who have migrated to the United States and have become naturalized citizens

3. NRIs and PIOs working in the United States on B1/B2, H1-B, E-2, or L1/L2 visas

Main objective of FATCA

1. Foreign Account Tax Compliance Act (FATCA) aims to prevent tax evasion by U.S. taxpayers who have financial assets and accounts outside the United States

2. It mandates foreign financial institutions to disclose account information to the U.S. Internal Revenue Service (IRS)

Why is FATCA declaration required?

The FATCA declaration is required for several important reasons:

• Prevents Tax Evasion

• It Enhances Tax Compliance as individuals are required to disclose their foreign accounts and financial assets, promoting transparency and accountability in the tax system.

• It ensures Global Cooperation as countries that sign intergovernmental agreements with the U.S. agree to enforce FATCA regulations, leading to a more coordinated global effort to address tax evasion.

• By identifying undeclared foreign assets and income, FATCA helps the U.S. government collect taxes that would otherwise go unpaid.

• For U.S. citizens and residents, providing a FATCA declaration is a legal obligation. Failure to comply can result in significant penalties, including fines and restrictions on opening or maintaining foreign accounts.

• FATCA promotes a culture of transparency and accountability among taxpayers and financial institutions. It ensures that U.S. taxpayers disclose their foreign financial interests, aligning with broader efforts to enhance financial integrity and reduce illicit financial activities.

What is the Process of FATCA?

FATCA requires certain US taxpayers and foreign financial institutions to report certain foreign financial assets to the IRS. FATCA imposes reporting requirements on specific individuals and withholding requirements on financial institutions.

FATCA also requires certain foreign financial institutions to report information about financial accounts held by US taxpayers or foreign entities in which US taxpayers own a significant stake directly to the IRS.

What is FATCA reporting (In India)?

If you are a US citizen (whether you live in the US or elsewhere) and have funds in India, the IRS wants you to report all the credit balances in your accounts annually.

What is covered by FATCA compliance?

Complying with FATCA requires you to report all foreign assets and income earned by US residents outside the country.

To comply with FATCA, the Indian government announced Rules 114(F to H) and the Income Tax Act Form 61B in 2014.  From January 2016,

have to self-declare FATCA compliance. In general, US Residents should give the following information:

1. Name
2. Account Number (PAN)
3. Address
4. Birthplace
5. Nationality
6. Occupation with a High Annual Income

Who are Exempted from FATCA reporting requirements?

There are specific exemptions that can simplify compliance for certain individuals or entities. List of organizations exempted from FATCA Declaration -

• Entities such as the U.S. federal government and its agencies

• A range of organizations, including the United Nations and other international entities,

• Foreign entities wholly owned by a U.S. person and meet specific criteria may not be required to report under FATCA.

• Foreign financial institutions that have entered into an agreement with the IRS to comply with FATCA are exempt from reporting on accounts held by U.S. persons if they adhere to the reporting requirements.

• Some FFIs are classified as "deemed-compliant" and are exempt from FATCA reporting under certain conditions. These include small financial institutions, local banks, and certain retirement funds.

What is the FATCA reporting threshold?

FATCA reporting thresholds differ depending on whether you file a joint tax return or live abroad.

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What is FATCA's Impact on US NRIs?

If you don't follow FATCA rules, you will face severe consequences, such as freezing bank accounts, blocking NPS accounts, and suspending mutual fund investments. You should complete both the FBAR and the FATCA. Filing one form does not relieve you of the obligation to file the other. Consider the following specific examples of investment avenues and the impact of FATCA:

Examples of investment avenues and the impact of FATCA

NPS

National Pension Scheme Account (NPS) holders must visit www.cra-nsdl.com to submit their FATCA declaration online. In the offline mode, one must download and submit the NPS FATCA self-declaration form to the nearest branch or point of presence.

Life Insurance

A US NRI must have an Indian passport to purchase life insurance policies in India online. They must also file the FATCA self-declaration if required.

Residential Property

House properties owned by NRIs in India do not fall under FATCA's specified assets. Any income earned from them is exempt from FATCA. This income, however, is subject to taxation in India.

FATCA Compliance

Fixed deposits, stocks, public provident funds, bank interest, other capital gains, and retirement contributions are Indian investments subject to reporting and taxation in the United States.

Mutual Funds

All AMCs of India must follow the relevant rules and regulations when accepting investment in mutual funds from all their NRI investors. As a result, they require NRIs to submit a FATCA self-declaration and the Tax ID of the resident country.

Bank Accounts

NRIs' NRE, NRO, and FCNR accounts fall under the purview of FATCA.

Which assets do not fall under FATCA?

Jewelry, Antiques, cars, art pieces, and other collectibles are examples of assets that are not subject to FATCA scrutiny. It is not necessary to report safety deposit boxes. Foreign currency you hold but not in any financial institution is exempt from FATCA reporting.

Final Thoughts

As tax evasion is a global issue, so a required the approach should be a global solution-based. FATCA prioritizes disclosure forms, international transparency, and regularity in compliance standards. While a US NRI investor must consider the FATCA provisions before investing, this requirement should not deter a US NRI from investing in Indian assets and financial instruments.