PFIC: Indian mutual funds when you're a US taxpayer.

A PFIC, passive foreign investment company, is a non-US corporation where at least 75% of gross income is passive, or at least 50% of its assets produce passive income. Passive income means interest, dividends and capital gains, which is exactly what a fund earns. The rules sit in sections 1291 to 1298 of the US tax code.

The regime was written to stop US taxpayers deferring US tax by holding investments through a foreign wrapper. Its reach is broad: it does not ask whether the fund is well run, regulated in its own country or popular, only whether it is foreign and passive.

Generally, yes. An Indian mutual fund is a foreign entity whose income is almost entirely passive, so it usually meets the PFIC tests. The same is commonly true of Indian exchange-traded funds and other pooled products. Shares of an ordinary operating company held directly are a different case and are usually not PFICs.

Whether a particular holding is a PFIC is a classification question with facts behind it, including how the fund is organised. A cross-border CPA can confirm it for each holding you own.

US persons for tax: US citizens and green card holders wherever they live, and visa holders who are US tax residents under the substantial presence test, which includes most H-1B workers living in the US. An Indian mutual fund bought before you moved to the US becomes a PFIC issue once you are a US person.

That last point catches many NRIs. A SIP started in India years ago does not stop being a PFIC because it predates the move; the US looks at what you hold while you are a US taxpayer.

Under the default rule, a gain on sale, and any distribution well above the recent average, is spread across every year you held the fund. Each year's share is taxed at the highest ordinary income rate for that year, plus an interest charge, and none of it qualifies for the lower long-term capital gains rate.

The longer the holding period and the larger the gain, the heavier the result. Losses do not offset in the same way either. This is why the regime is described as punitive, and why advisers look at the elections below before a fund is sold, not after.

They are alternatives to the default rule. A QEF election taxes your share of the fund's income each year, but needs an annual statement from the fund that Indian fund houses rarely provide. A mark-to-market election taxes each year's rise in value as ordinary income, and is available only for marketable holdings.

Each election has conditions, timing rules and consequences for later years, and the right choice depends on when you bought, how much the fund has gained, and how long you will remain a US person. This is the part of the regime to plan with a professional rather than alone.

Form 8621 is the IRS information return for PFIC shareholders. It is generally filed with your tax return each year, one form per fund, and also whenever you sell, receive a distribution or make an election. The instructions exempt small holdings in some years, broadly a total value of $25,000 or less, $50,000 if filing jointly.

The exemption does not apply in a year with a taxable sale, an excess distribution or an election. Several funds mean several forms, which is why PFIC reporting is often the most expensive part of an NRI's US return.

A required Form 8621 that is not filed can keep the statute of limitations open for the whole return, not just the PFIC items.

Legally it is possible, though many Indian fund houses restrict or decline investments from US persons because of US reporting rules. Where it is allowed, the PFIC regime and Form 8621 apply. Whether it makes sense for you is an investment and tax question for an adviser, not one a general page can answer.

Separately, Indian rules govern how a non-resident or an OCI holder may invest, through which accounts, and how proceeds can be repatriated. Both sets of rules apply at once.

They stop applying when you stop being a US person for tax. A visa holder who leaves and is no longer a US tax resident is generally outside them from then on. A US citizen or green card holder remains a US person in India, so PFIC rules and Form 8621 continue for as long as that lasts.

The year you leave is usually a part-year with its own rules, and gains built up while you were a US person can still be reportable. For green card holders, giving up the card has tax consequences of its own. Plan the timing of any sale with a cross-border CPA before you move.

Usually, yes. Indian mutual fund and bank accounts generally count towards the FBAR filed with FinCEN when your foreign accounts together exceed $10,000 at any point in the year, and may also need reporting on Form 8938. These are separate from Form 8621, and one filing does not replace another.