What is FATCA? Understanding the Foreign Account Tax Compliance Act for NRIs

If you are an NRI living in the US, complying with the Foreign Account Tax Compliance Act is mandatory if you wish to invest in Indian investment instruments

Governments worldwide have put systems in place to deal with tax evasion. However, despite the enforcement of stringent rules, even today, the United States suffers an annual tax evasion of approximately $1 trillion. The Foreign Account Tax Compliance Act or FATCA is what helps the US government minimize tax evasion via overseas accounts. Here’s a look at the law and how it affects Non-Resident Indians (NRIs) settled in the US.

What’s FATCA, and to whom does it apply?

The Foreign Account Tax Compliance Act came into effect in the US in 2010 as part of the Hiring Incentive to Restore Employment (HIRE) Act. It is a tax law requiring financial institutions in other countries – banks, mutual fund companies, insurance companies, etc. – to disclose details of overseas assets by US nationals.

To comply with the Foreign Account Tax Compliance Act, the financial institutions are supposed to communicate these details to the Internal Revenue Service (IRS) or the concerned governmental department in case of an Inter-Governmental Agreement (IGA) between the US and the Government in question.

How, and since when is this applicable to NRIs living in the US?

The FATCA has been in effect since 31 August 2015. The Indian Government’s IGA with the US gave the green light to the Foreign Account Tax Compliance Act to be implemented for NRIs living in the US on the said date.

As an NRI shifting to the US soon, do I need to know more?

As a first step, it is advisable to open an ‘NRI savings account’. An NRI savings account grants you access to investments in India. In addition, you need to be compliant with the Foreign Account Tax Compliance Act. Metra Trust helps you open an NRI Savings account in a hassle-free manner, with options to opt for a Non-Resident Ordinary (NRO), Non-Resident External (NRE) or Seafarer Savings Account. Contact us today to avail all the benefits!

For which investments in India does an NRI need to be FATCA-compliant?

Returns on mutual funds, fixed deposits (FDs), long and short-term capital gains on equity investments, and returns from the National Pension System (NPS) require an NRI to submit a Foreign Account Tax Compliance Act Self-Certification. There is, although, one exception. If you, as an NRI, own a property in India, you will be taxed only by the Indian Government, and the Foreign Account Tax Compliance Act won’t be applicable on any returns that you make from it.

Can I do the self-certification online?

Absolutely. For the NPS, the online Foreign Account Tax Compliance Act self-certification procedure is a simple 8-step process. For returns on mutual funds, an investor needs to provide details such as country of tax residence, tax identification number, country of birth, country of citizenship, etc., via a similar procedure. All of this can be done online.

What if an NRI denies this information to the authorities?

The consequences would be (financially) hurtful. In the event of non-compliance with the Foreign Account Tax Compliance Act, an NRI’s bank accounts back in India can be frozen, their folio numbers can be rendered inactive, and their NPS account, too, can be blocked.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Metra Trust or its affiliates to any licensing or registration requirements. Metra Trust shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.