Your Indian Mutual Fund Is a PFIC. And India Is Overtaxing It Too.
TL;DR
US NRIs face IRC Section 1291 PFIC treatment on Indian mutual funds plus India's default 30% Section 195 TDS. The India-US DTAA Article 11 caps Indian withholding at 15%. The US side stays painful.
By Vipul Sharma, Founder
Reviewed by Preetesh Maloo, Chartered Accountant, NRI Tax Partner
What is PFIC and why does it ruin everything
PFIC stands for Passive Foreign Investment Company. It's how the IRS classifies any foreign fund where more than 75% of income is passive (dividends, interest, capital gains). Every single Indian mutual fund qualifies.
Why it matters: PFIC rules are punitive. Unless you make a special election (QEF or Mark-to-Market), your gains are taxed at the highest marginal rate plus an interest charge for the “deferral benefit.” You can't use the lower long-term capital gains rate. And you need to file Form 8621 for each PFIC, that's a separate form for every Indian MF you hold.
Many US NRIs don't know this. They buy Indian MFs through Groww or Zerodha, hold for years, and get a nasty surprise at tax time.
DTAA doesn't fix PFIC. PFIC is a US domestic rule. But DTAA does fix the India side, reducing TDS from 30% to 15% on interest, and potentially reducing capital gains TDS too. One fight at a time.
Every Indian mutual fund is a PFIC under IRS rules
75% passive income threshold (dividends, interest, capital gains) makes every Indian MF qualify. Default punitive treatment: highest US marginal rate + an interest charge for the “deferral benefit.” Form 8621 required PER fund. Only QEF or Mark-to-Market elections soften it.
What DTAA actually fixes for American NRIs
The India-US DTAA helps with:
What the treaty does NOT help with for individual American NRIs is dividends. Article 10(2)'s 15% cap applies only when the recipient is a company owning 10% or more of the Indian payer's voting stock. For individual portfolio investors, the treaty cap is 25%, but India's domestic Section 195 rate is 20% (lower than the treaty cap). So individuals just pay the 20% domestic rate. Zero treaty relief on dividends for the typical American NRI.
What it doesn't help with: equity capital gains (same 12.5% rate), property gains (same rate), rental income (same rate).
The big win for American NRIs is FD interest + NRO interest. If you've got ₹25 lakh+ in NRO FDs, that's real money back every year.
Plus, whatever TDS is deducted at the DTAA rate, you can claim as Foreign Tax Credit on your US return (Form 1116). So it reduces your US tax too. Double benefit from claiming one treaty.
India-US DTAA: what it fixes, what it doesn't
FD interest
30% to 15%
Article 11 cap. Clean 15-point recovery. Drops further to 10% for interest on bank loans.
NRO interest
30% to 15%
Same Article 11 cap on every rupee of NRO interest.
Bond / NCD interest
30% to 15%
Article 11. 10% if the interest is paid on a loan made by a bank. Article 22 'Other Income' does NOT apply to debt-instrument interest.
Dividends (individual)
No treaty relief
Article 10(2)'s 15% cap requires ≥10% voting-stock ownership. For portfolio investors, the treaty cap is 25%, higher than India's 20% domestic Section 195 rate. So individuals just pay the 20%.
Equity / property capital gains
No treaty relief
Same 12.5% Indian rates apply. India retains taxing rights on Indian-source capital gains under the treaty.
Then on the US side
Foreign Tax Credit
Whatever India deducts at the DTAA rate, you claim as FTC on US Form 1116, reducing US tax too. Double benefit from one treaty claim.
The real money for American NRIs is FD + NRO + bond interest. ₹25 L+ in NRO FDs = several lakh per year in recoverable TDS.
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The practical playbook for American NRIs
Step 1: Accept the PFIC reality. If you hold Indian MFs, you're dealing with Form 8621. Consider whether holding Indian MFs is worth it given PFIC. Some US NRIs choose to invest in Indian ETFs listed on US exchanges instead.
Step 2: For FDs and NRO accounts, claim DTAA aggressively. Get your IRS Form 6166 (TRC). File Form 8802 early, it takes 6-12 weeks. Don't wait until June.
Step 3: File Form 10F on incometax.gov.in.
Step 4: File Indian ITR with DTAA rates. Claim refund for excess TDS.
Step 5: On your US return, claim Foreign Tax Credit (Form 1116) for the India TDS.
Step 6: For past years, file condonation in India for up to 5 Assessment Years back. And amend US returns if needed.
This is complex. An American NRI's tax situation involves two countries, two returns, PFIC forms, FBAR, Form 8938, plus DTAA claims. We work with CAs who handle this specific combination daily. It's not something a general CA can do well.
Six steps to recover excess Indian TDS as an American NRI
Start with Form 8802 first. It's the slowest piece (6-12 weeks, up to 6 months in peak season).
- Step 1Reality
Accept the PFIC reality. If you hold Indian MFs, you're filing Form 8621 per fund. Consider Indian ETFs on US exchanges as an alternative for new investments.
- Step 2TRC
Apply for IRS Form 6166 (TRC) via Form 8802. 6-12 weeks typical, up to 6 months in peak season. Start this in January, not June.
- Step 3
File Form 10F on incometax.gov.in once your Form 6166 is in hand.
- Step 4
File Indian ITR with DTAA treaty rates on interest and bond income. Claim refund of excess TDS over the Article 11 cap.
- Step 5Double benefit
On the US side, claim Foreign Tax Credit (Form 1116) for the Indian TDS paid at treaty rates. Reduces US tax dollar-for-dollar up to the FTC limit.
- Step 6Past 5 AY
For past years, file Section 119(2)(b) condonation in India for up to 5 Assessment Years (CBDT Circular 11/2024). Amend US returns if FTC carry-forwards need adjusting.
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The exceptions that change the answer
Where the general rule stops applying to you
Every rule below has a carve-out, a cut-off date or a condition that flips the answer. These are the ones that decide real cases.
LTCG rate: assets other than STT-paid listed equity (includes property)
Right now: 12.5% without indexation
Where it works differently
- A RESIDENT individual or HUF sells land or a building acquired before 23 July 2024
- May elect the lower of 12.5% without indexation or 20% with indexation.
- Grandfathering proviso inserted by Finance (No. 2) Act 2024.
- A NON-RESIDENT sells the same property
- 12.5% without indexation only. The election is NOT available.
- The grandfathering proviso is expressly limited to resident individuals and HUFs. This is the highest-value NRI distinction on the site.
- Shares or debentures of an Indian company were bought in convertible foreign exchange by a non-resident
- The first proviso to s.48 computes the gain in that foreign currency, neutralising rupee depreciation. This is separate from, and not lost with, indexation.
- First proviso to s.48 survives the 2024 changes.
- Adding surcharge and cess
- Surcharge on capital gains under s.111A/112/112A is capped at 15%, plus 4% health and education cess.
- The cap applies to gains under s.111A, s.112 and s.112A.
Commonly got wrong
- NRIs can choose 20% with indexation on property bought before July 2024. The election is resident-only. Stating otherwise understates an NRI's tax, which is the worst direction to be wrong in.Residents may elect 20% with indexation for pre-23-July-2024 land and buildings. Non-residents get 12.5% without indexation, full stop.
- LTCG on property is 20%. Stale since 23 July 2024 unless the transfer predates it.12.5% for transfers on or after 23 July 2024.
NRO account: what it costs and what it caps
Right now: Interest taxed at 30% plus surcharge and cess; repatriation capped at USD 1 million a financial year
Where it works differently
- A TRC and Form 10F (Form 41 from 1 Apr 2026) are furnished
- The treaty rate applies to the interest, commonly 10-15% under Article 11 instead of 30% plus surcharge.
- s.90(2). This is the single largest recurring recovery item for most NRIs.
- Remitting out
- Form 15CA is needed, plus Form 15CB from a CA where the remittance is chargeable and above Rs 5 lakh in the year.
- Rule 37BB.
- Joint holders
- The USD 1 million ceiling is per person per financial year, so joint holders each have their own.
- FEMA 13(R).
Commonly got wrong
- NRO interest is taxed at 30%. Incomplete. Surcharge and 4% cess sit on top, and a treaty can cut it to 10-15%.30% plus surcharge and cess by default, but 10-15% under most treaties if you hold a TRC and file Form 10F.
Condonation of delay window for refund and loss claims
Right now: 5 years from the end of the assessment year
Where it works differently
- The claim arises from a court order
- Different limitation applies. The period the matter was pending is generally excluded.
- Para in Circular 11/2024.
- Deciding authority
- Tiered by claim amount across Principal Commissioner, Chief Commissioner and CBDT.
- Circular 11/2024 monetary limits.
Commonly got wrong
- The condonation window is six years. Circular 9/2015 was superseded on 1 October 2024.Five years, per Circular 11/2024.
TDS on NRO account interest
Right now: 30% plus surcharge and cess
Where it works differently
- A valid TRC and Form 10F (Form 41 from 1 Apr 2026) are furnished
- The treaty rate applies, commonly 10-15% under Article 11.
- s.90(2) gives the more beneficial of treaty or Act.
- No PAN is furnished
- s.206AA imposes at least 20%, but Rule 37BC allows escape by furnishing name, address, TIN and TRC. Courts have also held s.206AA cannot override a treaty rate.
- Rule 37BC + settled case law.
- Claiming the treaty rate at source
- The s.115A(5) filing exemption is lost, so an Indian return becomes necessary.
- That exemption requires TDS at not less than the s.115A rate.
- The account is NRE or FCNR instead
- Interest is exempt and no TDS applies, while the holder is a FEMA non-resident.
- s.10(4)(ii) and s.10(15)(iv)(fa).
Commonly got wrong
- NRO interest TDS is 30%. Incomplete. Surcharge and 4% cess sit on top, so the effective rate is higher.30% plus surcharge and cess, around 31.2% at the base level.
- You can file Form 15G/15H to stop NRO TDS. Those are resident-only declarations. An NRI filing one makes a false declaration.Use Form 13 (Form 128 from 1 April 2026), or claim the treaty rate with a TRC.