Your Indian Mutual Fund Is a PFIC. And India Is Overtaxing It Too.

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.

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.

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.