Your Indian mutual fund may need a US tax form every year

You moved to the United States. Your SIPs, folios and old mutual fund units stayed in India. The investment may look unchanged in the AMC app, but the reporting around it can change sharply.

The first question is not whether you hold an H-1B visa. It is whether the United States treats you as a resident for tax purposes in that calendar year.

1. Work out your US tax residency first

Visa status and tax residency are different systems. The IRS says H-1B holders generally count their days in the United States for the substantial presence test. The test normally looks for at least 31 days in the current year and 183 weighted days across the current year and the previous two years.

That weighting counts all qualifying days in the current year, one-third of the previous year's days and one-sixth of the days from two years earlier. The IRS notes that an H-1B holder present for 122 days in each of three consecutive years will generally meet the test in the third year.

Exceptions and first-year or dual-status rules can change the result. Establish the residency start date before deciding which US forms apply.

If you are a US resident alien for the full year, the IRS generally taxes you like a US citizen and requires worldwide income on Form 1040. Income and gains connected with Indian investments can therefore matter in the United States even if the proceeds remain in India.

2. Indian mutual funds can remain investable, but your records must catch up

AMFI says NRIs can invest in Indian mutual funds, subject to the relevant fund's offer documents. Moving abroad does not by itself force a sale.

Your operational setup still needs attention. Update your residency status, address, tax-residency declaration and FATCA information with the KYC registration agency, AMC or registrar. Check that each folio is linked to an eligible NRE or NRO account rather than an old resident savings account.

The funding route affects repatriation. RBI rules distinguish investments made with inward remittance or eligible NRE/FCNR(B) money from non-repatriable investments funded through an NRO account. An NRO balance is generally subject to the conditions and annual limit that apply to remittance of eligible assets.

An AMC may also impose its own onboarding or transaction restrictions for people resident in the United States or Canada. Check the scheme documents and the AMC's current process before starting a new SIP, adding money or switching schemes.

3. Ask whether each fund is a PFIC for US purposes

US tax law has a separate regime for a passive foreign investment company, or PFIC. Indian mutual funds are often discussed in this context, but the answer depends on the fund's legal classification and the investor's facts. Do not assume that every folio receives identical treatment.

Where a holding is treated as PFIC stock, Form 8621 may be required. The IRS lists several triggers, including certain distributions, a gain on disposition, a qualified electing fund or mark-to-market election, and annual reporting under section 1298(f). A separate Form 8621 may be needed for each PFIC.

The default PFIC regime can allocate part of an excess distribution or gain to earlier holding years and add an interest charge. Elections may exist, but they have eligibility rules, timing consequences and information requirements. An Indian AMC may not provide the annual information needed for a qualified electing fund election. A mark-to-market election is limited to qualifying marketable stock.

This is why selling every Indian fund immediately after discovering the issue can make matters worse. A redemption or switch may itself be a disposition. Review the acquisition dates, cost, distributions and past US filing status before acting.

4. Form 8621 is not the only possible US filing

Three reporting systems are easy to mix up:

• Form 8621 deals with PFIC interests and related elections or events.
• Form 8938 reports specified foreign financial assets when their total value exceeds the threshold applicable to the taxpayer and filing status.
• FBAR, filed as FinCEN Form 114, generally applies when the aggregate value of reportable foreign financial accounts exceeds $10,000 at any point in the calendar year.

These forms do different jobs. Filing one does not automatically eliminate the others. Form 8938 contains coordination rules for assets reported on forms such as Form 8621, but the taxpayer still has to follow its instructions. The FBAR is filed separately from the income-tax return.

Your Indian bank accounts, brokerage accounts and mutual fund holdings should be reviewed together. The threshold tests often use the combined value of foreign accounts or assets, not one account at a time.

5. India can still tax the investment

Changing residence does not erase Indian tax. A redemption can create Indian capital gains, and an AMC may deduct tax at source from an NRI redemption. The amount withheld is not always the final tax liability.

A US resident alien who reports the same foreign-source income in the United States may be eligible for a foreign tax credit, subject to US rules and limits. Keep the Indian capital-gain statement, tax-deduction certificate, account statement, purchase history and exchange-rate records. The calendar year used for a US return and the Indian financial year do not line up, so clean transaction-level records matter.

Do not assume the India-US tax treaty cancels the reporting forms. Treaty relief, foreign tax credits and information reporting are separate questions.

6. A six-step review before the next transaction

• Determine your US tax residency and residency start date for every year since moving.
• Download a consolidated list of Indian folios, purchase dates, costs, distributions, switches and redemptions.
• Update NRI KYC, FATCA declarations, contact details and the bank mandate on every folio.
• Ask a US-India tax professional to classify each fund and identify any Form 8621, Form 8938 or FBAR obligation.
• Reconcile Indian tax withheld with the income and foreign tax credit reported in the United States.
• Review the consequences before redeeming, switching or restarting an SIP.

Bring the adviser data, not screenshots alone: fund legal name, scheme and plan, folio number, acquisition history, year-end value, highest account value, distributions, sale proceeds, Indian tax withheld and the account through which the investment was funded.

For many H-1B households, the difficult part is not whether an Indian mutual fund can be held. It is reconstructing the records after several US tax years have passed. Do the classification and filing review before the next transaction creates another reporting event.

This article is general educational information, not individual tax, legal or investment advice. Cross-border treatment depends on residency dates, ownership structure, fund classification, elections, account values and filing history.

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Questions

Can an H-1B holder keep Indian mutual funds?

Yes. AMFI says NRIs may invest in Indian mutual funds, subject to the relevant fund's offer documents and the AMC's process. The investor should update NRI KYC, FATCA details and the linked bank account.

Does an H-1B visa automatically make me a US tax resident?

No. US tax residency is determined separately, commonly through the substantial presence test. H-1B holders generally count their US days, but exceptions and dual-status rules may apply.

Is every Indian mutual fund automatically a PFIC?

Do not assume one answer covers every fund. PFIC treatment depends on US tax classification and the facts of the holding. A qualified cross-border tax adviser should review each scheme.

Do I file Form 8621 if I did not sell the fund?

Possibly. The IRS lists annual reporting and certain elections as filing triggers in addition to distributions and gains on disposition. Exceptions may apply.

Does filing an FBAR replace Form 8938 or Form 8621?

No. The forms serve different purposes and have different tests. Review all foreign accounts and assets together.

Should I redeem my Indian funds before filing US taxes?

Not without advice. A redemption or switch may create Indian tax and a US PFIC disposition. Review the holding and filing history before transacting.

Sources

1. IRS: H-1B tax residency and filing requirements
2. IRS: Form 8621
3. IRS: Instructions for Form 8621
4. IRS: Form 8938
5. FinCEN: FBAR filing requirements
6. AMFI: NRI mutual fund eligibility
7. RBI: Accounts in India by non-residents
8. RBI: NRI and OCI investment rules

Compound is analysis, not investment advice. Reva Money is not a SEBI-registered investment adviser.