If you are a US tax resident (citizen, green card holder, or on an H-1B or L-1 long enough to meet the substantial presence test) and you still hold Indian mutual funds, the IRS almost certainly treats each of those funds as a PFIC: a Passive Foreign Investment Company. That one label changes how your gains are taxed and adds a separate form, Form 8621, for each fund. This guide explains the rules as they stand for the 2026 tax year, using the current Form 8621 and its instructions (Revision December 2025).
To see what the default PFIC rules could cost on your own holdings, try the PFIC tax calculator alongside this guide.
What Is a PFIC?
A foreign corporation is a PFIC if it meets either of two tests for its tax year:
- Income test: 75% or more of its gross income is passive income (dividends, interest, capital gains and similar).
- Asset test: at least 50% of its assets, on average, produce passive income or are held to produce it.
The rules date from 1986. They were written to stop US investors from parking money in offshore funds to defer US tax. An Indian mutual fund is a pool of shares, bonds or gold that earns almost nothing but passive income, so it meets the tests easily. Equity, debt, hybrid and index funds all qualify, and so do Indian-listed ETFs and gold ETFs. In practice, almost every Indian pooled fund is a PFIC for a US person.
What is not a PFIC: shares of individual Indian companies (say, TCS or HDFC Bank held directly) are ordinary foreign stock. NRE and NRO fixed deposits are bank deposits. Their dividends, gains and interest are taxable in the US in the normal way, but they do not go on Form 8621.
Who Must File Form 8621
A US person who directly or indirectly holds a PFIC generally files Form 8621 for a tax year if they:
- receive certain distributions from the PFIC;
- recognise a gain on selling or otherwise disposing of PFIC units;
- are reporting under a QEF or mark-to-market election;
- are making an election on the form; or
- must file the annual report required by section 1298(f).
A separate Form 8621 is needed for each PFIC. Four Indian funds means four forms.
The $25,000 / $50,000 exception
You do not have to file the annual report for a fund under the default regime (a "section 1291 fund") if, on the last day of your tax year, the total value of all your PFIC holdings is $25,000 or less ($50,000 or less on a joint return) and you received no excess distribution from that fund and did not sell any of it during the year. The exception does not cover funds under a QEF or mark-to-market election: those are reported every year. Smaller holdings held indirectly have a separate $5,000 exception.
How long it takes
The IRS's own estimate of the burden is about 49 hours per Form 8621: 16 hours 58 minutes of record-keeping, 11 hours 24 minutes learning about the law or the form, and 20 hours 34 minutes preparing and sending it. Even with a CPA doing the work, fees add up quickly across several funds.
The Three PFIC Tax Regimes
US taxpayers can choose (or default into) one of three regimes for each PFIC they hold. The choice is per fund and is best made in the first year of holding; later elections are possible but need a deemed-sale (purging) election or special coordination rules.
1. Excess distribution regime (section 1291, the default)
This applies if you do nothing. When you sell, or receive a distribution that is more than 125% of the average you received in the previous three years, the gain or "excess distribution" is spread evenly over every day you held the fund. Then:
- the slice for the current year, and for any years before the fund was a PFIC for you, is taxed as ordinary income at your normal rate, with no interest;
- the slice for each earlier year is taxed at the highest individual rate in force for that year (37% for 2018 to 2025 and in 2026; 39.6% for 2013 to 2017), whatever your actual bracket was;
- interest is added on each earlier year's tax, as if you had paid it late, using the IRS underpayment rates (between about 3% and 8% a year from 2017 to 2026).
No long-term capital gains rate applies, and losses get no special benefit. For a long-held fund with good growth, the effective federal rate is typically 40-65% (about 43% at 5 years, 46% at 8 years and 61-64% at 15 years in our model), before any state tax.
One point that matters to people who moved from India: under proposed regulations, days you held the fund before you became a US person are treated as non-PFIC days, so gain allocated to them is taxed at your ordinary rate without interest. Ask your CPA how this applies to units you bought while living in India.
2. Qualified electing fund (QEF): rarely available
Under a QEF election you include your share of the fund's ordinary earnings and net capital gains in income each year, keeping capital gains character. The catch: the fund must give you a PFIC Annual Information Statement in the US format. In practice Indian AMCs do not provide one, so QEF is rarely an option for Indian mutual funds.
3. Mark-to-market (MTM) election
Each year, you treat your PFIC as if you sold it on Dec 31 and re-bought it on Jan 1. Any gain in value that year is ordinary income (up to 37% federal). Any decline is deductible only up to the MTM gains you included in earlier years. No interest charge, no back-loading of tax. Made via Form 8621, ideally in the first year of holding. It is available only if the units count as marketable stock; Treas. Reg. §1.1296-2(d) can treat NAV-redeemable foreign funds such as many Indian mutual funds as marketable if its conditions are met, so confirm with your CPA.
If you make the MTM election in a later year, the fund is treated as sold at market value at the end of that first election year, and that gain is taxed under the default excess distribution rules. From the following year, normal MTM applies. The trade-off of MTM is that you pay tax every year on gains you have not cashed, with no long-term capital gains rate.
| Regime | How gains are taxed | Interest charge | Practical for Indian funds? |
|---|---|---|---|
| Excess distribution (default) | Spread over holding period; earlier years at the top rate | Yes | Applies automatically |
| QEF | Annual share of earnings; capital gains keep their character | No | Rarely: AMCs don't issue the statement |
| Mark-to-market | Annual change in value as ordinary income | No (after the first election year) | Often, if the fund meets the marketable-stock rules |
Worked Example: Default Regime vs MTM
Illustrative only, using simplified assumptions. Rohan moved to Seattle in 2020 but continued his Indian SIP into Motilal Oswal Nasdaq 100 FoF. By 2026, he's invested $50,000 (about ₹48L at ₹96/$) and the current value is $95,000 (about ₹91L). His 5-year gain: $45,000 (simplified: in reality each SIP instalment has its own holding period).
If he sells under the default regime
- The $45,000 gain is spread evenly: $9,000 for each of five years.
- Four earlier-year slices at 37%: 4 × $9,000 × 37% = $13,320.
- Interest on those amounts at the IRS underpayment rates, compounded: about $2,500.
- Current-year slice at his ordinary rate of 24% to 37%: $2,160 to $3,330.
- Total: about $18,000 to $19,000 on a $45,000 gain (about 40-43% effective): four prior-year slices at 37% plus interest, and the current-year slice at his ordinary rate.
If he had elected MTM in the first year
- Each year's rise in value is taxed as ordinary income in that year.
- At an average federal rate of around 30%, the total over five years is roughly $13,500 to $15,000.
- No interest charge, and no big bill at the end.
The MTM path saves roughly $3,000-5,500 vs default on a $45K gain over five years, and the gap widens the longer you hold. That is why MTM, where available, is usually the cheaper election for US-resident Indians who insist on holding Indian mutual funds. For comparison, the same $45,000 gain on a US-listed fund held more than a year would be taxed at the long-term capital gains rate, 15% for most people in the 24% bracket ($6,750), before any net investment income tax. Run your own numbers in the PFIC tax calculator.
Form 8621, Part by Part
Form 8621 is four pages. You complete only the parts that apply to the fund and the regime:
| Part | What it covers |
|---|---|
| Top of form | Your details, the fund's name, address and reference ID, and the tax year |
| Part I: Summary of Annual Information | Class of shares, date acquired, units held and value at year end (lines 1 to 4), and the type of PFIC and amounts of any income, gain or excess distribution (line 5). Year-end statements from the AMC can generally be used for value. |
| Part II: Elections | Boxes to make elections: A (QEF), B (defer QEF tax), C (mark-to-market), D and E (deemed sale or deemed dividend when moving into QEF), and others |
| Part III: Income From a QEF | Your share of the QEF's ordinary earnings and net capital gain |
| Part IV: Gain or (Loss) From Mark-to-Market Election | Year-end value minus adjusted basis (lines 10a to 10c), losses limited to earlier inclusions, and sales of MTM units (lines 13 and 14) |
| Part V: Distributions From and Dispositions of Stock of a Section 1291 Fund | The excess distribution test (lines 15a to 15e) and gain on sale (15f); the allocation over your holding period, the deferred tax, foreign tax credit and interest (lines 16a to 16f). New for this revision: a currency code above line 15a and a US-dollar figure on line 15e(2). |
| Part VI: Status of Prior Year Section 1294 Elections | Only for people who deferred QEF tax under Election B |
A fund under MTM typically needs Parts I and IV. A default-regime fund you sold needs Parts I and V. The tax worked out on line 16e goes on your Form 1040 as additional tax, and the interest from line 16f is added as well; see the line instructions for exactly where.
Deadlines and What Happens If You Don't File
Form 8621 is attached to your Form 1040 and filed by the return's due date, including extensions. For most people that is mid-April, or October 15 with an automatic extension on Form 4868. An extension gives you more time to file, not to pay. If you have no return to file, Form 8621 goes on its own to the IRS Service Center in Ogden, Utah.
The biggest risk of not filing is open-ended exposure. Under section 6501(c)(8) of the Internal Revenue Code, when information required under section 1298(f) is not furnished, the time for the IRS to assess tax on the related return does not run out until three years after you provide it. If the failure was due to reasonable cause and not wilful neglect, only the items related to the failure stay open. If you have held Indian funds without filing, speak to a CPA before doing anything else.
FBAR, Form 8938 and FATCA
PFIC filing is separate from the two general foreign-account reports, and holding Indian funds usually triggers those too.
- FBAR (FinCEN Form 114): required if the total value of your foreign financial accounts exceeds $10,000 at any time during the calendar year. NRE and NRO accounts and mutual fund holdings count. It is filed with FinCEN, not the IRS, by April 15, with an automatic extension to October 15.
- Form 8938 (FATCA): filed with your tax return if your specified foreign financial assets exceed the thresholds below. Foreign mutual funds are reportable.
| Form 8938 filer | Last day of year above | Or at any time above |
|---|---|---|
| Living in the US, unmarried | $50,000 | $75,000 |
| Living in the US, married filing jointly | $100,000 | $150,000 |
| Living abroad, unmarried | $200,000 | $300,000 |
| Living abroad, married filing jointly | $400,000 | $600,000 |
Indian financial institutions also report accounts of US persons to the US under the FATCA agreement between the two countries, so "they won't know" is not a strategy.
Indian Tax and the DTAA
Selling Indian funds can also create Indian tax. Under Article 13 of the India-US tax treaty, each country taxes capital gains under its own law, so India taxes your redemption gains (for equity funds held over 12 months, 12.5% on gains above ₹1.25 lakh a year; 20% if held 12 months or less), usually by TDS. Indian tax may be claimable as a foreign tax credit on Form 1116 under the treaty's relief article. How that credit interacts with PFIC tax is technical: Form 8621 has its own foreign tax credit line (16d) for excess distributions, and its scope on sales is limited. Our India-US DTAA guide covers the credit mechanics; for PFIC sales, have your CPA model both countries' tax before you redeem.
Options US-Resident Indians Commonly Use
Hold India exposure through US-listed ETFs
US-registered ETFs that invest in India are not PFICs. They are taxed like any US fund and reported on a 1099, with no Form 8621.
| India exposure | US-listed fund | Ticker | Expense ratio |
|---|---|---|---|
| Broad India (large and mid cap) | iShares MSCI India ETF | INDA | 0.61% |
| India small cap | iShares MSCI India Small-Cap ETF | SMIN | 0.74% |
| India, earnings-weighted | WisdomTree India Earnings Fund | EPI | 0.84% |
Expense ratios as of 28 September 2026. These are examples of the category, not recommendations. Trade-offs: their costs are higher than Indian direct plans, they track MSCI or WisdomTree indices rather than the Nifty 50, and your returns include rupee-dollar movements (the rupee has weakened by roughly 3-4% a year against the dollar over the long run).
Keep non-PFIC Indian assets
NRE and NRO fixed deposits and directly held Indian shares are not PFICs. Interest and dividends are taxable in the US and reported in the normal way, and the accounts still count for FBAR and Form 8938.
Exit Indian funds in a planned way
Some people redeem their Indian funds over one or two tax years. Repatriate from your NRE account (repatriable holdings) or from NRO under the US$1 million per financial year facility, with the CA certificate and remittance forms your bank asks for; LRS is only for residents. Our guide to repatriating money from India walks through the paperwork. If you plan to keep investing in India while abroad, our NRI mutual fund guide explains the Indian rules.
Time things around a move back to India
If you plan to return, the RNOR window gives you about 2-3 years in which most foreign income stays outside Indian tax. Gains on Indian mutual funds are Indian-source income and stay taxable in India whatever your status, so RNOR matters more for timing the sale of your US holdings. See RNOR status and its tax benefits, and coordinate any PFIC exit with your US tax position and return date.
Special Cases
- ULIPs: the investment part is generally treated as a PFIC on top of the insurance part, which makes them especially awkward to report.
- EPF, PPF and NPS: whether these are PFICs is debated among CPAs and the IRS has not issued specific guidance. Some treat them conservatively as PFICs; others treat them as pension-type accounts. Agree an approach with your CPA and apply it consistently.
A Practical Checklist
- List every Indian pooled investment you hold: SIPs, lump sums, ETFs, ULIPs, PMS and AIF units.
- Check whether you have filed Form 8621, FBAR and Form 8938 in past years.
- Estimate your exposure with the PFIC tax calculator.
- Ask a CPA whether an MTM election is available for each fund, and what it would cost to make it now.
- Decide whether to hold, elect or exit, with Indian tax and repatriation in the plan.
This guide explains general rules and is not tax, legal or investment advice. PFIC rules are complex and depend on your facts, and cross-border rules change. Before acting, use a CPA experienced in US-India cross-border tax.