PFIC stands for Passive Foreign Investment Company — a US tax classification, not an Indian one. It applies to a foreign entity (from the IRS’s point of view, “foreign” means outside the US) when US tax law classifies it as a company and 75% or more of its gross income is passive, or at least 50% of its assets, on average, produce passive income. Indian mutual funds fall squarely into this category from the IRS’s perspective, because a mutual fund’s whole business is holding and trading securities — pure passive income and assets. Some Indian insurance-linked investment products can be caught too.
This matters specifically to US persons — US citizens, green card holders, and others who count as US tax residents — who also hold Indian mutual funds or similar investments. It has nothing to do with how India taxes the same fund; it’s an entirely separate, parallel US tax and reporting regime that sits on top of whatever India charges.
Why it catches people by surprise
Many NRIs living in the US keep mutual fund investments they held before moving, or start new ones through family in India, without realising the funds are treated as PFICs on their US return. The consequences are two-fold:
- Extra reporting. US persons who hold PFIC investments generally have to file additional forms with their US return for each fund, every year, regardless of whether they sold anything. There’s an exception: if all your PFIC holdings together are worth USD 25,000 or less on the last day of your tax year (double that on a joint return), you needn’t file for a fund that has no election, and from which you had no excess distribution or gain on a sale that year. Once you make an election for a fund, the exception no longer covers it.
- Harsher taxation. Depending on which election (if any) is made, gains and certain distributions from a PFIC can be taxed less favourably than an equivalent US investment would be — sometimes with an interest charge on top, calculated as if the gain had built up evenly over the years you held it.
What to do about it
Our guide to Indian mutual funds and PFIC works through the tax on a sale, with an estimator for your own figures. The right approach — which election to make, and when — depends on your specific funds, how long you’ve held them, and your broader US tax picture, and it’s not something to guess at. If you’re a US person who holds or is about to buy Indian mutual funds, talk to a CPA or Enrolled Agent experienced with PFICs before you buy, not after you’ve already built up gains, since some elections work best made in the year you first acquire the investment.
Also called: Passive Foreign Investment Company