Confused about PFIC rules for Indian NRIs in USA? Learn how PFIC affects your Indian mutual funds, tax filing, and smart alternatives to avoid penalties.

If you’re an NRI living in the US and investing in Indian mutual funds or other foreign assets, then you might have come across a scary term called PFIC or Passive Foreign Investment Company. Many NRIs panic when they hear this, mainly because of the complex taxation and reporting rules around it. In this article, I’ll break it down for you in simple terms so that you know what PFIC is, how it affects you as an NRI, and what steps you can take to handle it smartly.

PFIC Rules for Indian NRIs in USA: Tax Impact & Solutions

What is PFIC?

PFIC stands for Passive Foreign Investment Company. It is a concept under the US Internal Revenue Code (IRC Section 1297). This rule was introduced to prevent US taxpayers from deferring tax or converting ordinary income to capital gains through foreign investments that generate passive income.

So, what exactly qualifies as a PFIC?

A foreign (non-US) company is considered a PFIC if it meets either of the following conditions in a tax year:

1. Income Test: 75% or more of the company’s gross income is passive income (like interest, dividends, capital gains, rents, royalties).
2. Asset Test: 50% or more of the company’s assets produce or are held to produce passive income.

Why Should NRIs in the US Care About PFIC?

Let’s say you are an NRI living in the US and you are investing in Indian mutual funds, ETFs, or ULIPs. From the US tax perspective, many of these investment instruments qualify as PFICs.

This means:

• The IRS considers these investments as tax shelters, and
• You will be subject to punitive taxation rules and mandatory filing requirements.

Common Indian Investments That May Be Considered PFICs

• Mutual Funds (equity, debt, or hybrid)
• ULIPs (Unit Linked Insurance Plans)
• Exchange Traded Funds (ETFs)
• REITs or Infrastructure Investment Trusts (InvITs)

This is because most of these funds are registered as foreign corporations in India and earn passive income. Hence, under PFIC rules, they become taxable under special rules in the US.

How is a PFIC Taxed in the USA?

If you hold a PFIC, you have three options for reporting and taxation under the US tax law:

1. Default Taxation (Excess Distribution Method) – Most Penal

• Under this method, any gains from the sale or income (dividends) from PFIC are taxed at the highest marginal tax rate applicable in the year the income is recognized.
• The IRS applies interest charges as if the income had been earned and untaxed over several years.
• This is extremely punitive and complicated.

Example: You sold an Indian mutual fund with Rs.5 lakh gain. Instead of long-term capital gains (20% in India), IRS may tax it as if you earned Rs.1 lakh each year over 5 years and didn’t pay tax — and add interest.

2. Qualified Electing Fund (QEF) Election

• You must obtain annual information from the PFIC to declare your share of income and capital gains.
• This election is rarely practical because Indian mutual fund houses don’t provide QEF statements or financial data in the required IRS format.
• Hence, for most NRIs, this option is not feasible.

Problem: No Indian mutual fund (SBI, HDFC, ICICI, etc.) provides these QEF statements. So, this is not practical for Indian investors.

3. Mark-to-Market (MTM) Election

• If you elect this method, you declare annual unrealized gains/losses based on the fair market value of your investment at year-end.
• Gains are taxed as ordinary income, while losses are allowed to the extent of prior-year gains.
• However, this is applicable only for publicly traded PFICs (which most Indian mutual funds are not).
• Again, not practical for most Indian investments.

Problem: Most Indian mutual funds are not traded on US-recognized exchanges, so this method is unavailable for most NRIs.

Bottom line: For most NRIs investing in Indian mutual funds, taxation under the default PFIC rules applies — which is the most complex and harsh.

Reporting Requirements: Form 8621

If you are a US person (citizen or resident alien), and you own PFICs directly or indirectly, you are required to file Form 8621 along with your US tax return.

• One form is required per PFIC investment per year.
• If you hold multiple mutual funds, you’ll need to file multiple forms (If you hold 10 mutual funds, you need 10 forms.)
• Even if you didn’t sell or earn anything, you still have to report.
• No minimum threshold — even a Rs.10,000 investment is reportable.
• Missing this form can keep your entire tax return open for audit forever.
• Failing to file Form 8621 can result in penalties, delays in tax processing, and extended audit windows.

Many tax preparers charge high fees (CPA costs: $100 to $300 per form — which adds up quickly!)to file Form 8621 because of its complexity. If you don’t file it correctly, you might end up with IRS scrutiny or overpaying taxes.

Practical Examples for Indian NRIs

Let’s make it real with a simple example.

Scenario:

• You moved to the US in 2022 on H1B.
• You already had Rs.20 lakhs in Indian mutual funds (5 different schemes).
• You didn’t sell anything in 2022.
• You think there’s no tax — but that’s wrong.

IRS says:

File 5 Forms 8621 for each mutual fund.

You may owe tax if the fund paid dividends or showed gains.

Even unrealized gains may be taxed under the default method.

Not filing = Audit risk + Penalties.

Latest Developments and IRS Guidance (As of 2024-2025)

Here are the emerging PFIC-related developments and enforcement trends you must know as an NRI:

1. Increased IRS Scrutiny Under FATCA & CRS

The IRS is using data shared under FATCA (Foreign Account Tax Compliance Act) and Common Reporting Standards (CRS) to identify foreign investment holdings of US residents. NRIs with undeclared mutual funds or ULIPs are increasingly at risk of:

• Audits
• Penalties for missed filings (especially Form 8621, FBAR, Form 8938)

Even if you have no taxable gain, not filing Form 8621 when required may leave your entire return open to audit indefinitely.

2. Tax Software Integration Still Lags

Though platforms like TurboTax and H&R Block now flag PFICs, they don’t support Form 8621 directly. Many NRIs are being forced to file via CPAs or manually using fillable PDF forms.

This increases the cost of tax preparation, often:

• $100–$300 per Form 8621 per fund per year

If you have 10 Indian mutual funds, your filing cost alone may run into thousands of dollars.

3. No Indian Mutual Fund AMC Offers QEF Reporting

A Qualified Electing Fund (QEF) election is the most tax-friendly way to handle PFICs — but it requires specific annual disclosures from the fund (income, capital gains, etc.) in IRS format.

As of 2025:

• No Indian AMC (SBI, HDFC, ICICI, etc.) provides QEF statements.
• So QEF election is not possible.
• You’re left with Default or Mark-to-Market (MTM) — both tax-heavy.

4. Mutual Fund Units May Be Deemed Sold Even Without Selling

If you make a gift, switch plans (from regular to direct), or transfer funds between AMCs, it may be treated as a “constructive sale” for US tax purposes, triggering PFIC taxation.

5. IRS Watch on Cryptocurrency and PFIC Overlaps

Some Indian crypto-based ETFs and structured notes are beginning to emerge, which also fall under PFIC classification. Expect tighter rules and tracking on:

• Crypto-linked funds
• Hybrid products combining equity + crypto

Indian Investments That Are NOT PFICs

Investment Type	PFIC Status	Reason

Direct Indian Stocks (Equity)

Not PFIC

You own the company directly — not pooled funds.

NRE/NRO/FCNR Bank Deposits

Not PFIC

Fixed deposits, not investment companies.

Government Bonds (G-Secs, SDLs, T-Bills)

Not PFIC

Issued by Govt. of India.

PPF / EPF

Not PFIC

Government retirement schemes, not pooled funds.

Sovereign Gold Bonds (SGBs)

Not PFIC

Issued by RBI.

Traditional LIC Plans (non-ULIP)

Not PFIC

Treated as insurance, not investment pool.

Direct Real Estate (Physical property)

Not PFIC

Not a fund; you directly own the asset.

Indian Investments That ARE PFICs

Investment Type	PFIC Status	Reason
Indian Mutual Funds (Equity/Debt)	PFIC	Pooled funds earning passive income.
ULIPs (Investment-linked plans)	PFIC	Treated as investment companies by IRS.
ETFs by Indian AMCs	PFIC	Corporate structures generating passive returns.
REITs/InvITs	PFIC	Structured like companies, distribute passive income.
AIFs (Cat I & II)	PFIC	Investment fund nature.
Portfolio Management Services (PMS)	PFIC	Usually pooled — treated like PFICs.

What Are Your Options as an Indian NRI in the USA?

Option 1: Avoid PFICs Altogether

• If you are planning to stay in the US long term, it’s simpler to avoid Indian mutual funds.
• Invest in US-based India-focused ETFs (like INDA, EPI).
• These are not PFICs, easier to report, and have lower tax headaches.

Option 2: Shift to Non-PFIC Indian Assets

Consider moving your investments to:

• Direct Indian stocks (e.g., Reliance, TCS).
• NRE/NRO FDs – though interest is taxable, they’re not PFICs.
• Government bonds – G-Secs, T-Bills, or RBI Floating Rate Bonds.
• SGBs – offers gold exposure without PFIC classification.

Caution: Selling existing PFICs may trigger taxes — consult a tax expert first.

Option 3: Retain PFICs But File Diligently

If you prefer to hold Indian mutual funds:

• Budget for annual CPA filing costs.
• File Form 8621 properly.
• Understand that taxation will be harsh (especially on gains).

Common Mistakes NRIs Make

Thinking PFIC rules apply only when you sell – Wrong.

Skipping Form 8621 due to small balances – Wrong.

Gifting Indian mutual funds to avoid PFIC – May trigger “constructive sale.”

Believing ULIPs are exempt – Wrong, IRS treats them as PFICs.

Ignoring older Indian investments – IRS looks at current holding, not purchase date.

Frequently Asked Questions (FAQs) – PFIC for NRIs in the US

1. Does PFIC apply to investments made before moving to the US?

Yes, it can apply, and this is where many NRIs get caught off guard.

• The IRS does not care when or where you invested. If you’re now a US tax resident, all your global investments — including those made in India before moving — must be reported as per US tax laws.
• So, even if you invested in Indian mutual funds 5 years ago, and moved to the US last year, you may still need to:
  • File Form 8621 for each mutual fund (or PFIC) you continue to hold.
  • Report income, gains, and even unrealized gains, depending on the PFIC method applied.

Example: You bought Rs.10 lakhs of mutual funds in 2020 while in India. In 2024, you move to the US. From the day you become a US tax resident, any gains or income generated are taxable in the US, and PFIC rules kick in — even if you didn’t sell.

2. What if I never sold my Indian mutual funds? Do I still need to report them?

Yes. Just holding a PFIC like an Indian mutual fund requires reporting.

• Whether or not you sell, you must file Form 8621 every year.
• There’s no de minimis threshold — even small balances are reportable.

Skipping the filing can leave your entire US tax return open for audit indefinitely.

3. Can I avoid PFIC by investing through a US-based brokerage in Indian ETFs?

Yes. Many NRIs prefer using US-domiciled ETFs (like iShares MSCI India ETF – INDA or WisdomTree India Earnings Fund – EPI) that provide exposure to Indian markets.

• These are not PFICs, as they’re structured under US tax laws.
• Gains and dividends are treated like any other US investment — simpler reporting and lower tax impact.

4. Can I gift or transfer Indian mutual funds to family members in India to avoid PFIC filing?

Technically yes, but it’s not that simple.

• A gift or transfer is often considered a “constructive sale” by the IRS, triggering PFIC taxation.
• You may owe taxes as if you sold it at fair market value, even if you didn’t receive any money.
• Always consult a cross-border CPA before doing this.

5. Is a ULIP still a PFIC if it has an insurance component?

Yes. Even though ULIPs are marketed as insurance in India, they’re treated as investment funds by the IRS if they:

• Don’t meet US insurance definitions, or
• Accumulate passive investment income

ULIPs are almost always treated as PFICs unless structured carefully — which Indian insurers don’t usually do with US compliance in mind.

6. Can I switch from Regular to Direct Plan in mutual funds without triggering PFIC taxes?

Unfortunately, no.

• Any switch is considered a sale and a new purchase.
• The IRS may treat it as a disposition of PFIC shares, triggering taxation under the default PFIC method (which can be quite punitive).

7. I’ve held Indian mutual funds for over 10 years. Should I sell them now?

Selling PFICs may be wise to avoid future complexities, but:

• The act of selling triggers PFIC tax rules if done while you’re a US resident.
• It’s best to do a PFIC impact analysis with a tax advisor.
• You may explore electing the Mark-to-Market method (if eligible), which taxes gains annually instead of on sale — sometimes simplifying the burden.

8. Can I use the QEF method to report Indian mutual funds?

No — at least, not practically.

• The QEF (Qualified Electing Fund) method is the most tax-friendly PFIC reporting method.
• But it requires annual statements from the fund in a format that complies with IRS rules.
• No Indian AMC provides these — so QEF is not available for Indian mutual funds today.

9. Is EPF or PPF considered PFIC?

No.

• EPF and PPF are government-backed retirement schemes, not pooled passive investment companies.
• However, the interest earned is taxable in the US (even if tax-free in India).
• You may still need to report them under FBAR or FATCA if balances exceed thresholds.

10. What happens if I don’t report my PFICs to the IRS?

There are serious risks:

• IRS may impose penalties for non-disclosure, especially for high-value assets.
• You may lose eligibility for statute of limitations — i.e., your entire tax return stays open for audit indefinitely.
• Future green card or citizenship processes may be affected by tax non-compliance.

Filing even a zero-dollar Form 8621 can protect you from these consequences.

What About NRIs in Other Countries?

The PFIC rule is only applicable to US tax residents or citizens. If you are an NRI living in UAE, UK, Singapore, Australia, etc., then PFIC does not apply to you.

However, each country may have its own tax rules for foreign investments. For example:

• UK has its own reporting fund regime.
• Australia taxes foreign mutual funds differently.

But PFIC rules are unique to the United States — and infamously complex.

The PFIC rule is one of the most complicated tax regulations faced by NRIs in the US. If you are investing in Indian mutual funds or similar instruments, you are very likely dealing with PFICs — which means higher taxes, complex filings, and more compliance.

It is not illegal to invest in PFICs, but you must be careful about reporting them correctly and understanding the tax consequences.

As a fee-only financial planner, my advice is always to simplify your financial life. If the costs and compliance burden of PFIC rules outweigh the returns, then it may be better to explore US-domiciled alternatives or direct investments in India that do not fall under PFIC classification.

When in doubt, always consult a qualified cross-border tax expert.

Conclusion – If you are an Indian NRI living in the US, dealing with PFIC rules can be confusing and stressful. The IRS treats many common Indian investments like mutual funds, ULIPs, ETFs, and REITs as PFICs — which means more paperwork, higher taxes, and extra costs. But don’t worry — you can still manage it smartly. Once you understand which investments are considered PFICs and how they are taxed, you can make better decisions. Instead of mutual funds or ULIPs, you can choose simpler options like direct Indian stocks, NRE bank deposits, or US-based ETFs that invest in India — these are easier to manage and don’t fall under PFIC rules. You don’t have to stop investing in India completely. Just plan it carefully based on your current country of residence and tax rules. It’s always wise to take help from a cross-border tax expert and a fee-only financial planner who understands both US and Indian rules. With the right guidance, even complicated rules like PFIC can be handled smoothly and won’t come in the way of your financial goals.

This article is a continuation of our initial story on launching FinMasters and spending $477,924 to do so, make sure you read that one first for context. Here’s an overview of what I intend to discuss:

• An update on what we did for the past 18 months
• Google & publishers
• What went wrong? If anything? #

But why even write this in the first place?

There is a lot of misleading content about what it takes to build an online business, very little on this particular scale, and even less so about bad bets.

FinMasters journey

The last report ended with those 2 scenarios: 

• Downscale and keep the loss to a minimum while hoping that there will be some growth later on.
• Continue to double down on the good things and extend the timeline by one more year while committing $150,000 more to the project.

The traffic looked like this:

It’s not hard to guess that we chose the second option. We continued with what we have been doing, working with the most reputable and knowledgeable writers we can afford to hire, both for the site and for our freemium newsletter: and we ended the year generating around $7,000 per month in affiliate revenue.

We were still struggling to get any traffic for general personal finance topics due to a lack of authority, so we decided to continue building our library of content, while at the same time introducing two new types of articles:

1. Write the best research posts possible, e.g. https://finmasters.com/consumer-debt-statistics/, the best data available & best presentation, to differentiate ourselves.
2. Fun, easier, and cheaper to produce articles, like: https://finmasters.com/weird-jobs-that-pay-well/, which would give us short & medium-term gains, until we build out authority. We decided to work with an agency on those and edit in-house.

We’ve continued to invest in marketing as well, we started doing more PPC to promote our new research posts here is our traffic from November 2022:

Financially, towards the end of 2022, we were losing around $15,000/month, but the traffic was growing. We continued with the same strategy in 2023, but it was more about execution, without trying a lot of new things. Milica who managed the project moved to manage all our media projects.

We also acquired a smaller site on Flippa on a topic dear to me, logical fallacies: fallacyinlogic.com, if you want to read more about fallacies: https://finmasters.com/logical-fallacy/.

Here is what our costs looked like for 2023:

While the traffic was growing, our revenue was not, to continue growing more sustainably, we decided to experiment with display ads and join Raptive.

Right before joining Raptive, we had our first “surprise”, Google HCU came and we lost around 30% of the traffic, 2 weeks later, another update came and we lost another 30%, here is the chart again:

I was honestly surprised by the October update, which affected almost all our sites and was something that I haven’t seen happening in the past 13 years, Google specifically hitting sites that engage in affiliate marketing, no matter their history and reputation. For E.g. WPBeginner, which is the oldest and largest WordPress site, based on Ahrefs lost around 20+% of the traffic as well.

Pretty much all our affiliate income was gone and what we thought would be around $6,000/month in ads revenue, turned out to be $2,000. I was on my 3 months sabbatical, and I think in a bit of a shock, not recognizing nor accepting the new reality.

I think it took me maybe 6 more months to accept the new reality, for some time I was just thinking that this was a temporary thing and things would turn around. As I look at it now, is maybe the situation from 2-3 years ago that was atypical in terms of how good we’ve been doing.

Before coming back to our story, let me share my answer to the question: is Google hating small publishers?

No, Google is just simply serving its users, employees, and shareholders as always; it’s also aiming to maintain competitiveness in search against other information sources. 

For a long time, Google had a lot of unique but incomplete content, with bloggers sharing random thoughts on their sites, comments, and forums, and they encouraged long-form, in-depth content summarizing that information. However, now they don’t need that anymore. This is because they already have too much similar content, and AI can now effectively digest and summarize a thousand unique viewpoints. What Google truly needs now is to bring back the internet from 15 years ago – forums, discussions, and comments.

Now let’s get back to our story and what we decided to do further:

Focus on what you can control

Since we can control only our content and how users engage with it, we worked on coming up with multiple data points to figure out what articles need improving, besides bounce rate, we measure how many users and how long users are scrolling, if they click any resources or if they hit the back button.

On top of that, we run various user tests like: https://www.codeinwp.com/blog/content-quality/, to get more qualitative data on how we can improve UX on the sites.

Based on those we had our whole content team do a round of quick updates, particularly making sure the intros are more useful to users.

While our content engagement numbers improved, the traffic didn’t follow.

What we should be doing now?

Currently, as I’m writing this, there’s another significant Google update in progress. It seems we’re facing another -25% drop in traffic. However, given how far we’ve diverged from our original plans, this decline doesn’t affect our current strategy much.

Our immediate plan is to maintain our content library at a minimum level. Additionally, we’re considering splitting the site into two parts, with our investment-focused content moving to a new site. This move should make it easier for us to establish a more specialized brand, especially since we already own optionistics.com in this domain.

Overall, we’ll need to review our entire publishing approach, is still early to tell about the changes we’ll make.

What went wrong? If anything?

I believe decisions shouldn’t be judged solely in hindsight with a bias. A good decision might lead to a bad outcome, but what matters more to me is the process behind it. It’s easy to label it a bad idea now, considering we’ve lost about 90% of our investment. However, to evaluate it properly, I would revisit my initial thesis.

“Heads I win; Tails I don’t lose much.” This is the principle which guided my assessment of this investment. I reasoned that by investing in high-quality content, even if we didn’t achieve the desired return, the downside would be limited, while there was a slim chance for a significant upside.

In hindsight, we’re far from experiencing minimal losses. Reflecting on what could have been done differently, I realize that overconfidence was likely the biggest mistake. I relied too heavily on past success in our content business, without adequately adjusting to the current market conditions.

A question that I failed to ask for some time, especially when approaching the personal finance niche, where there is a huge amount of content written: What we’re bringing new & unique to what’s already there? The answer is that honestly, very very little.

While I was aware that market dynamics would change, I underestimated the urgency, assuming the window of opportunity was wider than it was.

Confronting past mistakes isn’t enjoyable, and in the past, I often avoided it by not even measuring our efforts in the first place. However, now that we do it, there’s no reason not to seize the opportunity for reflection.

For context, since I don’t want the post to sound like a complaint, we’re still running a profitable company, we didn’t rely on external funding for this venture. FinMasters represented a significant but not the largest portion of our investments, accounting for roughly 20%.

We’re still looking to acquire online businesses, if you’re interested in doing so, here is how we’re different:

We come up with a fair contract for both buyer & seller, without unnecessary restrictions, and we’re transparent with what are the prices we usually pay, those can still vary a lot, but for non-growing businesses is between 3-4x yearly revenue.

You’ll not be dealing with a layer of assistants, you can email me directly at [email protected] and have an answer in a day. We can usually close in around 2 weeks. We are not asking for a million things that we can usually find ourselves.

Some products will grow, some will stay as they are, and some will die, but in all cases, we’ll be trying to find the best solution for the existing users and do the best we can to not cause damage to the work you’ve done.

A lot of people trusted us with their projects so far and we’re happy to provide references. We acquired products like PPOM, Multi Page Generator, Optionistics, imgbot.net, and http://blog.cathy-moore.com. Usually, people who want to move on to other things.