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Indian Mutual Funds reporting/taxes on US Tax Filings

Posted: Tue Jun 21, 2011 6:19 pm
by srikal
Hi

I have USC, OCI, working and residing in India for the past 3 years.

Last year (2010) I have purchased few Indian MF and towards the year end I sold them.

My US Tax filing company representative has communicated few things wrt to Indian MF report on US Tax filing, which made me un-believable, just want to confirm. Precisely this is what she mentioned:

- Within the FY 2010, provide the MF purchase date, NAV on the date of purchase, and year end NAV. You need to pay the tax on that (even if you have not sold).

Means, by just holding the Indian MF (and not selling), itself will force you to pay the tax on the gain.

(She said that though this is a paper gain or loss, until you really sell it. But you still need to pay the tax on it).

This appears astonishing to me.

Is she correct in saying that, you have to pay the tax for year end gains (even if that gain is paper gain)?

2nd issue:
________
I have not filed my Indian tax return for this year. If the gains are there I will be paying the tax to Indian Govt on the Capital Gains. Then I will have to pay the tax 2 times.

Is that right?

For that she said that, if you pay tax for Indian Govt in on the MFs Capital gain in 2011 to Indian Government, you may claim that back on 2011 tax filing with IRS, in the 2012.

Is she right?

(Also, Some of the mutual funds, based on the holding period, we may not pay the Indian tax at all to Indian Govt.. In that case, can I still go ahead and make a claim on 2011 US tax filing, when I do it in 2012)?


Please help me to understand this mistery and motive behind this US policy of paying taxes on unrealised Mutual Fund gains/losses.

Regards

Srikal

Indian Mutual Funds reporting/taxes on US Tax Filings

Posted: Tue Jun 21, 2011 7:07 pm
by greyfri
Yes, she is absolutely correct. You have to pay tax on any MTM gains for each year at your ordinary marginal tax rate. You can take MTM losses also, but only to the extent of "unreversed" MTM gains.

If you pay capital gains tax to India, you can claim a tax credit for that. If you do not pay capital gains tax because of holding period, you cannot claim a tax credit since you have not paid any tax directly to India.

This has to be done independently for each Mutual Fund. In your case, it seems like you bought and sold all in the same year, so its a simple calculation and you can take a tax credit against US taxes for taxes paid to India.

I'm not sure why the motive should matter to you, but the simple answer is that US mutual funds are required to pass on capital gains and dividends to holders who pay tax on them. But foreign mutual funds (like Indian mutual funds) have no such obligation. 'Growth' Indian Mutual funds can defer income essentially until sale even though the fund has embedded gains and dividend income. This would make a nice tax dodge as a way to defer income and to convert ordinary income into lower taxed capital gains. Congress did not want that, hence it gives you the choice of 3 rules:

1) The Mutual Fund Company can provide you with full details of your share of capital gains and dividends over the year and you can recognize them. No Indian MF is going to do that, so you can't use this method.
2) You can defer this income until sale (or until dividends are paid). But in that case, the taxation is extremely punitive. You had to pay tax for each year you held the MF at the highest marginal rate (35%) for that year AND an interest charge. And the calculation is incredibly complex.

3) The MTM method mentioned above.

Short Answer: Do not buy Indian MFs. Buy stocks directly.

Indian Mutual Funds reporting/taxes on US Tax Filings

Posted: Tue Jun 21, 2011 9:10 pm
by srikal
Thanks for taking time to explain the rationale and impact of buying Indian mutual funds.

has been buying stocks and mutual funds for quiet long time in US and never had this kind of scenario.

Yes, it is a concern to know the details of such rule - At an elementary level of paying tax for an unrealized gain or getting benefit of an unrealized loss occurred odd to me.

I was also under the impression that, as USC and living in India, it is better to buy Mutual Funds rather than stocks. Now I learn a different/new lesson here.

Now the question is, since you favoured buying stocks vs. mutual funds here, how stocks would different than that of Mutual funds - from US tax perspective?

Means
- can we buy stocks and report the same when we realized the loss/gain. Or do they do follow the same US Tax track as that of Mutual Funds?
- Are there any gotchas, at the base premises, on what nature of stocks to buy and not to buy? (again from tax perspective).

Any additional information is highly appreciated in this regard.

Indian Mutual Funds reporting/taxes on US Tax Filings

Posted: Wed Jun 22, 2011 4:06 pm
by greyfri
No tax issues regarding stocks unless they are really mutual funds in disguise (ETFs traded in Indian stock exchanges). In general, any widely traded stock on a major exchange is fine. You report dividends on schedule B, capital gains on Schedule D and take credit for any tax paid directly to India.

One twist is that all your transactions are assumed to be denominated in $$ based on that day's exchange rate. So if you buy stocks for 5 lakh today, sell for 5L in a year's time, you might still have a US tax gain or loss based on Rs/$ exchange rate even if you never actually converted currencies.

If you still retain a US brokerage account, you can actually buy an ETF in the US such as iShares INDY ETF that holds the S&P Nifty 50. The brokerage and iShares will take care of all reporting, foreign credit determination etc. for you and send a 1099-B.

Indian Mutual Funds reporting/taxes on US Tax Filings

Posted: Fri Aug 19, 2011 5:02 am
by udyfery
Can some one confirm above is true for "Growth Funds" ?
I invested in SIP (systematic investment plan) where I invest MONTHLY fixed amount in growth funds.
So, should I subtract year end NAV from monthly NAV to calculate capital gain? How do I calculate capital gain for next year?
What about year I lost? How should I calculate losses?
I started investing in growth funds 2005 and ended in 2011.
I lost in 2007-8. I sold half in 2010, half still holding. So, I was under impression that I pay capital gain in 2010.
Looking forward to responses. Thanks you all in advance!!!