PFIC (Passive Foreign Investment Company) is a US tax classification under IRC Section 1297. Any non-US corporation where (a) 75%+ of gross income is passive, or (b) 50%+ of assets produce passive income, qualifies as a PFIC. Indian mutual funds and ETFs are PFICs for US-resident investors.
Why it matters: US persons holding PFICs face punitive taxation — the “excess distribution” method applies the highest marginal tax rate plus interest charges on deferred gains. Form 8621 must be filed for each PFIC annually.
INR example: An NRI on a US H-1B visa holds ₹10 lakh in an Indian equity mutual fund. On redemption, the gain is taxed in India at 12.5% LTCG (after the ₹1.25L exemption) and reported to the IRS as PFIC income, often at 37%+ effective US rate. DTAA helps avoid double-tax via Foreign Tax Credit but does not eliminate PFIC reporting.
When to use: US-resident NRIs should typically avoid Indian mutual funds and prefer direct equities or US-listed India ETFs (e.g. INDA, EPI). Make the QEF election early if you must hold PFICs.
SEBI/Tax note: Always consult a US-India dual-qualified CPA before investing across borders. PFIC rules override DTAA benefits.