US tax rules thwarting NRI investments in mutual funds
Indian investors from the US have a new battle to contend with; the additional compliance burden on Indian mutual funds under the US Foreign Account Tax Compliance Act or Fatca.
According to people familiar with the development, most large mutual funds in India have been requesting non-resident Indians (NRI) for more time to accept their funds for local schemes, as these funds are not yet ready to handle additional paperwork and disclosures. In most cases, applications for such investments are being put in the backburner.
This has cut out NRIs from yet another investment option in India; they were earlier finding it difficult to buy houses as real estate companies, fearful of the stringent US tax laws, were reluctant on selling to such investors.
The US enacted the tax legislation in 2010 that requires foreign financial institutions to report information about non-US investments held by US taxpayers. This information was also to be shared with Indian tax authorities. If the information is not disclosed, individuals could be penalised, with the action impacting entities associated with such individuals.
The November 1, 2015 deadline for taking in new funds with additional know-your-client norms is also a major deterrent. — The norms require MFs to mandatorily disclose investor information.
“We have been hearing from our clients that many mutual funds have stopped accepting new investments,” said a senior executive with a large professional services firm who advises NRIs. “This is a major problem for NRIs as they would now have to go for direct investment in equities through a portfolio manager.”
Weak returns from gold and real estate, and renewed thrust on economic reforms have led small retail investors to return to mutual funds.
While leading mutual funds refused to comment on the issue, some fund managers accepted privately that NRI investments were being held back, while some said that they have asked these NRIs to get tax-compliant certificates from the US government.