What is FATCA in Mutual Funds? Meaning & Compliance

If you’re a mutual fund investor in India, you may have received alerts from your fund house or distributor urging you to comply with FATCA regulations. But what is FATCA in mutual funds, and why is it relevant to you, even if you’re not a US citizen? In this article, we’ll explore the Foreign Account Tax Compliance Act (FATCA) in simple terms, its relevance to mutual fund investments in India, and the steps investors must take to stay compliant.

Foreign Account Tax Compliance Act in Mutual Funds

FATCA, or the Foreign Account Tax Compliance Act, is a United States law introduced in 2010. It aims to curb tax evasion by US taxpayers who use financial accounts and assets held outside the US. Under this act, all foreign financial institutions (FFIs), including mutual fund companies, insurance firms, and banks, are required to report information about financial accounts held by US persons to the US Internal Revenue Service (IRS).

Even though FATCA is a US law, it has global implications. To make FATCA operational worldwide, the US signed Inter-Governmental Agreements (IGAs) with several countries, including India. This agreement ensures Indian financial institutions report necessary information to Indian tax authorities, who in turn share the data with the US government.

Why FATCA Matters to Mutual Fund Investors in India?

The Indian government signed an IGA with the United States on 9 July 2015. Since then, FATCA compliance has been a legal requirement for Indian financial institutions, including mutual funds. This means that mutual fund houses in India must collect tax-related information from all investors and report accounts that may have links to the United States.

Even if you’re an Indian citizen with no US ties, you may still be asked to submit FATCA-related declarations to confirm your tax residency. This is particularly relevant for investors who opened mutual fund folios between July 1, 2014 and August 31, 2015. Failure to comply could result in account restrictions, including the inability to make new investments, switch units, or redeem holdings.

Who Needs to Comply With FATCA?

FATCA applies to a broad range of individuals and entities. The compliance requirement isn’t just limited to US citizens.

Here’s who needs to comply:

US citizens, green card holders, and residents with substantial presence in the US.
Non-resident Indians (NRIs) who are US taxpayers
Indian investors with links to the US, such as US place of birth or dual citizenship
Entities with controlling persons who are US persons

What Information Do Investors Need to Provide?

To be FATCA compliant, investors must submit certain tax and personal details. These include:

Country of tax residence
Tax Identification Number (TIN)of that country (similar to PAN in India)
Country of birth
Nationality
Citizenship status

In case of non-individual investors (like companies or trusts), information about controlling persons (owners or decision-makers) must also be provided, including their tax residency and TINs.

This data helps determine whether the investor qualifies as a “specified US person” under FATCA rules. Once classified, mutual funds must report such accounts to Indian authorities.

How to Submit FATCA Declarations?

Mutual fund investors can update FATCA details through multiple channels:

Visit the websites of official registrar and transfer agents (RTAs)like CAMS, KFintech, Sundaram BNP Paribas, and Franklin Templeton
Submit a self-certification form either online or offline
Provide necessary KYC (Know Your Customer) documentation
In case of joint holders, each investor must submit their FATCA information individually

It is important to note that even existing investors need to ensure that their information is up to date. Any lapse or inconsistency could lead to the freezing of mutual fund accounts or restrictions on further transactions.

Consequences of Not Being FATCA Compliant

Restrictions on further purchases or additional investments
Suspension of systematic investment plans (SIPs)
Inability to redeem, switch or transfer mutual fund units
Risk of your account being reported as “recalcitrant” (resistant to authority or control) and possibly attracting scrutiny

Additionally, from a fund house’s perspective, failure to comply with FATCA can attract penalties and impact its ability to maintain international banking relationships.

Importance of FATCA for NRIs and US Tax Residents

FATCA is especially crucial for NRIs and individuals with US citizenship or residency. Since these individuals are subject to US tax laws regardless of where they live or earn, FATCA ensures that their offshore financial accounts are also reported to the IRS.

If you’re an NRI who maintains mutual fund investments in India but are also a US taxpayer, you must comply with FATCA reporting requirements both in India and in your US tax filings. Failure to do so could result in penalties from the IRS.

FATCA and Joint Holders in Mutual Fund Accounts

Another key aspect of FATCA is its impact on joint holders. If any one of the joint investors in a mutual fund folio is a specified US person, then the entire value of the folio must be reported. This means that even if you’re the second or third holder in a joint account, your tax status matters.

This rule ensures there are no loopholes where a US taxpayer could avoid disclosure by holding accounts jointly.

FATCA Is Not a One-Time Requirement

FATCA is not a one-and-done process. Mutual fund houses are required to monitor and review investor accounts regularly. Any change in the investor’s circumstances – such as a new country of residence, change in citizenship, or update in KYC – may trigger FATCA reporting requirements again.

Hence, investors are advised to keep their information updated and stay alert to communication from fund houses and RTAs.

Key Takeaways

Here are some essential pointers mutual fund investors should keep in mind regarding FATCA:

FATCA is a US law, but Indian investors are affected due to the India-US IGA.
It ensures transparency and aims to prevent tax evasion by reporting financial accounts of US taxpayers.
All mutual fund investors need to declare their tax residency status at the time of investment or as per deadlines set by fund houses.
Failure to provide FATCA details can result in blocked transactions or frozen accounts.
FATCA compliance is applicable to individual investors, joint holders, NRIs, and institutional investors.
Investors can update their FATCA information online through RTA websites or offline channels.

Conclusion

FATCA compliance in mutual funds is not just a regulatory formality but an essential part of maintaining transparency and legal conformity in international finance. As an investor in India, it is your responsibility to provide accurate tax information and ensure that your folios remain active and compliant.

Being FATCA-compliant helps protect your investments, ensures uninterrupted access to mutual fund services, and fosters global cooperation in fighting tax evasion. So, if you haven’t yet checked your FATCA status, now is the time. A few minutes spent updating your records today can save you from transaction hassles and legal complications in the future.