Investing in India from the US: NRE, NRO and FCNR Accounts, and the US Tax Trap in Indian Mutual Funds

The short version

• Indian accounts and investments fall under India's rules and the US rules at the same time, and the two systems do not adjust to each other.
• NRE interest is exempt from Indian income tax for an individual who is resident outside India under FEMA. NRE and FCNR interest is taxable in the US, even though India does not tax it.
• NRO interest is taxable in India, and the bank deducts tax at source. If you are eligible for the treaty and provide a Tax Residency Certificate and Form No. 41, the India–US treaty limits Indian tax on ordinary NRO deposit interest to 15 percent. The US credit for Indian tax on that interest generally stops at that rate.
• Beyond current income, NRIs and PIOs may remit up to USD 1 million per financial year from an NRO account, through one bank, with documentary evidence and after applicable Indian taxes are paid.
• The FBAR is required if all your foreign financial accounts together exceed $10,000 at any time during the calendar year. Check the Form 8938 thresholds too.
• The US generally treats Indian mutual funds as PFICs. Under the default rules, the lower long-term capital gains rate does not apply and an interest charge can be added. Whatever the regime, a separate Form 8621 may be needed for each fund each year, unless an exception applies.
• Fund houses set their own policies for investors living in the US, and their documents differ.
• Ask a cross-border tax professional before you buy or sell.

What this guide covers

• Who this is for: anyone who is a US tax resident (US citizens, green-card holders and visa holders who meet the US residence tests) and who holds, or plans to hold, money or investments in India.
• The three Indian bank accounts for non-residents (NRE, NRO and FCNR), what each may hold, and how money moves back out of India.
• How India taxes the interest, gains and dividends, under India's Income-tax Act, 2025, which applies from 1 April 2026.
• How the US taxes the same income, and the US reporting forms (FBAR, Form 8938 and Form 8621).
• Why Indian mutual funds are generally PFICs for US tax purposes, what that means, and the points on which there is no official answer.
• It does not tell you what to buy or sell.
• Our NRI Tax 101 guide covers tax residence and US filing and reporting, with a note on the India side. Our money-transfer guide covers sending money to India.

Words used in this guide

• NRI: Non-Resident Indian, an Indian citizen resident outside India.
• PIO: Person of Indian Origin. The Reserve Bank's rules include OCI cardholders who are resident outside India.
• FEMA: India's foreign-exchange law. It decides which accounts you may hold.
• RNOR: Resident but not ordinarily resident, a status under India's income-tax rules.
• Repatriable: money that may be sent out of India.
• Tax deducted at source: the tax a bank or fund house deducts before paying you.
• Tax Residency Certificate: a certificate from the US showing you are a US tax resident; with Form No. 41, it is needed to claim the treaty rate in India.
• KYC: know your client, the identity and address checks a fund house must complete before you invest.
• Folio: your account with a mutual fund house.
• SIP: a systematic investment plan, regular purchases of a fund.
• FBAR: FinCEN Form 114, the US report of foreign financial accounts.
• Form 8938: the US statement of specified foreign financial assets, filed with your tax return.
• PFIC: passive foreign investment company, a foreign corporation (which can include a foreign fund) that meets a US test based on passive income or passive assets.
• Form 8621: the US information return for each PFIC, filed each year unless an exception applies.

Two countries, three different tests of residence

• India's foreign-exchange law (FEMA) decides which accounts you may hold. It has its own test of "resident outside India".
• That test asks whether you lived in India for more than 182 days in the preceding financial year, and whether you have gone abroad for work, business or another purpose that shows an intention to stay away for an uncertain period.
• The Reserve Bank says that, if questioned, the onus is on the individual to prove their status.
• India's Income-tax Act, 2025 decides what India taxes. It uses day counts in each tax year (April to March), such as 182 days in India. Its result can differ from the FEMA test.
• The US decides what the US taxes. US citizens and US tax residents are taxed on their worldwide income, so Indian interest, gains and dividends belong on the US return whatever India decides.
• Keep the three tests apart. Several of the rules below depend on one test and not the others.

The three accounts at a glance

The details of each account follow.

The three Indian accounts in detail

NRE (Non-Resident External) account

• Who: Non-Resident Indians (Indian citizens resident outside India) and Persons of Indian Origin, which the Reserve Bank's rules define to include OCI cardholders who are resident outside India.
• Form: savings, current, recurring or fixed deposit, held in Indian rupees.
• What goes in: money remitted from abroad, interest on the account, and transfers from other NRE or FCNR(B) accounts, among other permitted credits.
• The permitted credits include current income such as rent or dividends once Indian tax has been paid.
• Transfers from your NRO account within the USD 1 million limit described below have long been allowed under the NRO rules. Since June 2026 the NRE rules list them too.
• What comes out: local payments in India, investments in India, and transfers abroad. The balance is repatriable.
• Joint holding: with other NRIs or PIOs, or with a resident relative on a "former or survivor" basis. During the account holder's lifetime, the resident relative may operate the account only as a power-of-attorney holder.

NRO (Non-Resident Ordinary) account

• Who: any person resident outside India, for genuine transactions in rupees.
• Form: savings, current, recurring or fixed deposit, in rupees.
• What goes in: income arising in India, such as rent, pension, dividends and interest, as well as remittances from abroad and transfers from other NRO accounts.
• What comes out: local payments, transfers to other NRO accounts, and remittance of current income abroad. Beyond that, the balance can be sent abroad only within the USD 1 million limit below.
• Joint holding: with residents on a "former or survivor" basis, or with other NRIs and PIOs.

FCNR(B) (Foreign Currency Non-Resident) account

• Who: NRIs and PIOs.
• Form: fixed deposits only, held in a freely convertible foreign currency such as US dollars, so the deposit itself does not change with the rupee exchange rate.
• The Reserve Bank's FAQ gives terms of one to five years.
• Other rules: credits, debits and joint holding follow the NRE rules.

When you return to India

• When you return to India for work or otherwise become resident under FEMA, the Reserve Bank's rules require NRE accounts to be redesignated as resident accounts, or their funds moved to a Resident Foreign Currency (RFC) account, immediately.
• NRO accounts may be redesignated as resident accounts.
• FCNR(B) deposits may run to maturity at the contracted rate.
• Our returning-to-India checklist sets out the steps.

Moving money out of India: the USD 1 million limit

• NRE and FCNR balances are repatriable.
• From an NRO account, NRIs and PIOs may remit up to USD 1 million per financial year (April to March), on submission of documentary evidence. The money can come out of NRO balances, sale proceeds of assets, or assets inherited in India.
• Transfers from NRO to NRE count within the same limit.
• For NRO balances, the bank also takes your undertaking that the money comes from your own legitimate receivables in India, not from borrowing or a transfer from another NRO account.
• All instalments in a year should go through the same bank, and larger amounts need the Reserve Bank's approval.
• Remittances are subject to payment of applicable Indian taxes, and the bank will ask for the tax paperwork the Central Board of Direct Taxes prescribes. The Reserve Bank does not issue instructions on tax.
• For remittances from 1 April 2026, the paperwork is Form 145 where required (Income-tax Rules, 2026, rule 220).
• For those remittances, an accountant's certificate in Form 146 is also needed where a taxable payment takes the year's total above Rs 5 lakh and no tax-officer certificate has been obtained. (Forms 145 and 146 replaced Forms 15CA and 15CB.)

How India taxes what the accounts earn (tax year 2026-27)

• NRE interest is exempt from Indian income tax for an individual who is resident outside India under FEMA. The test is the FEMA status, not the income-tax day count. (Income-tax Act, 2025, section 11 and Schedule IV, item 1; formerly section 10(4)(ii) of the 1961 Act.)
• FCNR(B) interest is exempt for a person who is non-resident, or resident but not ordinarily resident (RNOR), under the income-tax rules. (2025 Act, Schedule IV, item 14, which carries over former section 10(15)(iv)(fa).)
• NRO interest is taxable in India. The bank deducts tax at source for a non-resident at 30 percent plus 4 percent cess, with a surcharge where income exceeds Rs 50 lakh, at the 2026-27 rates. (Finance Act, 2026, First Schedule, Part II; Income-tax Act, 2025, section 393(2), Table serial 17; formerly section 195.)
• For ordinary NRO deposit interest, the India–US tax treaty limits Indian tax to 15 percent of the gross amount, subject to treaty eligibility and beneficial-ownership requirements. (Article 11(2).)
• The treaty's separate 10 percent rate applies to interest on a loan granted by a bank or similar financial institution, not to ordinary deposit interest.
• To claim the treaty rate, you need a Tax Residency Certificate from the US and the further information India prescribes. From 1 April 2026 that is Form No. 41 under rule 75 of the Income-tax Rules, 2026 (it replaced Form 10F).
• The Income Tax Department says Form 41 is filed online on its e-filing portal, once for each tax year, with the Tax Residency Certificate uploaded. Your bank will tell you what it needs.
• India's exemptions do not reach your US tax return, as the next section explains.

How the US taxes the same accounts

• A US citizen or US tax resident reports all interest and dividends, from inside and outside the US.
• NRE and FCNR interest is therefore taxable in the US, even though India does not tax it.
• The treaty's saving clause lets the US tax its residents (as the treaty defines them) and its citizens as if the treaty did not exist, apart from specific exceptions.
• The US foreign tax credit (generally claimed on Form 1116) can reduce US tax by qualifying income tax actually paid to India.
• Because India collects no tax on NRE interest, the interest remains subject to applicable US tax rules; there is generally no Indian tax on it to claim as a foreign tax credit.
• Indian tax deducted from NRO interest can qualify, but generally only up to the treaty rate (15 percent for ordinary deposit interest).
• Tax withheld above that rate counts as refundable, so the US does not allow a credit for it, and it has to be reclaimed from India.
• Higher earners may also owe the 3.8 percent net investment income tax on this interest and on investment gains. Your state may tax this income too, so ask your preparer.
• Keep the bank's tax certificates and statements. They support both the Indian refund claim and the US credit.

Reporting your Indian accounts to the US

FBAR (FinCEN Form 114)

• Required if the total value of all your foreign financial accounts, Indian ones included, exceeds $10,000 at any time during the calendar year.
• NRE, NRO and FCNR accounts and fixed deposits count.
• Indian mutual fund holdings count too, whether held in a folio with the fund house or in a demat account. (The FBAR rules list an account with a publicly offered mutual fund that has a regular net asset value and regular redemptions.)
• The FBAR is due April 15, with an automatic extension to October 15. It is filed with FinCEN, not with your tax return.

Form 8938 (filed with your tax return)

• For people living in the US, required if your specified foreign financial assets are worth more than $50,000 on the last day of the year or more than $75,000 at any time during it.
• For married couples living in the US and filing jointly, the thresholds are more than $100,000 on the last day of the year and more than $150,000 at any time during it.
• Indian bank accounts and foreign mutual funds are included.
• A fund you report on a timely filed Form 8621 is not listed again on Form 8938. You note that Form 8621 in Form 8938's Part IV, and the fund's value still counts when you work out whether you meet the Form 8938 threshold.
• The relief covers the fund reported on Form 8621, not a whole bank or custodial account it may be held in.

Both forms

• The two forms overlap but are separate. Filing one does not replace the other.
• A demat or brokerage account in India is reported as an account; the shares inside it do not have to be listed separately on the FBAR or Form 8938.
• Penalties for a missing FBAR or Form 8938 can be significant, so file both where they apply.

Indian mutual funds: what India allows

• Under India's foreign-exchange rules, an NRI or an OCI may buy and sell units of Indian mutual funds without limit, on a repatriation basis or on a non-repatriation basis.
• For a repatriation-basis purchase, payment comes from money remitted from abroad or from a repatriable account such as NRE or FCNR. The proceeds may be sent abroad or credited to an NRE, FCNR(B) or NRO account.
• Non-repatriation purchases can also be paid from NRO, and their sale proceeds are credited only to the NRO account.
• Fund houses need KYC. For non-residents, India's securities regulator requires a copy of the passport or OCI card and proof of your overseas address, and in-person or video verification unless an exemption applies (for example, Aadhaar-based KYC).
• Opening a new KYC online generally requires you to be in India. SEBI relaxed this in December 2025 only for updating an existing KYC, and its August 2026 proposal to remove the requirement for non-residents from FATF-compliant countries was not final when we checked.

Fund houses' own policies for US residents

• Fund houses set their own policies for investors living in the US, because their funds are not registered under US securities law and because of US tax-reporting rules.
• Their documents (checked October 2026) differ. Several accept new money from a US-resident NRI or PIO only while the investor is physically in India and submits a paper application with extra documents. Some list US persons among those who cannot invest at all. Another asks US residents to sign a separate declaration.
• A fund house's own web pages can contradict its scheme documents.
• Fund houses may also stop new purchases and SIPs for an investor who moves to the US, while still allowing redemptions, and some reserve the right to redeem units.
• Read the "Who cannot invest" section of the current scheme documents, and ask the fund house in writing, before investing.
• If you already hold Indian funds and have moved to the US, update your KYC and residential status with the fund house.

How India taxes Indian mutual funds held by a non-resident

• Equity-oriented funds (at least 65 percent in listed Indian equity): gains on units held for 12 months or less are taxed at 20 percent. Gains on units held longer are taxed at 12.5 percent on the amount above Rs 1.25 lakh a year. (2025 Act, section 196 for short-term gains and section 198 for long-term gains.)
• Debt-heavy "specified mutual funds" include funds investing more than 65 percent of their proceeds in debt and money-market instruments and funds investing at least 65 percent in units of such funds, applying the statutory averaging rules. (Section 76(5)(b).)
• For covered units bought on or after 1 April 2023, gains are generally treated as short-term regardless of the holding period and taxed at applicable rates. (Section 76.)
• Other funds (for example hybrid, international or gold funds, and debt funds bought before 1 April 2023): gains on units held for more than 24 months (more than 12 months for units listed on a stock exchange, such as ETFs) are long-term and taxed at 12.5 percent (section 197). Shorter holdings are short-term and taxed at the ordinary rates.
• Dividends on Indian shares paid to a non-resident are taxed at 20 percent, and the treaty's 25 percent cap for individuals does not lower this. (Section 207.)
• Distributions from Indian mutual funds to a non-resident have tax deducted at 20 percent plus surcharge and cess, or at a lower treaty rate if one applies and you have given the fund your Tax Residency Certificate and Form No. 41. (Income-tax Act, 2025, section 393(2), Table serial 10 and Note 2.)
• The final Indian rate on those distributions is 20 percent where the units were bought in foreign currency, and can otherwise be the ordinary rates, so ask an Indian tax adviser.
• For a non-resident, the fund house deducts tax at source on redemptions at the rate for each type of gain, plus surcharge and cess. For example: 20 percent on short-term equity-fund gains, 12.5 percent on long-term equity-fund gains above Rs 1.25 lakh, and 30 percent on gains from debt-heavy specified mutual funds.
• Surcharge on dividends and on capital gains taxed under sections 196, 197 and 198 is capped at 15 percent; gains on debt-heavy specified mutual funds do not get this cap.

Indian mutual funds and the US PFIC rules

Is my fund a PFIC?

• A PFIC (passive foreign investment company) is a foreign corporation where 75 percent or more of its gross income is passive income, or at least 50 percent of its assets produce passive income or are held to produce it.
• An Indian mutual fund or ETF pools investors' money into shares, bonds and cash, so nearly all of its income is passive.
• Indian mutual funds are set up as trusts, as India's mutual fund regulations require. Under the US entity-classification rules, a managed fund of this kind is expected to be treated as a corporation (no IRS ruling names Indian funds), and its largely passive income would then meet the PFIC tests.
• Whether a particular fund is a PFIC is a question for a cross-border tax professional.
• Shares you hold directly in an Indian operating company are a different case. A company running an ordinary business is not a PFIC unless it meets one of the two tests, which some cash-rich or holding companies do.

What does it cost me if I make no election?

• This is the default "excess distribution" regime. Gain on a sale, and distributions above 125 percent of the average of the three preceding years, are spread over each day you held the fund. (26 U.S.C. 1291.)
• The part allocated to the current year, and to any part of your holding period before the fund became a PFIC, is taxed as ordinary income.
• The part allocated to each earlier year is taxed at the highest US rate for that year, with an interest charge added as if the tax had been paid late.
• The lower long-term capital gains rate does not apply. A loss on a sale is not taken into account under these rules.
• Using fund units as security for a loan is treated as disposing of them. (26 U.S.C. 1298(b)(6).)

The two elections, and their limits

• Qualified electing fund (QEF) election: you are taxed each year on your share of the fund's earnings and capital gains. It is available only if the fund gives you a PFIC Annual Information Statement each year, so it depends on the fund house.
• Mark-to-market election: you are taxed each year, as ordinary income, on the rise in value.
• It is available only for "marketable stock": stock regularly traded on a qualified exchange, or a fund redeemable at net asset value that meets eight specific conditions in the regulations. Whether a particular Indian fund qualifies is a professional question.
• Timing matters. If the mark-to-market election is made after the first year you held the fund, the US rules treat the fund as sold at the end of the election year, and that gain falls under the default regime.

Does Indian tax reduce the US PFIC tax?

• India taxes the redemption under its own rules, and the US taxes it under the PFIC rules.
• US law lets Indian tax withheld from a fund's distribution reduce the PFIC tax in a set way.
• For a sale, the Form 8621 instructions apply that rule only to any part of the gain that would be treated as a dividend under a provision that does not normally reach small investors. So Indian tax on a redemption gain may give little or no relief against the PFIC tax on earlier years.
• Whether Indian tax on a redemption gain can be credited against the US tax on the current-year part is not settled by any official guidance we found.
• Ask a cross-border professional before you redeem, because the combined tax can be high.

What do I have to file?

• A US person holding PFIC shares may need a separate Form 8621 for each PFIC, with the tax return (or sent to the IRS on its own if no return is otherwise required), subject to the exceptions below.
• Limited exception for a fund under the default regime: no annual filing for that fund if the value of all your PFIC holdings is $25,000 or less on the last day of the year ($50,000 for both spouses on a joint return), and that year you received no excess distribution from it and had no gain from selling it.
• Any redemption at a gain removes the exception for that fund for that year.
• PFICs held inside US retirement accounts such as a 401(k) or an IRA, or inside a 529 plan, are outside the filing requirement. That exception covers US accounts only, not Indian ones.
• If a required Form 8621 is not filed, the time the IRS has to assess tax on the related return does not close until at least three years after the information is provided. The same rule applies to a missing Form 8938.

Indian savings schemes with no official US answer

PPF

• Under India's small-savings rules, only a resident Indian citizen can open a new account. These rules use the income-tax test of residence, not FEMA.
• An account opened while resident may continue to maturity if you become non-resident, on a non-repatriation basis, without extension and with no interest after maturity.
• If you stop being an Indian citizen, the account is treated as closed from the end of the month before, with interest after that at the post-office savings rate.

NPS

• Indian citizens living abroad and OCI cardholders are eligible, according to the pension regulator (other PIOs are not).

EPF, PPF, NPS and ULIPs: the US position

• We found no official IRS guidance on whether EPF, PPF, NPS or unit-linked insurance plans (ULIPs) are PFICs or have other US reporting consequences, and professional views differ.
• Do not assume either way. Ask a cross-border professional, and report the accounts on the FBAR and Form 8938 where they meet the definitions.

Before you invest, or if you already hold Indian funds

• List every Indian account and holding, with its value at the highest point of the year and on 31 December, for the FBAR and Form 8938.
• For each mutual fund, note when you bought it, what you paid, and every purchase and redemption since, because the PFIC calculation needs the holding period of each unit.
• Check with a cross-border tax professional whether you are a US tax resident yet, whether your funds are PFICs, and whether an election is available, ideally before you buy or before you become a US tax resident.
• Before any redemption, ask what tax each country will charge and whether any of it can be credited.
• Keep Indian tax certificates, bank statements and fund statements together each year.
• If you move back to India, follow the account changes in our returning-to-India checklist.