India Fixed Deposits (FDs) and U.S. Tax Rules
Contents
U.S. Tax of India Fixed Deposits
U.S. Tax of India Fixed Deposits: One common type of simple investment in India is the Fixed Deposit or “FD.” The FD is similar to a U.S. CD or Certificate of Deposit. The customer deposits money into a fixed deposit, and it grows over a set time period. At the end of the growth phase, the customer is free to withdraw the money, without penalty.
The U.S. tax of Indian Fixed Deposits is different. Generally, the income is taxed as it is accrued — and not “grossed-up” at the end. In addition, the FDs are reported on various international reporting forms, such as FBAR and FATCA.
The IRS takes an aggressive approach on foreign accounts compliance, and the failure to stay compliant may results in fines and penalties, although the IRS has also developed various amnesty programs to reduce or eliminate these penalties.
How Do Fixed Deposits Work?
An FD or TD (Term Deposit) is an investment in which money earns a “guaranteed range” interest rate which will not change much (if at all) for the term of the investment (equivalent to a U.S. “CD”).
More often than not, the bank or foreign financial institution will offer various rates based on the length of deposit (just as in the United States a CD would generally offer better interest rates the longer you keep the money in the bank.)
During the period in which the money is invested in the fixed deposit, it cannot be accessed by the customer.
One of the main benefits of the fixed deposit is that it is earning interest tax-free (usually as long as the tax received is below a certain amount each year).
This is also where the customer gets into a problem with US tax law.
Fixed Deposits or Term Deposits – Taxable in the U.S.
While the fixed deposit is not taxable in India, the same rules do not apply to the United States. In other words, the United States does not recognize a fixed deposit as a tax-free instrument.
Thus, if you are receiving annual earnings from a foreign financial institution as a result of investing in a Fixed Deposit, and you have to pay US tax on the earnings – even if the interest is being re-deposited, reinvested, or transferred into a new fixed deposit account (it is very common for a person to have one “customer number” and numerous fixed deposit accounts per customer number)
IRS Reporting Compliance
In addition to the tax rules, there are also reporting rules. The FDs are reported on international information returns. The two most common forms are the FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act)
If you are out compliance, you may consider entering one of the IRS Offshore Voluntary Disclosure Programs to get into compliance.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.