Indian mutual funds and the U.S. PFIC rules
If your family holds Indian mutual funds and files U.S. returns, the PFIC rules commonly apply. Here is what they mean, who files Form 8621, and how the tax is worked out.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on November 5, 2026.
For U.S. taxpayers who hold an Indian mutual fund, the PFIC rules commonly apply. A PFIC, or passive foreign investment company, is a foreign company that mostly holds investments, and Form 8621 reports it to the IRS. Our Whole-Basket Year-End Count keeps the yearly duty straight. See the countries guide.
- PFIC test: 75% or more passive income, or at least 50% passive assets (Code section 1297).
- No IRS ruling names Indian funds. Treating them as PFICs is common practice and not settled.
- With no election, a gain is spread over each day held; earlier years are taxed at each year's top rate (37% for 2018 to 2026) plus IRS interest.
- Form 8621 goes with Form 1040, one per fund, each year unless an exception applies.
The numbers
| Item | Rule | Tax year |
|---|---|---|
| Skip Form 8621 | All PFIC units total $25,000 or less on December 31 ($50,000 joint), with no excess payout, gain or election | 2025, 2026 |
| Excess distribution | Payout above 125% of the 3 earlier years' average, or any redemption gain | 2025, 2026 |
| IRS interest | 8% in 2024; 7% in 2025; 7%, 6%, 7%, 7% by quarter in 2026 | 2024 to 2026 |
| Due date | April 15, 2026 (October 15 if extended); April 15, 2027 (October 15) | 2025, 2026 |
Interest rates change each quarter.
An invented example
Units bought December 31, 2022 and redeemed December 31, 2025 for a $10,960 gain: 1,096 days held, so $10 a day. No election.
| Year | Gain share | Tax | Interest |
|---|---|---|---|
| 2023 | $3,650 | $1,350.50 at 37% | About $213 |
| 2024 | $3,660 | $1,354.20 at 37% | About $98 |
| 2025 | $3,650 | $876.00 at a 24% bracket | None |
Source: our arithmetic from the tax code
Our checklist
The Whole-Basket Year-End Count:
- Record each scheme, plan and option held on December 31, with its annual-statement value.
- Add the whole basket in dollars and compare with $25,000 ($50,000 joint).
- Record every purchase date. Each SIP (systematic investment plan) instalment has its own start date.
- Record each payout and redemption with its date and rupee amount, per our statements guide.
Common questions
Do I file Form 8621 if I sell nothing?
Usually yes, every year, unless all your PFIC units together are $25,000 or less ($50,000 joint) at year end with no excess payout, gain or election.
Is there a penalty for a missing Form 8621?
No dollar penalty is set for the form, but the whole return can stay open to the IRS until 3 years after the form is filed. The $10,000 penalty people quote belongs to [Form 8938](/indian-mutual-funds/countries/usa-fbar-8938-treaty-and-credits/).
Does the growth option change PFIC tax?
No. Redeeming growth units is a sale, and all the gain counts as an excess distribution, as in the example above. See [Indian tax on fund gains](/indian-mutual-funds/india-rules/india-tax-on-fund-gains-and-dividends/) and our [Indian CPA page](/indian-cpa/).
Official sources
- IRS: About Form 8621
- IRS: Instructions for Form 8621 (Rev. December 2025)
- eCFR: 26 CFR 1.1298-1, who files Form 8621 and the exceptions
- Cornell Law School: 26 U.S.C. 1291, excess distributions
- IRS: Quarterly interest rates
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