FATCA
The Foreign Account Tax Compliance Act (FATCA) is a US federal law enacted in 2010 that requires foreign financial institutions, including Indian banks, mutual funds, and brokerages, to identify and report financial accounts held by US persons to the US Internal Revenue Service (IRS) or face withholding penalties. India signed an intergovernmental agreement with the US in 2015 to facilitate FATCA compliance.
FATCA was enacted by the United States Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, primarily targeting US citizens and residents who held undisclosed foreign financial accounts to avoid US taxes. Its global extraterritorial reach is extraordinary: any foreign financial institution that does not comply with FATCA reporting requirements faces a 30% withholding tax on US-source income flowing through them. This penalty effectively forced virtually every significant financial institution worldwide — including Indian entities — into the FATCA compliance framework.
India and the United States entered into a Model 1 Intergovernmental Agreement (IGA) in July 2015, under which Indian financial institutions report US account holder information to the Indian income tax authorities, who then share it with the IRS. This 'reciprocal' arrangement also obligates the US to share information about Indian account holders in US financial institutions — creating a bilateral tax information exchange. Indian financial institutions were required to register with the IRS's FATCA Registration System and begin due diligence on their customer base to identify US Persons (US citizens, Green Card holders, or those with US indicia such as a US address or phone number).
For Indian investors, the practical impact of FATCA was the proliferation of self-certification forms. When opening bank accounts, mutual fund folios, or demat accounts, customers were required to declare whether they were US Persons. The requirement caught many non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) who held US residency or citizenship but had Indian financial accounts. Failure to provide self-certification could result in account restrictions. Mutual fund distributors and AMCs developed standardised self-certification forms aligned with FATCA and the Common Reporting Standard (CRS), a related OECD initiative for global tax transparency.
Beyond the administrative burden, FATCA highlighted the increasingly interconnected nature of global financial regulation. Indian banks with US-dollar-denominated correspondent banking relationships had particularly strong incentives to comply, given their reliance on US payment systems. For high-net-worth individuals and NRIs managing cross-border wealth, FATCA compliance — alongside FEMA (Foreign Exchange Management Act) requirements — became a standing item in financial planning conversations.