Ever noticed that pesky question that pops up every time you visit a mutual fund house’s website? It asks you whether you are a US resident/person or not. What is the logic of that question? It is not just us—who reside in India and are Indian citizens—who can invest in mutual funds here. There could be a non-resident Indian (NRI) residing in the US or an American citizen who would want to invest in India. However, according to US capital market regulator Securities and Exchange Commission (SEC), only US registered and regulated schemes can solicit money from US investors.
Fund houses in India came to the conclusion that if their websites carry mutual fund scheme-related information and application forms and if US-based people could invest in them online, it may be interpreted as solicitation. So the question is asked upfront. This rule pertains to everyone who resides in the US—US citizens or NRIs or green card holders.
The good news for these investors is that if they are physically present in India or Indian territory, they can invest in mutual funds that are registered in India. All they need to do is sign a declaration that she has invested on her own accord and the Indian fund houses did not solicit money from her.
But what happens if you are sitting in the US and select the option on an India-registered fund house that you are indeed a US resident/person? Your transaction will not go through. But you can browse the website.
Over the years, taxation laws have got more stringent. Another twist to this tale is the Foreign Account Tax Compliance Act (Fatca) which was passed in the US in 2010. Until then, tax laws in the US had put the onus on self-declaration; residents in the US had to disclose their income. But since self-declaration didn’t appear to have worked all the time, the US government enacted Fatca and signed an agreement with more than 50 countries worldwide. India is a signatory to this agreement.
This means any financial institution, like banks, fund houses, insurance companies, that get investments from anyone residing in the US (she may be temporarily living in one of these countries at the time) is supposed to furnish such investment details to the US. If the firms refuse to cooperate, the Act allows the US government to deduct 30% tax from these companies if they are already registered or doing business in the US.
While the SEC enacted the first law, the US government enacted Fatca. Although both are not directly related, they are aimed at investor protection and investor disclosure.