Tax on mutual funds/stock transfer to parents

Taxation
1

Hi Everyone

I’ll be moving to US soon. To avoid US’s PFIC rules being applied on my Indian mutual funds, I want to transfer that investment to my parents. So, I’ve two options -

  1. I redeem everything. Transfer money to parents. Invest through their DEMAT account
  2. I transfer the stocks and mutuals funds from my DEMAT account to theirs

In which of these two scenarios, where would I be paying less tax? In general, how does the taxation works in these two cases? Is there a better way to transfer the money/investments? Please help!

2

My view, if the investments made in India is sizable, you need to talk to a tax expert on this before you take a decision on transfer or liquidating MFs in India.

I am not an expert but my two cents to the above is.

  1. If your intention is to hold on to the mutual fund, I do not think there will be an issue as tax needs to be paid on the income earned. Not sure if your MF is on growth basis or dividend.
  2. It would be ideal that once you move out to US, you could then consult tax experts or friends there to ascertain the actual process. I am sure there will be many Indians like you in US who would have faced the same issues like you. I am sure it is not mandatory that you need to transfer or sell before you travel. I am sure US will have their own tax rules and regulation and it would be best advised that you consult someone there than speak to a tax consultant in India.

While searching on this topic I found one point which was interesting

“Most people think that they will be taxed twice on the same income. That is not true. India and the US have a treaty agreement in place and you will get tax credit in each country on the taxes paid in the other.”

Disclaimer: Not an expert at all.

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3

Thanks for your reply, neha.
From what I’ve been able to understand, US’s PFIC rule is dangerously overreaching. It considers all non US-domiciled MFs, ETFs as ‘PFIC’ that are under their purview to be taxed as soon as you land in US… because you become the US tax resident. There might be some nuance to it, but to be on a safer side, I want to get rid of it before I travel.
So, the only solution is to remove my name from the MFs and ETFs that I own. Meaning - I either sell them or transfer them. That’s the genesis of the question.

4

Just my opinion, do contact professionals before making your final decision.

Option 2 that is to transfer it will be a better choice
… this is my personal opinion.

5

This may help… but check with a professional…

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6

Thank you so much. This is actually very helpful and matches with what I’ve already being reading at other places!

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