Article
Feb 28, 2026
PFIC Tax for NRIs Moving to the US: How to Avoid Paying US Tax on Pre-Residency Gains (With ₹1 Crore Case Study)
If you are an NRI who recently moved to the United States and still hold Indian mutual funds, this article is critical for you.
Indian mutual funds are classified as PFICs (Passive Foreign Investment Companies) under US tax law. Without planning, PFIC taxation can be punitive.
But here’s the good news:
If structured properly in your first year of US residency, you can avoid paying US tax on gains that accrued before you moved.
This guide explains:
What happens when you move to the US with Indian mutual funds
Whether the US taxes your pre-residency gains
How the Mark-to-Market (MTM) election under Section 1296 works
A detailed ₹1 crore case study
What you should actually do
Why Indian Mutual Funds Become a Problem in the US
Once you become a US tax resident:
The US taxes your worldwide income
Indian mutual funds are treated as PFICs
PFICs trigger complex reporting (Form 8621)
Default PFIC rules (Section 1291) can lead to:
High effective tax
Interest penalties
Retroactive gain allocation
This is why planning in your first US tax year matters.
The Key Question
Will the US tax gains that accrued before I became a US resident?
If handled correctly:
No. The US does not tax pre-residency gains.
This is where the Mark-to-Market (MTM) election under Internal Revenue Code Section 1296 becomes powerful.
How the MTM Election Protects You
Under Treasury Regulation §1.1296-1(d)(5):
When you become a US person and make a timely MTM election:
Your cost basis for US tax purposes is reset to
the fair market value on the first day you become a US tax resident
This effectively “cuts off” pre-US appreciation from US taxation.
Case Study: ₹1 Crore Indian Mutual Fund Portfolio
Let’s walk through a realistic scenario.
Facts
Investment date: April 2018
Purchase value: ₹50,00,000
Value on date of US residency (Jan 1, 2025): ₹1,00,00,000
Sale date: October 2025
Sale value: ₹1,10,00,000
MTM election made for 2025
Step 1: Pre-US Gains
From 2018 to Dec 31, 2024:
Purchase: ₹50L
Value at US entry: ₹1 Cr
Gain: ₹50L
India Tax:
India will treat this as long-term capital gains (LTCG).
US Tax:
Because of the MTM transition rule:
👉 The US treats your starting basis as ₹1 Cr.
👉 The ₹50L gain is NOT taxed in the US.
This is the most important takeaway.
Step 2: Post-US Gains
From Jan 1, 2025 to October 2025:
Value at residency start: ₹1 Cr
Sale value: ₹1.10 Cr
Gain: ₹10L
This ₹10L is taxable in the US.
Under MTM rules:
The gain is treated as ordinary income, not LTCG.
No PFIC interest penalty applies.
No retroactive gain allocation.
Final Tax Outcome Summary
Portion of Gain | India Tax | US Tax |
₹50L (Pre-US gain) | LTCG | ❌ Not taxed |
₹10L (Post-US gain) | LTCG | Ordinary income |
The US does NOT retroactively tax your pre-residency appreciation.
What If You Do Nothing?
If you do not make the MTM election:
Section 1291 rules apply
Gains may be allocated across holding years
Interest penalties can apply
Compliance becomes expensive
Effective tax rate can rise significantly
For most NRIs who just moved to the US, this is the worst option.
What Should NRIs Moving to the US Do?
If you have already become a US tax resident:
Make a timely MTM election in your first US tax year
Consider selling the mutual funds in the same year
Rebuild portfolio using US-efficient structures
If you have not yet become a US resident:
👉 Selling before residency often creates the cleanest outcome.
Common Questions NRIs Ask
Do I pay US tax on pre-US gains?
No — if you properly elect MTM in your first US tax year.
Is the post-residency gain LTCG in the US?
No. Under MTM, it is taxed as ordinary income.
Can I claim foreign tax credit?
Yes, typically for taxes paid? to India — but coordination matters.
Should I continue holding Indian mutual funds in the US
In most long-term cases, it is inefficient due to PFIC rules and compliance burden.
Why This Planning Matters
For a ₹1 crore portfolio:
Avoiding taxation on ₹50L of pre-US gains can mean lakhs saved.
Avoiding Section 1291 interest charges prevents compounding penalties.
Correct filing avoids IRS risk and future audit exposure.
PFIC mistakes are expensive — and often irreversible.
How Pivot Money Can Help
At Pivot Money, we work with NRIs and global Indians who:
Are moving to the US
Already moved and hold Indian mutual funds
Need help with PFIC reporting (Form 8621)
Want coordinated India + US tax strategy
Want to restructure portfolios efficiently
We help you:
Plan the MTM election properly
Coordinate India LTCG and US reporting
Work with experienced cross-border CPAs
Transition into a tax-efficient long-term structure
If you’ve recently moved to the US and hold Indian mutual funds worth ₹50L, ₹1 Cr, or more — this is not something to leave to chance.
Reach out to Pivot Money and we’ll help you structure this correctly.