Buying Indian shares is permitted for a US citizen living in India. What makes it complicated is that two tax authorities have a claim on the same portfolio. India decides liability based on how many days the person spends in the country. The United States decides it based on the passport the person holds, regardless of where they sleep at night.
US citizens are subject to the same tests as any other foreign national, with one carve-out. The 60-day threshold does not apply to Indian citizens who leave India for employment. A US citizen without Indian citizenship therefore falls under the standard 60-day plus 365-day rule.
the three Indian tax residency categories
Non-Resident (NR). When the day-count tests are not met, the person is classified as NR. Only Indian-source income enters the tax net, which covers capital gains on Indian shares, dividends from Indian companies, and interest from Indian bank accounts.
Resident but Not Ordinarily Resident (RNOR). Meeting the 182-day test alone does not make someone fully resident. If the person has not been resident in India for 2 of the last 10 years, or has spent 730 days or less in India over the last 7 years, they fall into RNOR. This is a transitional category. Indian-source income is taxed, and foreign income is taxed only when it flows from a business controlled in India or a profession set up in India.
Resident and Ordinarily Resident (ROR). Once the additional lookback conditions are satisfied, the person becomes ROR. India then taxes worldwide income. Every foreign asset, including US brokerage accounts and US shares, has to be disclosed in Schedule FA of the Indian tax return.
One mistake recurs here. Spending 182 days in India does not automatically trigger worldwide taxation. The lookback conditions have to be met as well.
how US citizens can buy Indian stocks
The route depends on residency status and the type of account used.
Portfolio Investment Scheme (PIS). US citizens classified as NR or RNOR can buy Indian shares through the PIS route with an authorised dealer bank, on a repatriation basis. Funds come from an NRE account, and sale proceeds can be sent abroad.
Non-repatriation basis. Investment is also permitted through an NRO account, on a non-repatriation basis. The sale proceeds return to the NRO account and cannot be moved overseas.
Budget 2026 change. A meaningful shift took effect in Budget 2026. The definition of “Person Resident Outside India” (PROI) now covers foreign citizens, not only NRIs. US citizens living outside India can therefore invest directly in Indian equity through the PIS route, with individual limits raised from 5% to 10% and aggregate limits from 10% to 24%.
the US tax obligations that follow the passport
US citizenship means US tax obligations travel with the person. The IRS taxes US citizens on worldwide income regardless of residence. Indian stocks, Indian mutual funds, and Indian bank accounts are all reportable.
FBAR (FinCEN Form 114). Required when the combined balance in foreign financial accounts crosses $10,000 at any point in the calendar year. Indian bank accounts, including NRE and NRO accounts, count toward this threshold.
Form 8938 (FATCA). Required when specified foreign financial assets exceed the applicable threshold. For US citizens living abroad, the threshold is $200,000 at year-end or $300,000 at any point during the year for single filers, and $400,000 / $600,000 for married filing jointly. Indian stocks held in a demat account, Indian mutual funds, and Indian bank accounts are specified foreign financial assets.
Form 8621 (PFIC). Indian mutual funds and ETFs are classified as Passive Foreign Investment Companies (PFICs) under US tax law. The default regime is punitive, with gains taxed at the highest marginal rate plus a compounded interest charge. Form 8621 is required for each PFIC holding once the total value crosses $25,000 for single filers. This is one of the costliest compliance burdens for US citizens holding Indian mutual funds.
Foreign Tax Credit. Tax paid in India on Indian-source income can be claimed against US tax liability on the same income, using Form 1116. This prevents double taxation on dividends and capital gains.
the FATCA declaration on the Indian side
US citizens opening Indian bank accounts or investing in Indian mutual funds must complete a FATCA self-certification. The declaration asks for US tax residency details and the US Tax Identification Number (TIN). Missing FATCA can lead to frozen folios, blocked SIPs, and restricted redemptions.
Indian mutual fund investments can be hard for US citizens to access, because many AMCs restrict or decline investments from US residents due to FATCA compliance requirements.
what happens when a US citizen returns to the US
If the US citizen leaves India and becomes a non-resident again, the Indian tax treatment reverts to NR status. Capital gains on Indian shares remain taxable in India, and DTAA relief can be claimed in the US for taxes paid in India.
For US citizens who stay in India and move from RNOR to ROR, worldwide income becomes taxable in India, and all foreign assets, including US brokerage accounts and US stocks, must be disclosed in Schedule FA. Foreign Tax Credit can be claimed in India for US taxes paid on the same income, capped at the Indian tax liability.
what retail investors should take from this
The investment itself is permitted. The complexity sits in the compliance. A US citizen living in India faces reporting obligations in both countries, and the penalties for missing them are significant.
The Indian mutual fund route is the most difficult because of PFIC rules. Direct Indian stocks avoid that classification. For US citizens who want Indian equity exposure without the PFIC reporting burden, individual shares or India-focused ETFs listed in the US are the cleaner options.
The day-count calculation decides the Indian tax status, and it has to be recalculated every financial year. A US citizen who spends 182 days in India in one year but fewer in the next may shift from ROR to RNOR to NR, and the tax treatment shifts with it.
Frequently Asked Questions
1. Does holding a US passport stop someone from opening a demat account in India?
No. A US citizen can open a demat and trading account in India. What changes is the paperwork and the route. NRIs and foreign citizens typically need a PIS approval from an authorised dealer bank before trading on a repatriation basis, and the account is usually linked to an NRE or NRO account rather than a regular savings account.
2. Which is the bigger compliance headache — Indian tax or US tax?
For most US citizens in India, the US side is heavier. India taxes only Indian-source income until ROR status is reached. The US taxes worldwide income from the day the passport is issued. FBAR, Form 8938, and Form 8621 stack on top of the Indian return, and the last of those applies to every Indian mutual fund held.
3. Why do so many Indian mutual funds refuse US citizens as investors?
It comes down to FATCA. American tax law requires foreign financial institutions to report US account holders to the IRS. Many Indian AMCs have decided the compliance cost is not worth the business and simply decline applications from US residents and citizens. The restriction is applied at the fund house level, not by SEBI.
4. Is it better to buy Indian shares directly instead of through mutual funds?
For US citizens, often yes. Indian mutual funds and ETFs are classified as PFICs, which triggers Form 8621 and a punitive default tax rate in the US. Individual Indian shares are not PFICs. A demat account holding direct stocks avoids the worst of that reporting burden.
5. What happens if a US citizen forgets to file FBAR or Form 8938?
The penalties are severe. A non-willful FBAR failure can attract a penalty of up to $10,000 per account per year. A willful failure can go up to 50% of the account balance or $100,000, whichever is higher. Form 8938 penalties start at $10,000 per year and escalate with continued non-compliance.
