On June 3rd, 2015, India signed the Multilateral Competent Authority Agreement (MCAA) to enable automatic exchange of information under the Common Reporting Standard (CRS). The Central Board of Direct Taxes (CBDT) has been providing guidance on reporting requirements for Reporting Financial Institutions (RFIs) regarding reportable accounts. They issued a comprehensive Guidance Note on August 31st, 2015, to assist RFIs, regulators and Income Tax Department officers. This note was subsequently updated on December 31st, 2015, May 31st, 2016 and November 30th, 2016.
Now, the CBDT has issued a clarification using its powers under section 119 of the Income-tax Act, 1961, which partially modifies the Guidance Note dated November 30th, 2016. The purpose of this clarification is to address any uncertainties related to the reporting of accounts other than U.S. reportable accounts.
CBDT Clarification on Reporting of Treaty Qualified Retirement Fund
The CBDT has clarified that Treaty Qualified Retirement Funds established in India and receiving benefits under the agreement between India and the USA are considered non-reporting financial institutions under certain rules. However, under the Common Reporting Standard (CRS), these funds are not treated as non-reporting financial institutions when it comes to maintaining and reporting information about any reportable account other than a U.S. reportable account.
i) The term “Treaty Qualified Retirement Fund” is defined in the Explanation to I-T Rule 114F(5). It refers to a fund established in India that receives benefits under an agreement between India and the USA regarding income derived from sources within the USA. The fund must satisfy any relevant limitations on benefits requirement and primarily operate to administer pension or retirement benefits.
ii) A Treaty Qualified Retirement Fund is considered a non-reporting financial institution under I-T Rule 114F(5)(b).
iii) According to the Inter-Governmental Agreement and Memorandum of Understanding between India and the USA (FATCA-IGA), a Treaty-Qualified Retirement Fund is treated as an Exempt beneficial owner for certain purposes under the U.S. Internal Revenue Code. It is also classified as a Non-Reporting Indian Financial Institution.
iv) However, under the Common Reporting Standard (CRS), which involves information exchange for reportable accounts other than U.S. reportable accounts, a Treaty Qualified Retirement Fund is not treated as a Non-Reporting Financial Institution.
v) To clarify, a Treaty Qualified Retirement Fund will not be considered a non-reporting financial institution when it comes to maintaining and reporting information about any reportable account other than a U.S. reportable account, as defined in I-T Rule 114F(11).
CBDT Clarification on Reporting of Non-Public Fund of Armed Forces
The status of the non-public fund of the Armed Forces has been further clarified by the CBDT. While the fund is considered a Non-Reporting Indian Financial Institution and an exempt beneficial owner under the FATCA-IGA, it is categorized as an active non-financial entity (NFE) under the CRS. This means that it is not treated as a financial institution except for cases of any reportable account that falls under the definition of a U.S. reportable account.
i) The CBDT has clarified the status of the non-public fund of the armed forces under I-T Rule 114F(5). According to the explanation provided, a non-public fund of the armed forces refers to a fund established in India by the armed forces of the Union of India for the welfare of current and former armed forces members. This fund’s income is exempt from tax under I-T section 10(23AA).
ii) Under the FATCA-IGA, the Regimental Fund or Non-public fund of the Armed Forces is considered a Non-Reporting Indian Financial Institution and an exempt beneficial owner for certain purposes.
iii) However, as per the CRS, the non-public fund of the armed forces is categorized as an active non-financial entity (NFE) and not treated as a financial institution.
iv) To clarify further, the non-public fund of the armed forces will not be considered a financial institution, except for cases of any reportable account that falls under the definition of a U.S. reportable account as defined in I-T Rule 114F(11).
CBDT Clarification on Reporting of Gratuity Funds
Gratuity funds fall under the category of non-reporting financial institutions under specific rules provided they also qualify as financial institutions. The CBDT has provided detailed criteria for determining the reporting requirements under the CRS for accounts held in gratuity funds, addressing various scenarios, including accounts managed by individuals or entities that are not financial institutions and accounts meeting retirement or pension conditions.
i) A gratuity fund is considered a non-reporting financial institution under I-T Rule 114F(5)(c), provided it also qualifies as a financial institution under the same rule. According to Explanation J to Rule 114F(5), a gratuity fund refers to a fund established under the Payment of Gratuity Act, 1972, to provide gratuity payments to specific types of employees of an Indian employer mentioned in the Gratuity Act.
ii) As per paragraph II (H) of Annex II of the FATCA-IGA, a gratuity fund is classified as a Non-Reporting Indian Financial Institution and an exempt beneficial owner for sections 1471 and 1472 of the U.S. Internal Revenue Code. However, gratuity funds are not explicitly mentioned as Non-Reporting Financial Institutions under the CRS.
iii) To clarify reporting requirements under the CRS for accounts other than U.S. reportable accounts:
a) Gratuity funds solely managed by individuals or entities that are not financial institutions are considered passive non-financial entities under I-T Rule 114F(D)(i).
b) If a gratuity fund is managed as an investment entity under I-T Rule 114F(3)(c)(B), it will qualify as a Financial Institution and a Reporting Financial Institution for CRS reporting purposes.
c) Generally, accounts held in gratuity funds are treated as excluded accounts if they meet the conditions of retirement or pension accounts under I-T Rule 114F(1)(h)(i), including monetary contribution limits.
d) Accounts in gratuity funds that allow withdrawals based on specific criteria beyond death, disability or retirement (e.g., withdrawals upon resignation after a certain period of service) can be treated as excluded accounts under I-T Rule 114F(1)(h)(ii), subject to meeting all specified conditions, including annual monetary contribution limits.
e) If a gratuity fund is a reporting financial institution, relevant accounts meeting the conditions of I-T Rule 114F(1)(h)(i) or (h)(ii) will be treated as excluded accounts.
Conclusion
This clarification by CBDT clarifies the reporting requirements for certain financial institutions and funds under the CRS. By clarifying the treatment of Treaty Qualified Retirement Funds, Non-public funds of the Armed Forces and Gratuity Funds, the CBDT seeks to enhance transparency and compliance in the exchange of financial information between India and other participating jurisdictions.
CBDT Clarification dated 26/07/2023: Reporting of Funds (CRS) under I-T Rule 114F(5)