The FATCA is a US law that requires certain foreign financial institutions and entities to identify and report accounts held by US persons, helping prevent offshore tax evasion.
For Indian businesses that work with international clients, investors, banks or group entities, FATCA compliance is essential to meet reporting obligations, avoid penalties and support cross-border financial relationships.
What is the Foreign Account Tax Compliance Act, and who does it apply to?
FATCA is a US law that requires foreign financial institutions and certain non-financial foreign entities to identify and report accounts linked to US taxpayers. It applies to FFIs, NFFEs and Indian businesses with US investors, US beneficial owners or operations that bring them within FATCA's scope.
FATCA was introduced into US law in 2010 to reduce offshore tax evasion by obtaining information on foreign accounts linked to US taxpayers. It draws obligations from two distinct entity types:
Foreign financial institutions (FFIs)
This covers banks, brokers, investment funds and certain insurance companies operating outside the US. Where an FFI holds accounts belonging to US persons, it must register with the Internal Revenue Service (IRS), report account balances and income, and document ownership.
Non-financial foreign entities (NFFEs)
Every non-US entity that falls outside the FFI definition falls into this category. An NFFE must certify either that it has no substantial US owners or identify those owners to the relevant institution.
How FATCA works in India: The IGA framework
In India, FATCA operates through a Model 1 intergovernmental agreement (IGA) under which Indian FFIs report specified account information to the Central Board of Direct Taxes (CBDT), which then transmits the data annually to the Internal Revenue Service (IRS).
India formalised its Model 1 IGA with the US on July 9, 2015. Three rules under the Income Tax Rules, 1962, govern domestic implementation. Rule 114F defines reportable institutions and accounts, Rule 114G specifies the information to be collected and Rule 114H sets out the due diligence standards.
The scope of CRS reporting has already been widened to include crypto-assets, specified electronic money products and Central Bank Digital Currencies, effective 1 January 2026, through amendments to Rules 114F–114H (Income-tax (Amendment) Rules, 2026). Under the Income Tax Act, 2025 (effective 1 April 2026), this framework is being recast as draft Rules 238, 239 and 240, which carry these provisions forward.
Every account holder must submit a self-declaration to their bank confirming whether they have a US tax connection. Where a US connection is identified, the account becomes reportable under the annual IRS submission. A refusal to provide the declaration may result in restrictions on, or closure of, the account.
What are the key FATCA compliance requirements?
The key FATCA compliance requirements are ongoing due diligence, IRS registration where applicable and annual reporting. FATCA compliance is continuous, not a one-time filing, so institutions must regularly review accounts, maintain required registrations and submit annual reports.
- Due diligence: Institutions must screen new and existing accounts for US indicia, such as a US address, US place of birth or standing instructions to transfer funds to a US account. New customers must also provide a self-declaration at onboarding to confirm their tax residency. In India, this applies to every account holder regardless of nationality.
- IRS registration: Every reporting financial institution must register on the IRS FATCA portal. Once approved, it receives a Global Intermediary Identification Number (GIIN), which is used in subsequent filings and correspondence. Registered Indian FFIs also appear on the IRS's publicly searchable FFI list.
- Annual reporting: Indian reporting institutions file Form 61B with the CBDT on or before 31 May each year, covering all reportable accounts for the preceding calendar year (1 January to 31 December). In the US, Form 8938 (Statement of Specified Foreign Financial Assets) is filed with the annual income tax return.
What are the most common FATCA compliance errors and penalties?
The most common FATCA compliance issues include incorrect entity classification, missing taxpayer identification numbers (TINs), confusion between FATCA and other reporting requirements, and failure to meet registration or reporting obligations. These errors can lead to penalties, withholding taxes and increased regulatory scrutiny.
- Wrong classification: A business may incorrectly classify itself or a customer as non-reportable when the account is actually within FATCA's scope. This can disrupt reporting and create downstream compliance issues for banks and counterparties.
- Missing TIN: Model 1 FFIs must report a US TIN for each reportable account. Indian institutions filing Form 61B with the CBDT must include TINs for all US reportable accounts. Repeated missing TINs can result in the institution being flagged as non-compliant.
- Separate filings, separate risk: FATCA and the Foreign Bank and Financial Accounts Report (FBAR) are separate reporting requirements with different rules. For US persons with Indian accounts, both may apply. Filing one does not satisfy the other, and the IRS may compare both when reviewing offshore asset reporting.
- Penalty exposure: Failure to file Form 8938 can result in a US$10,000 penalty, increasing to US$50,000 for continued non-compliance after an IRS notice. Underpaid tax relating to undisclosed foreign assets may also attract a 40% penalty.
- Non-participating risk: A reporting institution that does not register or report correctly may be treated as a non-participating FFI. This can trigger 30% withholding on certain US-source payments and damage relationships beyond the immediate tax cost.
How can businesses manage FATCA compliance?
Businesses can manage FATCA compliance by identifying their reporting status, completing required registrations, conducting due diligence and meeting annual reporting obligations. A simple FATCA process works best when it is built into onboarding, record-keeping and annual review cycles.
- Confirm whether your entity qualifies as an FFI or NFFE under Rule 114F.
- Register on the IRS FATCA portal and obtain your Global Intermediary Identification Number (GIIN).
- Collect self-declaration forms at onboarding to confirm each account holder's tax residency status.
- Review accounts for US indicia, such as a US address, US place of birth or US-directed fund transfers, and obtain follow-up documentation where required.
- File Form 61B with the CBDT by 31 May each year for all reportable accounts.
- Obtain and retain US TINs for all reportable accounts, as required under Rule 114H.
Conclusion
FATCA compliance is most effective when it becomes part of everyday record-keeping rather than a year-end exercise. By maintaining accurate records, completing due diligence and meeting annual reporting obligations, businesses can reduce compliance risks and support smoother cross-border operations. TallyPrime helps businesses keep financial records organised throughout the year, making FATCA reporting more efficient and reliable.
