Rule 238 — Definitions.
The rule is the definition set for itself and for rules 239 and 240, which carry the reporting and due diligence obligations. It has sixteen numbered clauses.
Clause (1) defines "financial account" as an account other than an excluded account maintained by a financial institution, and includes a depository account, a custodial account, any equity or debt interest in an investment entity, any equity or debt interest in another financial institution where the class of interests was established with a purpose of avoiding reporting under rule 239 (and, for a U.S. Reportable account, where its value is determined primarily by reference to assets giving rise to U.S. Source withholdable payments), and any cash value insurance contract or annuity contract, other than a non-investment-linked, non-transferable immediate life annuity monetising a pension or disability benefit under an excluded account. Its Explanation then defines depository account — extended, for accounts other than U.S. Reportable accounts, to an account or notional account representing specified electronic money products and to an account holding central bank digital currencies — custodial account, equity interest in a partnership firm and in a trust, insurance contract, annuity contract, cash value insurance contract (with a fifty thousand U.S. Dollar floor for a U.S. Reportable account), and cash value with its five carve-outs.
Still in clause (1), the Explanation lists eight kinds of excluded account: a retirement or pension account meeting five requirements including a contribution limit of fifty thousand U.S. Dollars a year or a lifetime limit of one million U.S. Dollars; a non-retirement savings or investment account meeting four requirements including an annual contribution limit of fifty thousand U.S. Dollars; an account under the Senior Citizens Savings Scheme Rules, 2004; a life insurance contract ending before the insured attains ninety years, on four conditions; an account held solely by an estate with the will or death certificate on file; an account established in connection with a court order or judgment, a sale, exchange or lease of property, a loan servicing or tax escrow obligation, or a company foundation or capital increase (not more than 12 months old and not a U.S. Reportable account); a credit card overpayment account, other than a U.S. Reportable account, where from on or before 31st December, 2015 the institution prevents or refunds within sixty days overpayments above fifty thousand U.S. Dollars; and a specified electronic money product account, other than a U.S. Reportable account, where the rolling average 90 day end-of-day aggregate balance did not exceed usd 10,000 on any day in the period.
Clause (2) defines "financial asset" by an inclusive list of securities, partnership interests, commodities, swaps, insurance and annuity contracts and interests in them, excludes a non-debt and direct interest in immovable property, and for accounts other than U.S. Reportable accounts includes any interest in a relevant crypto-asset.
Clause (3) defines "financial institution" as a custodial institution, a depository institution, an investment entity or a specified insurance company, and defines each: a custodial institution by a twenty per cent income test over the three preceding financial years or the period of existence, whichever is less; a depository institution, extended for non-U.S. Reportable accounts to holders of specified electronic money products or central bank digital currencies; an investment entity by the activities it conducts for customers or by gross income primarily attributable to investing where it is managed by another financial institution, with a fifty per cent gross income test in Explanation 1; and a specified insurance company.
Clause (4) defines "non-participating financial institution" by reference to Article 1(r) of the fatca agreement, excluding an Indian financial institution and a partner jurisdiction financial institution except one treated as non-participating under Article 5.
Clause (5) lists fourteen categories of "non-reporting financial institution" — Governmental entity, International Organisation or Central Bank subject to two exceptions; the four kinds of retirement fund; a non-public fund of the armed forces, Employees' State Insurance Fund, gratuity fund or provident fund; an investment-entity-only Indian financial institution all of whose interest holders are such entities; a qualified credit card issuer; certain advisory or portfolio-managing investment entities established in India; an exempt collective investment vehicle; a reported trust; and, for U.S. Reportable accounts only, a financial institution with a local client base, a local bank, a financial institution with only low value accounts, a sponsored investment entity and controlled foreign corporation, and a sponsored closely held investment vehicle; and, for accounts other than U.S. Reportable accounts, a qualified non-profit entity. Its Explanation defines each of those nineteen terms, carrying the numerical tests: five per cent beneficiary limits, fifty per cent contribution tests, fifty thousand U.S. Dollar contribution limits, fewer than fifty participants and a twenty per cent non-resident entitlement limit for a narrow participation fund, a ninety eight per cent resident holding test and the other conditions for a financial institution with a local client base, one hundred seventy-five million and five hundred million U.S. Dollar asset limits for a local bank, fifty thousand U.S. Dollar account and fifty million U.S. Dollar asset limits for a financial institution with only low-value accounts, and the sponsorship, registration and record-retention conditions for the sponsored entities.
Clause (6) defines "reportable account" as a financial account identified by the rule 240 due diligence as held by a reportable person, by an entity not based in the United States of America with one or more controlling persons that is a specified U.S. Person, or by a passive non-financial entity with one or more controlling persons described in clause (8)(b). Its Explanation defines active non-financial entity by eight alternative criteria, controlling person by reference to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 and the three regulators' circulars, non-financial entity, passive non-financial entity, related entity with its more than fifty per cent control test, and passive income with its ten heads and the dealer exception.
Clause (7) takes "relevant crypto-asset" from rule 241. Clause (8) defines "reporting financial institution" as a financial institution other than a non-reporting financial institution which is resident in India, excluding its branches outside India, and any Indian branch of such an institution not resident in India. Clause (9) defines "reportable person". Clause (10) defines "Specified Electronic Money Product" by five criteria with a 60 day holding test in its Explanation. Clauses (11) to (14) define "specified U.S. Person", "U.S. Person", "U.S. Reportable account" and "U.S. Source withholdable payment", and clauses (15) and (16) define "withholding foreign partnership" and "withholding foreign trust".
Rules 239 and 240 impose the reporting and due diligence obligations for financial account information, and both are unworkable unless every term in them is fixed. This rule fixes them, and it does so in the vocabulary of the two international regimes the obligations implement — one addressed to U.S. Reportable accounts under the fatca agreement, the other to reportable accounts generally. That is why so many definitions carry an alternative reading "for an account other than a U.S. Reportable account": the same institution, account or asset may fall on different sides of a definition depending on which regime is in issue.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Income test for a custodial institution | Twenty per cent of gross income | Income attributable to holding financial assets and related financial services, over the three financial years preceding the year of determination or the period of existence, whichever is less | Clause (3), Explanation (a) |
| Gross income test for an investment entity | Fifty per cent of the gross income of the entity | Attributable to the relevant activities, over the shorter of the three-year period ending on 31st March of the preceding year or the period of existence | Clause (3), Explanation 1 |
| Cash value floor for a cash value insurance contract | An amount equivalent to fifty thousand U.S. Dollars | Applies in the case of a U.S. Reportable account | Clause (1), Explanation (f) |
| Annual contribution limit for an excluded retirement or pension account | An amount equivalent to fifty thousand U.S. Dollars or less | Alternative to the lifetime limit; account aggregation and currency translation under rule 240 | Clause (1), Explanation (h)(i)(E) |
| Lifetime contribution limit for an excluded retirement or pension account | An amount equivalent to one million U.S. Dollars or less | Alternative to the annual limit | Clause (1), Explanation (h)(i)(E) |
| Annual contribution limit for an excluded savings or investment account | An amount equivalent to fifty thousand U.S. Dollars or less | Non-retirement savings vehicle meeting the other three requirements | Clause (1), Explanation (h)(ii)(D) |
| Age limit for an excluded life insurance contract | Before the insured individual attains age of ninety years | The coverage period must end before that age and the four conditions must be met | Clause (1), Explanation (h)(iv) |
| Age of an account for the foundation or capital increase exclusion | Not more than 12 months | The account must also not be a U.S. Reportable account | Clause (1), Explanation (h)(vi)(E)(v) and (vi) |
| Credit card overpayment limit and refund period | An amount equivalent to fifty thousand U.S. Dollars, refunded within sixty days | Policies implemented beginning on or before the 31st December, 2015, for an account other than a U.S. Reportable account | Clause (1), Explanation (h)(vii)(B) |
| Balance test for an excluded specified electronic money product account | Rolling average 90 day end-of-day aggregate account balance or value not exceeding usd 10,000 on any day | During any period of 90 consecutive days in the calendar year or other appropriate reporting period; not a U.S. Reportable account | Clause (1), Explanation (h)(viii) |
| Beneficiary limit in a Broad Participation Retirement Fund and in a provident fund | No beneficiary with a right to more than five per cent of the fund's assets | One of the conditions for non-reporting status | Clause (5), Explanation (E)(i) and (K)(i) |
| Employer contribution test for a Broad Participation Retirement Fund | At least fifty per cent of total contributions from the sponsoring employers | One of the alternative requirements in clause (E)(iii) | Clause (5), Explanation (E)(iii)(b) |
| Participant limit for a Narrow Participation Retirement Fund | Less than fifty participants | With the four other conditions | Clause (5), Explanation (F)(i) |
| Non-resident entitlement limit for a Narrow Participation Retirement Fund | Not more than twenty per cent of the fund's assets | For participants who are not residents in India | Clause (5), Explanation (F)(iv) |
| Resident holding test for a financial institution with a local client base | At least ninety eight per cent of the financial accounts by value | Held by residents | Clause (5), Explanation (N)(v) |
| Asset limits for a local bank | Not more than an amount equivalent to one hundred seventy-five million U.S. Dollars on its own balance sheet, and not more than five hundred million U.S. Dollars for it and any related entity on a consolidated or combined basis | Both limits must be satisfied | Clause (5), Explanation (O)(iv) |
| Account and asset limits for a financial institution with only low-value accounts | No account above an amount equivalent to fifty thousand U.S. Dollars, and not more than fifty million U.S. Dollars in assets alone or with related entities | The institution must also not be an investment entity | Clause (5), Explanation (P)(ii) and (iii) |
| Ownership limit for a sponsored, closely held investment vehicle | Twenty or less than twenty individuals | Owning all the debt and equity interests, subject to the stated exclusions | Clause (5), Explanation (R)(iv) |
| Record retention by a sponsoring entity | Six years | Documentation collected with respect to the financial institution | Clause (5), Explanation (R)(v)(b) |
| Passive income and passive asset test for an active non-financial entity | Less than fifty per cent of gross income and less than fifty per cent of assets | For the preceding financial year; one of eight alternative criteria | Clause (6), Explanation (A)(i) |
| Period after initial organisation for the start-up criterion | Twenty four months from the date of the initial organisation of the entity | After which the entity no longer qualifies under that criterion | Clause (6), Explanation (A)(v) |
| Control test for a related entity | More than fifty per cent of the votes and value in an entity | Direct or indirect ownership | Clause (6), Explanation (E) |
| Holding period test for a specified electronic money product | 60 days | Funds held longer than 60 days after instructions to transfer, or after receipt where no instructions are received, mean the product is not created solely to facilitate a transfer | Clause (10), Explanation (ii) |
The single most important structural feature is that many definitions read differently for a U.S. Reportable account and for every other account, and the difference is not cosmetic: relevant crypto-assets enter "financial asset" and the investment entity tests only for non-U.S. Reportable accounts, specified electronic money products and central bank digital currencies enter "depository account" and "depository institution" only for those accounts, and five of the non-reporting categories in clause (5) are available only for U.S. Reportable accounts while the qualified non-profit entity category is available only for the others. An institution therefore cannot settle its status once and for all; it settles it against the regime in issue. Second, nearly every monetary figure in the rule is stated as an amount equivalent to a sum in U.S. Dollars and is to be applied using the account aggregation and currency translation rules in rule 240 — the figures are not rupee amounts and are not applied account by account. Third, the exclusions are conjunctive: an excluded account under clause (1) must meet every lettered requirement of its category, and a fund or bank claiming non-reporting status under clause (5) must meet every condition of the definition it relies on, so failing one item puts the account or institution squarely back inside rules 239 and 240. Finally, this rule creates no obligation of its own — it defines; the reporting is done under rule 239 and the identification under rule 240.
A bank in India maintains a savings account for an individual. It is a depository institution and so a financial institution under clause (3), and resident in India, so it is a reporting financial institution under clause (8)(a) unless it fits a clause (5) category. The account is a depository account and so a financial account under clause (1) unless it is an excluded account, and it becomes a reportable account under clause (6) only when the rule 240 due diligence identifies the holder as a reportable person. If the same bank also maintains a branch outside India, clause (8)(a) leaves that branch out of its reporting perimeter.
A financial institution meets this rule when classifying itself and every account it maintains before reporting under rule 239; an account holder meets it indirectly, through the self-certification and documentation the institution asks for under the rule 240 due diligence procedures.
"financial institution" means a custodial institution, a depository institution, an investment entity, or a specified insurance company.
a financial institution (other than a non-reporting financial institution) which is resident in India, but excludes any branch of such institution, that is located outside India
its income attributable to the holding of financial assets and related financial services equals or exceeds twenty per cent of its gross income during the three financial years preceding the year in which determination is made or the period during which the entity has been in existence, whichever is less
