SEBI Directs Financial Institutions to Integrate FATCA/CRS Reporting into KYC Processes
India’s Securities and Exchange Board of India (SEBI) has issued a directive requiring registered intermediaries that qualify as Reporting Financial Institutions (RFIs) to incorporate Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) due diligence and reporting into their customer onboarding and Know Your Customer (KYC) procedures. This update aligns with the revised Automatic Exchange of Information (AEOI) reporting framework that took effect on April 1, 2026. The move aims to ensure that financial institutions are compliant with international tax information exchange standards.
The directive specifically targets firms that meet the RFI definition, not all intermediaries. These institutions must update their existing KYC systems to capture and maintain the necessary information for their reporting duties under FATCA and CRS. This integration places responsibility across both onboarding and compliance functions, rather than solely on teams preparing tax reports.
Understanding FATCA and CRS Reporting Requirements
FATCA is a United States tax compliance law that requires foreign financial institutions to report on financial accounts held by U.S. taxpayers. CRS, on the other hand, is a global standard developed by the Organisation for Economic Co-operation and Development (OECD) for the AEOI of financial account information. Both frameworks are designed to combat tax evasion by ensuring that financial account information is reported to tax authorities.
The revised framework in India is governed by Section 508 of the Income-tax Act, 2025, and Rules 238 to 240 of the Income-tax Rules, 2026. These rules outline the procedures for identifying, reporting, and exchanging financial account information. For RFIs, compliance involves understanding which entities are classified as RFIs under Rule 238(8) of the Income-tax Rules, 2026, and taking the necessary steps to meet their obligations.
Integrating Due Diligence into Customer Onboarding
SEBI’s circular emphasizes that registered intermediaries must weave AEOI due diligence requirements into their customer onboarding and KYC processes. This means that from the initial stages of bringing a new customer on board, the institution must gather information relevant to FATCA and CRS. This includes identifying the tax residency of individuals and entities and collecting necessary documentation to support this.
Retaining this information is as critical as collecting it. Financial institutions need robust systems to store this data securely and make it accessible for reporting purposes. The responsibility for due diligence and reporting is placed directly on the RFI, requiring them to establish clear internal processes and controls.
Form 166 XML Reporting and Mandatory Fields
A key aspect of the reporting process involves the generation of Form 166 in XML format. Reporting teams must ensure that their software is updated to capture all newly required fields. The Income Tax portal performs validation checks on submitted XML files, and any missing mandatory fields will result in validation errors, preventing the submission.
This requirement means that financial institutions need to review and potentially update their reporting software. The circular explicitly states that failure to include required fields will lead to errors, highlighting the importance of meticulous data capture. Consulting the Central Board of Direct Taxes’ Guidance Note on FATCA and CRS, dated July 24, 2026, is also recommended for detailed instructions.
Client Certifications and Compliance Responsibility
Under the revised framework, intermediaries are required to upload FATCA and CRS certifications collected from their clients to the KYC Registration Agencies (KRAs) systems. SEBI clearly places the compliance obligation on the intermediary itself. This means that the onus of obtaining and reporting these certifications, along with all related compliances, rests solely with the respective intermediaries.
To meet these requirements, compliance teams should focus on three main tasks: updating customer onboarding and KYC processes, ensuring all mandatory fields are included in Form 166 XML generation, and uploading client certifications to KRA systems. While the circular does not specify a completion date for these system changes, prompt action is advisable to ensure ongoing compliance with the AEOI framework.
Frequently Asked Questions
What is SEBI’s new directive for financial institutions?
SEBI has directed registered intermediaries, known as Reporting Financial Institutions (RFIs), to include FATCA and CRS due diligence and reporting within their existing KYC procedures.
Why is this directive being implemented?
The directive aligns with the updated Automatic Exchange of Information (AEOI) reporting framework that started on April 1, 2026, to help combat tax evasion and ensure international tax information exchange compliance.
What are FATCA and CRS?
FATCA is a U.S. law requiring foreign financial institutions to report on accounts held by U.S. taxpayers. CRS is a global standard by the OECD for exchanging financial account information automatically between countries.
What are the key responsibilities for financial institutions under this new directive?
Institutions must update their KYC systems to collect and store FATCA/CRS data, ensure all mandatory fields are included in Form 166 XML reports, and upload client certifications to KRA systems.
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