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Frequently Asked Questions about Public Provident Funds for Non-Resident Indians
Public Provident Funds are a favorite investment avenue in India, thanks to the tax-free, risk-free interest rate of 8% per annum. But for NRIs
seeking to put some money in this avenue, the news ain't so good.
Firstly as an NRI you cannot open a new PPF account. Secondly, if you
live in a country like the US or UK, you will have to pay tax there on
your PPF earnings and withdrawals. Let's dive deeper.
Can an NRI open a new PPF account?
No, a Non Resident Indian (NRI) cannot open a new PPF account in India. Prior to 2003, NRIs were not even allowed to make contributions into existing PPF accounts, that is, accounts opened before they became NRIs. However, in 2003, a notification (MOF (DEA) No GSR 585 (E) dated 25.7.2003) was issued permitting NRIs to continue investing in existing PPF accounts till maturity. An NRI can now invest up to Rs 70,000 per financial year in an existing account, that is, an account that he opened prior to becoming an NRI.
If you inadvertently opened an account after becoming an NRI, it is best to close it before it comes to the attention of the concerned authorities in India.
From which account can an NRI invest in the PPF account?
An NRI can use funds in the NRE account or the NRO account to make investments in the PPF account. It is important to remember that the PPF rules require you to invest at least Rs 500 per financial year in the PPF account. Says Sandeep Shanbhag, Director of Wonderland Investments and an expert in NRI financial matters, "If you fail to make the minimum investment in a year or years your account will be considered dormant. Subsequently, when you want to revive the account, you would need to invest Rs 500 for each year that you missed plus pay up a penalty of Rs 50."
What happens on maturity?
If you are an NRI at the time the deposit matures, you would need to withdraw the balance. An NRI is not eligible for extension on the PPF account. What happens if you leave the account unattended past the maturity date? "In such cases the account will be considered 'extended without contribution' in blocks of 5 years for an unlimited period of time. Extended without contribution means that the NRI will not have to make the minimum yearly investment of Rs 500. His account will continue to earn interest at the prevailing rate," says Shanbhag adding, "We hear of instances where banks allow NRIs to extend the PPF account only for 2 blocks of 5 years or 3 blocks of 5 years. But according to the rule book the extension can be made for an unlimited period of time."
Can PPF withdrawals be repatriated?
When NRIs were permitted to continue investing in existing PPF accounts in 2003, the permission was on non-repatriable basis, that is, NRIs could not remit proceeds of PPF withdrawal out of the country. Subsequently the RBI announced a Liberalized remittance scheme in 2004 according to which NRIs could remit up to USD 1 million per financial year from the NRO account. Therefore, as of today, you can credit the withdrawal proceeds of your PPF account into the NRO account. And balance in the NRO account can be repatriated abroad up to a limit of USD 1 million per financial year. Of course, you would need to follow certain procedure for such repatriation.
Read: How to remit NRO account funds abroad
What taxes are applicable on PPF interest?
There are two stages at which there will be a tax implication; one in India and the other in the country of NRIs residence.
In India
In India, PPF is one of the investments available for deduction under section 80C. That is, if you have income in India (from say rental property), then you can reduce your tax payout in India by investing in the PPF. The interest income as well as principle withdrawals are tax free in India.
In the country of residence
You would need to look at the tax rules that apply in the country of your residence. In countries like the US, the interest earned on the PPF will be taxable. Rajesh Vaidya a CPA and Senior Accountant at Florida based Raju Maniar CPA firm explains, "PPF does not qualify as a retirement account under the US tax laws and therefore the interest will be taxable in the US. Now, the question is whether you should pay tax every year on the accrued interest or on the entire interest at the time of withdrawal. While there is no rule on this, a taxpayer can take a view depending on what is beneficial to him. For instance, if you expect to be in the high tax bracket when you withdraw, then you might pay higher tax at that time. In such case you might want to pay tax every year on accrued interest. But whatever method you choose, ensure that it is followed consistently."
To sum up
Having seen the basics of investing in PPFs, we look at the key question: Should NRIs invest in the PPF?
Says Shanbhag, "PPF is an attractive investment from the returns point of view - 8% tax free. If you have income in India, PPF will also give you a tax deduction under section 80 C. However, you cannot invest too much in this account. The limit for maximum investment is just Rs 70,000 or USD 1400 per annum. Secondly, like all investments that NRIs make in India, the PPF is also subject to currency risk. If the rupee falls significantly at the time of maturity of your account, your interest rate gains may be wiped out."
Can an NRI open a new PPF account?
No, a Non Resident Indian (NRI) cannot open a new PPF account in India. Prior to 2003, NRIs were not even allowed to make contributions into existing PPF accounts, that is, accounts opened before they became NRIs. However, in 2003, a notification (MOF (DEA) No GSR 585 (E) dated 25.7.2003) was issued permitting NRIs to continue investing in existing PPF accounts till maturity. An NRI can now invest up to Rs 70,000 per financial year in an existing account, that is, an account that he opened prior to becoming an NRI.
If you inadvertently opened an account after becoming an NRI, it is best to close it before it comes to the attention of the concerned authorities in India.
From which account can an NRI invest in the PPF account?
An NRI can use funds in the NRE account or the NRO account to make investments in the PPF account. It is important to remember that the PPF rules require you to invest at least Rs 500 per financial year in the PPF account. Says Sandeep Shanbhag, Director of Wonderland Investments and an expert in NRI financial matters, "If you fail to make the minimum investment in a year or years your account will be considered dormant. Subsequently, when you want to revive the account, you would need to invest Rs 500 for each year that you missed plus pay up a penalty of Rs 50."
What happens on maturity?
If you are an NRI at the time the deposit matures, you would need to withdraw the balance. An NRI is not eligible for extension on the PPF account. What happens if you leave the account unattended past the maturity date? "In such cases the account will be considered 'extended without contribution' in blocks of 5 years for an unlimited period of time. Extended without contribution means that the NRI will not have to make the minimum yearly investment of Rs 500. His account will continue to earn interest at the prevailing rate," says Shanbhag adding, "We hear of instances where banks allow NRIs to extend the PPF account only for 2 blocks of 5 years or 3 blocks of 5 years. But according to the rule book the extension can be made for an unlimited period of time."
Can PPF withdrawals be repatriated?
When NRIs were permitted to continue investing in existing PPF accounts in 2003, the permission was on non-repatriable basis, that is, NRIs could not remit proceeds of PPF withdrawal out of the country. Subsequently the RBI announced a Liberalized remittance scheme in 2004 according to which NRIs could remit up to USD 1 million per financial year from the NRO account. Therefore, as of today, you can credit the withdrawal proceeds of your PPF account into the NRO account. And balance in the NRO account can be repatriated abroad up to a limit of USD 1 million per financial year. Of course, you would need to follow certain procedure for such repatriation.
Read: How to remit NRO account funds abroad
What taxes are applicable on PPF interest?
There are two stages at which there will be a tax implication; one in India and the other in the country of NRIs residence.
In India
In India, PPF is one of the investments available for deduction under section 80C. That is, if you have income in India (from say rental property), then you can reduce your tax payout in India by investing in the PPF. The interest income as well as principle withdrawals are tax free in India.
In the country of residence
You would need to look at the tax rules that apply in the country of your residence. In countries like the US, the interest earned on the PPF will be taxable. Rajesh Vaidya a CPA and Senior Accountant at Florida based Raju Maniar CPA firm explains, "PPF does not qualify as a retirement account under the US tax laws and therefore the interest will be taxable in the US. Now, the question is whether you should pay tax every year on the accrued interest or on the entire interest at the time of withdrawal. While there is no rule on this, a taxpayer can take a view depending on what is beneficial to him. For instance, if you expect to be in the high tax bracket when you withdraw, then you might pay higher tax at that time. In such case you might want to pay tax every year on accrued interest. But whatever method you choose, ensure that it is followed consistently."
To sum up
Having seen the basics of investing in PPFs, we look at the key question: Should NRIs invest in the PPF?
Says Shanbhag, "PPF is an attractive investment from the returns point of view - 8% tax free. If you have income in India, PPF will also give you a tax deduction under section 80 C. However, you cannot invest too much in this account. The limit for maximum investment is just Rs 70,000 or USD 1400 per annum. Secondly, like all investments that NRIs make in India, the PPF is also subject to currency risk. If the rupee falls significantly at the time of maturity of your account, your interest rate gains may be wiped out."
