PPF and NSC for NRIs – Latest Rules 2018

Recently Government reversed the rule which it has notified on 3rd Oct 2017.  What is the PPF and NSC for NRIs – Latest Rules 2018? How is this impact existing PPF investors?

When its come to the question of tax saving with good interest then PPF is no doubt a better option as a small saving scheme. PPF has been a beneficial product for all investors. Even NRIs prefer to continue with their PPF accounts until the time they can, as the product earns them tax-free and safe interest. Even National saving Certificate also is considered a safe and preferred investment by many. However, NSC not enjoys the tax benefits like PPF and also NSC is not the long-term product (NSC period is 5-Yrs only).

Public provident fund (PPF) and national saving certificate (NSC) are the most common and relatively risk-free long-term investment options for Indians as they are ruled by the government. And because of its tax-free interest feature, compounded annually attractive interest rates, and section 80C tax benefit, PPF has become the first choice for every investor.

In India, a major portion of the salaried class employees would prefer to invest in PPF and NSCs as part of their annual long-term financial planning.

But if you are an NRI, then you must be aware of the fact that you cannot open a new PPF account, or invest in National savings certificate. However As per the new Amendment rules in 2017 by the Government, if you had a PPF account or NSC certificate before you become an NRI, then as per PPF account rules and NSC conditions you were allowed to continue with the same till their maturity. It means you no need to close your account rather you can continue it with the bit cut off interest rates.

 The interest for both PPF and NSC schemes stands at 7.8% p.a for October-December. Since April last year, interest rates on all small saving schemes are declared on an on a quarterly basis.

Who are NRIs?

 Before I proceed further first let clear you about the NRI concept. A person is considered resident in India if he is in the country for 182 days or 60 days in a year and 365 days in each of the preceding four years as per Income Tax Act. When a person doesn’t satisfy both these conditions, he is termed as NRI. 

On 3rd October 2017, Finance ministry in central government has come up with a quiet notification which will force all NRIs to come out of their small saving investments.

The structure of investment for NRIs in PPF

# An NRI can now invest up to Rs 1,50,000 per financial year in an existing account, that is, an account that he opened prior to becoming an NRI.

# 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.

# 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 taxes are applicable on PPF interest for NRIs?

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 US

# The tax rules that apply in the country of your residence like in countries the US, the interest earned on the PPF will be taxable. PPF does not qualify as a retirement account under the US tax laws and therefore the interest will be taxable in the US.

# You should pay tax whether every year on the accrued interest or on the entire interest at the time of withdrawal depending on what is beneficial to you but whatever method you choose, ensure that it is followed consistently.

What are the drawbacks for NRIs?

# 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.1,50,000 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 

# Till the time the PPF account is actually closed or the NSC certificate encashed, the accumulated money in the account would earn interest at a much lower rate, equivalent to the interest earned from a post office savings account (POSA), which is 4% per annum currently.

# Also, family members accompanying the outbound assignees will get impacted on getting NRI status.

PPF account rules & NSC rules for NRIs (Before 3rd October 2017)

# Aspe the rules, NRIs were not allowed to open a new PPF account neither they can make new NSC Investment. 

# If a resident having PPF account or NSC, has become an NRI, then he is allowed to continue with the respective account till the maturity.

# If the PPF account was in an extended status, means the investor has already extended his PPF account for 5 years (after the completion of 15 years), and later become the NRI, in this case, the investor is allowed to continue the PPF account. But he will not be able to extend the account further for another block of 5 years.

# However, NRI was permitted to make a regular contribution to the maximum limit and keep earning tax-free interest (in case of PPF only) like resident investors.

# On maturity of PPF account and NSC, NRIs have to compulsorily close the account. An NRI is not eligible for the extension on the PPF account.

 PPF account rules and NSC rules for NRIs (after 3rd October 2017)

# Though NRIs still can’t open a fresh account, now NRIs even not allowed to continue with their ongoing PPF and NSC accounts, which they were earlier allowed to continue till the maturity. All accounts in the name of NRIs stands closed on 3rd October 2017.

# All NRIs, PPF and NSC accounts will earn the PPF interest rates until the date of notification i.e. 3rd October 2017. After that, they will earn Post office savings rate until they close PPF or NSC. 

# This means now NRIs can close the PPF and NSC accounts immediately irrespective of their closure rules.

# For the resident Indians who are turning to be NRIs, if they have PPF or NSC investments, their account will automatically be closed or deemed to be closed the time their residential status changes from Resident to Non Resident, and they will get Post office savings bank rate on their deposit from the day they become NRI till the money is withdrawn.

PPF and NSC for NRIs – Latest Rules 2018

Recently on 23rd February 2018, Government came with clarification with PPF investments. As per this new notification, it kept the 3rd October 2017 notification in abeyance.

This means NRIs who are currently holding PPF account, then they can continue it until maturity and enjoy the interest rate which is applicable to PPF. But they are not allowed to extend further.

However,  for NSC holders, they have to close it immediately when their status changes to NRI.

PPF and NSC for NRIs - Latest Rules 2018

Hope this new Government notification might have relieved many NRI PPF investors.