What is PPF for NRI? What are its tax implications?

PPF, or Public Provident Fund, is a long-term savings and investment option in India that offers attractive interest rates and tax benefits. Although primarily designed for Indian residents, NRIs or Non-Resident Indians can also invest in PPF accounts, subject to certain conditions. This article will provide key information on PPF for NRIs, including eligibility criteria, features, and opening and managing a PPF account.

See also: Laws governing inheritance of immovable property in India by NRIs

 

What is a PPF account?

A PPF account is a savings and investment scheme backed by the Indian government. It encourages people to save money for the long term and provides attractive interest rates and tax benefits. 

PPF is a safe and tax-free investment option the government offers, where Indian citizens can invest a portion of their earnings. The account requires a 15-year commitment, with the option to extend it in five-year increments. The contributions made towards PPF are tax-deductible under Section 80C of the Income Tax Act. 

The best part about PPF is that the interest earned on the balance is also tax-free. It is a reliable and stable investment option that people prefer when looking for a systematic and tax-effective strategy to accumulate wealth over the long term.

 

PPF for NRI

Generally, if you are a non-resident Indian (NRI), you cannot open a Public Provident Fund (PPF) account in India. These accounts are exclusively for Indian residents. However, suppose someone opens a PPF account as an Indian resident but later becomes an NRI. In that case, they can still keep and maintain their account until maturity, which is usually after 15 years. After becoming an NRI, they are not allowed to add any more funds to the account.

 

PPF for NRI: Rules

1. NRIs are not allowed to open new PPF accounts.
2. NRIs can continue with the existing PPF account until maturity but cannot make fresh contributions after their status changes to NRI.
3. NRIs cannot extend their PPF account after the initial 15-year maturity period.
4. The government sets the interest rate on PPF and is subject to periodic revisions. NRIs with existing PPF accounts continue to earn interest at the prevailing rates.
5. NRIs can withdraw partially from their PPF accounts after completing the 7th financial year from the opening date, subject to specific limits and conditions.
6. PPF account holders, including NRIs, can avail of loans against their PPF balance from the 3rd to the 6th financial year. However, once the account is extended, the loan facility is unavailable.
7. NRIs can nominate a beneficiary who will receive the proceeds in the event of the account holder’s demise.
8. NRIs maintaining a PPF account can do so in Indian Rupees.

 

PPF for NRI: Tax implications

The Public Provident Fund stands out as a tax-free investment avenue, making it highly favoured in India. The returns earned from these funds remain exempt from taxation. Nevertheless, when the PPF matures, NRIs find themselves obliged to close the account, leaving them with no alternative. 

In such instances, it becomes necessary to withdraw the entire matured amount and subsequently close the account. The credited sum is then transferred to the NRO account, subject to the established rules governing NRO accounts, and taxes must be settled by the prevailing regulations at that time.

 

PPF for NRI: Benefits

1. NRIs can continue to enjoy tax advantages from PPF accounts maintained during residency.
2. The interest earned on the PPF balance is tax-free in India, making it an attractive option for NRIs seeking tax-free returns.
3. PPF account holders, including NRIs, can borrow against their balance in times of financial emergency, providing cash without liquidating the investment.
4. NRIs can withdraw partial funds from their PPF accounts after the 7th financial year from account opening, providing flexibility for unexpected financial needs.
5. PPF accounts enable beneficiary nomination, facilitating money transfer upon account holder’s death and helping account holders plan and secure their families’ finances.
6. NRIs with Indian Rupee PPF accounts might benefit from currency diversification while PPF investments are in INR; NRIs may benefit from Indian Rupee appreciation versus foreign currencies.
7. PPF accounts may be a tax-efficient and disciplined retirement portfolio component for NRIs interested in retiring in India or contemplating a return.

 

NRI PPF accounts: Restrictions

1. NRIs have different rules for opening and operating a PPF account.
2. NRIs cannot make additional investments in their PPF accounts once they mature, but they can keep making contributions to their account.
3. NRIs must use their FCNR, non-resident ordinary, or non-resident external accounts to make investments into their PPF account.
4. NRIs can invest in PPF accounts only for the duration of their investment term on a non-repatriation basis.
5. NRIs have access to partial withdrawal and loan options, but the money obtained from these two methods can only be spent within India.
6. NRIs have a fixed maturity term of 15 years from the account opening date for PPF accounts, unlike resident Indians who can continue making investments in the account at 5-year intervals after the account has been open for 15 years.

 

PPF account: Withdrawal  

1. Non-Resident Indians (NRIs) are eligible to withdraw from their PPF accounts after 7 years from the date of the account opening.
2. NRIs can make unlimited withdrawals after the initial 7-year lock-in period.
3. NRIs are allowed to withdraw up to 50% of the account balance after the completion of each financial year, starting from the 7th year.
4. Partial withdrawals can be made once a year after the 7-year lock-in period, and it requires submitting Form C and coordination with the relevant financial institution or authority.
5. Premature withdrawals are permitted for specific reasons, such as medical treatment, higher education, housing expenses, and meeting expenses due to natural calamity or critical illness. A 1% penalty is applicable in the case of premature withdrawals.
6. Withdrawals from PPF accounts for NRIs are tax-free in India. However, NRIs should consult their tax advisor in their country of residence as some countries may impose taxes on the PPF interest earned.
7. The PPF contributions made during the period of NRI status do not earn any interest, but the accumulated balance in the account continues to be tax-free.

 

FAQs

Can NRIs open a new PPF account?

No, NRIs are not allowed to open a new PPF account.

Can NRIs continue with their existing PPF account after becoming an NRI?

Yes, NRIs can continue with their existing PPF account until maturity, which is usually after 15 years. After becoming an NRI, they are not allowed to add any more funds to the account.

Can NRIs withdraw partially from their PPF accounts?

Yes, NRIs can withdraw partially from their PPF accounts after completing the 7th financial year from the opening date, subject to specific limits and conditions.

Can NRIs avail of loans against their PPF balance?

Yes, PPF account holders, including NRIs, can avail of loans against their PPF balance from the 3rd to the 6th financial year. However, once the account is extended, the loan facility is unavailable.

What happens when the PPF account of an NRI matures?

When the PPF account of an NRI matures, they are obliged to close the account and withdraw the entire matured amount. The credited sum is then transferred to the NRO account, subject to the established rules governing NRO accounts, and taxes must be settled by the prevailing regulations at that time.

Can NRIs nominate a beneficiary for their PPF account?

Yes, NRIs can nominate a beneficiary who will receive the proceeds in the event of the account holder's demise.

Can NRIs benefit from currency diversification by maintaining a PPF account in Indian Rupees?

Yes, NRIs with Indian Rupee PPF accounts might benefit from currency diversification, while PPF investments are in INR; NRIs may benefit from Indian Rupee appreciation versus foreign currencies.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com