Changes In PPF, NSC Rules: What NRIs need to know...
In
brief
1) NRIs are not allowed to invest in small savings
schemes like NSC and PPF. However, they were earlier permitted to retain
their PPF account if they had opened it before becoming an NRI.
2)
The
government notification on PPF dated 3rd October 2017 states,
"Provided that if a resident who opened an account under this scheme,
subsequently becomes a non-resident during the currency of the maturity period,
the account shall be deemed to be closed with effect from the day he becomes a
non-resident and interest with effect from that date shall be paid at the rate
applicable to the Post Office Saving Account up to the last day of the month
preceding the month in which the account is actually closed."
3)
This
means PPF accounts would be considered closed prior to maturity in case the
holder becomes a non-resident Indian (NRI). The investor will be then paid
interest at the rate applicable to Post Office savings accounts till the date
the PPF account is closed.
4)
Similarly,
in a notification dated October 3 on NSC, the finance ministry says:
"Provided that if a resident Indian having purchased a certificate,
subsequently becomes Non-Resident during the currency of the maturity period,
the certificate shall be encashed or deemed to be encashed on the day he
becomes a non-Resident, and interest shall be paid at the rate applicable to
the Post Office Savings Account, from time to time, from such day and up to the
last day of the month preceding the month in which it is actually
encashed."
5)
In both
the above cases, the interest shall be paid at the rate applicable to the Post
Office Saving Account (POSA), from the date of deemed closure/ encashment up to
the last day of the month preceding the month in which the same is actually
closed/ encashed.
In
detail
Background
PPF and NSC are the most popular and common
long term saving instruments in which Indians invest for long term financial
planning.
The amount invested in these instruments is eligible for deduction up
to INR 150,000 under section 80C along with other eligible investments.
The interest earned on PPF accounts is tax free
and NSC interest is eligible for deduction under section 80C.
Besides the tax break, investments in these
instruments are safe as they are guaranteed by the Government of India.
Currently, both instruments (PPF and NSC) carry
interest at 7.8% per annum and the rate applicable to the Post Office Savings
Account is 4% per annum.
The
amendment
The Government of India has now made amendments
in the PPF scheme and NSC rules, whereby the benefit of investment in such
instruments is restricted to resident Indians only.
Where such individuals become NR, anytime
during the holding period of such instruments, the PPF account will deem to be
closed and/ or NSC certificate shall encashed or deem to be encashed on the day
when such individual becomes a NR.
Until the time the PPF account is actually
closed or NSC certificate actually encashed, the accumulated money will earn
interest at a lower rate, as applicable to POSA (which is presently 4% per
annum)
The
impact
The amendment is likely to impact a large
number of people who become Non Residents when they go on overseas assignments.
If their family members also accompany them,
they too will get impacted as they too become NR. If such individuals have
parked their funds in PPF accounts/ NSC certificates, they may need to
liquidate them.
The amendment indicates that such accounts may
need to be closed and/ or NSC encashed and when such individuals come back into
India and become residents, they may have to open a fresh PPF account, unless
the Government of India provides some mechanism to revive such accounts for
such categories of individuals or provides any clarifications
It is unclear whether residency to be
determined under the tax laws, i.e., Income-tax Act, 1961 (Act) or under the
exchange regulations, i.e., Foreign Exchange Management Act, 1999 (FEMA).
While residency under the Act is determined
based on physical presence of the individual in India, residency under the FEMA
is determined also on the basis of intention to stay in India.
A clarification on this from the Government is
expected.
The
link for the notification is given below.
Oh my! I am so happy to come across this post. It has been a very long time that I discussed such a topic. Last week a friend of mine told me about income tax benefit on home loan that made me change my thinking.
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