PPF and NSC are the popular tax saving investment. These government savings scheme also gives a better interest rate than a bank deposit. Hence, these schemes are lucrative to the Non-resident Indiana (NRI) as well. In developed countries, the interest rate is very low, hence you NRIs want to invest in PPF and NSC to earn a handsome return. But, Government has made a separate rule for the NRI. In fact, they can’t enjoy the benefits available to common Indian citizens. Recently, the government has made the norms more strict. Now, the NRI would not get the benefit of high-interest rate.
New Rules of PPF and NSC
On one hand, the government is trying to accumulate more money through the small saving scheme as it has permitted banks to sell NSC, MIS and post office recurring deposits. On the other hand, it has reduced the interest rate if these schemes for NRI customers. I am reproducing the recent notification of the government of India.
“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,”
“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”
Let us decode the above notification. Thes are the new rules of NRI investment into PPF and NSC account.
- When you become a Non-resident Indian, your PPF and NSC account would be deemed closed.
- From the date you become NRI, your PPF and NSC account would not earn the normal interest rate.
- Subsequently, you deposit would earn the interest rate of post office saving account. The current interest rate of savings account is 4%.
After this notification, you need to revisit the PPF and NSC investment.
PPF For NRI
PPF or Public Provident Fund is a retirement saving scheme. The government of India runs this scheme and your investment goes into the government account. The government has linked the interest of this scheme from the Government bond yield. However, often it gives better interest rate than bond yield and bank fixed deposit. The current rate of 7.8% is far better than FD rates of below 7%. Further, The PPF account gives you tax benefit. The maturity amount is also tax-free.
For you, an NRI, the PPF account would be very lucrative for banks in USA and Europe give a lesser interest rate. But I would tell you upfront that PPF account is only for Indian Resident citizens. An NRI can’t open a PPF account.
But what if you open a PPF account while being an Indian citizen but become an NRI before the PPF account maturity? The new rule says that your PPF account would be considered closed on the day you inform about your NRI status. It means you would not be able to contribute further. You would be free to withdraw the balance amount.
If you do not withdraw your PPF balance after this deemed closure, your PPF account would earn the interest rate of post office savings account. Earlier, such accounts keep earning the PPF interest rate.
NSC for NRI
The National Savings Certificate or NSC is also a government small savings scheme. The rule for this scheme is similar to the PPF account. Following are the wordings of new notification on NSC for NRIs.
the certificate will be encashed, or deemed to be encashed on the day he becomes non-resident and interest will be paid accordingly.
- An NRI can’t invest in NSC. In fact, NRI can’t invest in any post office savings scheme.
- You can encash NSC by declaring your NRI status.
- You would get the interest rate of NSC till you turn an NRI.
- After your NRI status, the interest rate would be of the saving account.
When A Person Becomes NRI
According to the income tax rules, A person is considered resident in India if he is in the country for 182 days or more in a year or 60 days in a year and 365 days in each of the preceding four years
However, the residency definition differs under the Foreign Exchange Management Act. So there is some confusion and government mus clarify on this.