Tax impact on PPF, NSC when an individual’s status changes to NRI

An individual who is mobile and likely to take employment in different countries needs to be cautious on the investments made in PPF & NSC schemes..

Recently, the government of India made amendments to the PPF scheme and NSC rules whereby the benefits of investment in such instruments have been restricted to resident Indians only.

Public provident fund (PPF) and national saving certificate (NSCs) are the most common and relatively risk-free long-term investment options for Indian individuals as they are monitored by the government.

In India, a large section of salaried class employees invests in PPF and NSCs as part of their annual long-term financial planning.

The amounts invested in these instruments are eligible for an aggregate tax deduction of up to Rs1.5 lakh under section 80C of the Income-Tax Act, 1961 (‘the Act’), along with other eligible investments.

Interest income earned from PPF accounts is exempt under section 10 (11) of the Act. Interest from NSCs is eligible for deduction under section 80C.

The interest rate applicable to both PPF and NSC schemes stands at 7.6% per annum for January–March 2018 and such rate of interest is notified every quarter by the central government.

These investment schemes have been prevalent for decades and have been subject to amendments from time to time.

Recently, the government of India made amendments to the PPF scheme and NSC rules whereby the benefits of investment in such instruments have been restricted to resident Indians only.

Accordingly, in the case individuals qualifying as non-resident at any time during the holding period of such instruments, the PPF account will deem to be closed, with effect from the day an individual becomes non-resident.

Also, such individuals holding NSC certificates need to encash the instrument on the day they become non-resident.

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.

The amendment is likely to impact a large number of outbound assignees, whose residential status gets changed to non-resident on account of taking up assignments/secondments overseas. Also, family members accompanying the outbound assignees will get impacted on getting NRI status.

The amendment doesn’t provide relief to the individuals who come back to India and become residents, as they may have to open a fresh PPF account, unless the government provides some mechanism to revive such accounts or provides some relief.

Thus, an individual who is mobile and likely to take employment in different countries needs to be cautious on the investments made in PPF & NSC schemes.

FAQs

1. After subscribing to the PPF/NSC scheme, if a person in the same tax year qualifies as non-resident, would that individual still be eligible for 80C deduction under the Act?

Section 80C of the Act does not distinguish between resident individuals and non-resident individuals for the availability of tax deduction benefits. Hence, an individual qualifying as a non-resident Indian would also be eligible to avail himself or herself of the tax deduction under the provisions of the Act.

2. Who would qualify as a non-resident Indian under the PPF/NSC schemes?

There is ambiguity on whether residency for the purpose of PPF/NSC schemes needs to be determined under the tax laws, or under the foreign exchange regulations.

The Act does not define a non-resident Indian, but defines non-resident based on the number of days of physical presence of an individual in India.

However, the Foreign Exchange Management Act (FEMA) defines a non-resident Indian as an Indian citizen being a person resident outside of India. Further clarifications on this aspect are awaited.

3. Are the contributions of Singapore-based NRIs to the Employees’ Provident Fund scheme in India affected by this amendment?

The said amendment is only applicable to PPF and NSC. Hence, NRI contributions to the Employees’ Provident Fund in India, pursuant to the India-Singapore Comprehensive Economic Cooperation Agreement, or CECA, will not be impacted.

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