PPF is one of the finest fixed income investments.
Exempt-Exempt-Exempt. You get tax benefits on investment, earn tax-free interest, and get tax-free proceeds on maturity.
PPF interest rate is also quite decent for a fixed income product. Unlike EPF, you can continue this account for life by regularly extending the account.
In this post, I will write about the rules of extension for a PPF account and how a new circular on irregular PPF accounts affects PPF investments by NRIs.
How does the Extension of PPF account work?
You do not have to close your PPF account on completion of 15 years.
You can extend your PPF account in blocks of 5 years any number of times. In other words, you can continue PPF account for life.
There are 2 ways in which a PPF account can be continued beyond maturity.
#1 Extension with contribution
- You must submit Form H within 1 year of date of maturity/completion of extension window.
- PPF balance at the time of extension continues to earn full PPF interest.
- You can make fresh investments in the account and such fresh deposits after PPF extension also earn full PPF interest.
- You can withdraw up to 60% of the PPF balance (at the time of extension) during the next 5 years. Only one withdrawal permitted every year.
#2 Extension without contribution
- This is the default option, and you do not have to submit Form H for this. In fact, Form H does not even have option to extend account “without contribution”.
- If you do not fill up the Form H and opt for “with contribution” mode within one year of maturity (or expiry of extension window) and do not close the account either, your account gets extended automatically in “without contribution” mode.
- PPF balance at the time of extension continues to earn PPF interest until the account is closed.
- You CANNOT make fresh investments in the account. If you contribute to the PPF account by mistake, such investments after extension will not earn any interest.
- You can close and take out even the full amount whenever you want. Can also make partial withdrawals. However, only one withdrawal allowed per year is permitted.
You can exercise this choice (of filling up Form H) at the time of each extension. However, once your PPF account has been extended without contribution, you cannot go back to “with contribution” at the time of next extension.
To extend the PPF account with contribution, you must submit Form H within 1 year of maturity of PPF account. As discussed above, if you do not submit Form H and do not close the account either, your PPF account will be automatically extended under “without contribution” mode.
You can read about the extension of PPF accounts in detail in this post.
PPF rules for NRIs
NRIs are not permitted to OPEN PPF accounts.
However, if the PPF account was opened when the investor was a resident and later became an NRI during the currency (term) of the account, such PPF account can be continued until maturity (15 years) or the expiry of the extension period of 5 years.
NRIs are not permitted to EXTEND PPF accounts either.
These are old rules.
This new rule brings some (not entire) clarity about how to deal with PPF accounts that have been extended by an NRI in non-compliance with the extant PPF regulations.
So, if you have extended your PPF account despite being an NRI on the day of extension, you will earn saving account interest (Post office savings account interest or POSA) on such account until September 30, 2024. And no interest thereafter.
Disclaimer: What I share below is my understanding and extrapolation of the new PPF rule. There may be gaps in my understanding. Frankly, a lot also depends on the whims and fancies of the bank/Post office employees (unless you choose to confront).
There are 4 possibilities.
#1 You were an NRI at the time of extension, and you submitted Form H (that DID NOT ASK for your residential status) to extend the account
This specific case is referred to in the circular.
In such cases, you earn full interest until initial maturity or expiry of previous extension window.
Since the extension was irregular, you will earn POSA from the date of extension until September 30, 2024. No interest thereafter.
My conjecture: You are allowed to earn interest until September 30, 2024, because the Government wants to give you a benefit of doubt. Since the form did not ask, you might not have realized the NRIs cannot extend PPF account.
#2 You were an NRI at the time of extension, and you submitted Form H (that ASKED for your residential status) to extend the account
In this case, you have deliberately furnished the wrong information in your application.
You earn full interest until the initial maturity or expiry of previous extension window.
No interest from the date of extension until closure of account.
#3 You are an NRI at the time of extension, but you did not submit any form H and extension happened by default
In this case, there is no deliberate attempt to mislead. However, the way the Govt. has added this new rule, it seems that the grant of POSA interest until September 30, 2024, is an exception and not a rule. And this exception is available only to those who filled Form H that did not ask for residential status.
Hence, you face the full brunt.
You earn full interest until the initial maturity or expiry of previous extension window.
No interest from the date of extension until closure of account.
#4 You are a Resident at the time of extension
Residents are allowed to extend their PPF accounts.
No problem. You will earn full PPF interest in your account.
Just remember, if you have extended your PPF account without contribution, fresh contributions in your PPF account will not earn any interest.
Hence, if you plan to continue to contribute to your PPF account, please remember to extend the account by filling Form H.
What do you do if you extended the account as an NRI?
If your PPF account got extended “without contribution”, you can close the account whenever you want. Since you will not earn any interest, it may make sense to close the PPF and take out the money.
If you had extended the account “with contribution” by filling Form H, you cannot close the account until the extension window of 5 years expires. But this rule is for resident investors. In this case, since the account is anyways irregular, I am not very sure if you will be allowed to close the PPF account before completion of extension window.
If you are not allowed to close, your balance will not earn any interest until the extension block gets over. This is where the interpretation and responsiveness of bank/post office staff comes into play.
Which definition of NRI to use?
The first is as per the Income Tax department, which is mostly about the number of days spent in the previous financial year.
The second is as per the foreign exchange regulations (FEMA), where the reason for your travel is also considered while determining your residential status. For instance, as per FEMA, you are NRI from day 1 of travel if you are travelling abroad for education or employment.
You can read about the differences in the two definitions in this post. And you will realize that your residential status (resident or NRI) may not always be the same as per the two definitions.
There are certain products where NRIs cannot invest. For this purpose, the definition as per FEMA will be applicable. FEMA determines where you can invest,
The tax treatment of income and capital gains varies for residents and NRIs. In this case, the definition as per Income Tax act will be applicable. Income Tax definition decides how the income from Indian investments will be taxed.
For the specific case of PPF account opening or account extension, which definition should we consider?
Since we are concerned about whether you can invest in PPF, the definition as per the foreign exchange regulations will apply.
Therefore, if you are moving abroad from education or employment, you are NRI from day 1 of travel. Do consider this aspect while opening or extending your PPF account.
Do not indulge in wishful thinking
If you plan to open a PPF account or extend an existing one thinking that the Government/Post office/bank will not find out about your NRI status, that’s just wishful thinking. Suggest you don’t do that.
The above extract is also from the above new circular. As your PAN and Aadhaar gets seeded in your PPF account, a lot of information about you will be readily available to the banks. For instance, if you are filing your ITR as an NRI, the banks may be able to access such information in the future and question your application to extend PPF account. Worse still, the banks/post office may build a case that no interest shall be payable on the contribution/balance after irregular extension.
Image Credit: Unsplash
Additional Links
Guidelines for Regularization of irregular accounts opened under Small Savings Schemes
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This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.
