This is not a good news for NRI (non-residents) who have invested in PPF accounts.
As per a recent Government notification, PPF accounts have to be closed when the account holder becomes an NRI (non-resident Indian).
As I understand, the definition of NRI (person outside India) as per FEMA will be considered (and not as per Income Tax Act). So, if you are going abroad for employment, you are NRI (as per FEMA) for day 1 and the PPF account has to be closed right away.
Here is the excerpt from the notification (NOTIFICATION NO. GSR 1237(E) [F.NO.1/10/2016-NS.II) dated October 3, 2017.
IMPORTANT: The aforesaid notification has been put on hold vide Government Notification dated February 23, 2018. Read more this development and the implications in this post dated February 24, 2018.
What were the earlier PPF rules for NRI?
NRIs could not open PPF accounts. However, the PPF accounts opened before becoming NRIs could be continued till maturity.
NRIs were not allowed to extend their PPF accounts (with or without contribution).
What are the new rules?
As I understand, now the PPF account has to be closed straight away if you become an NRI. It can’t even be continued till maturity.
What are the implications of this move?
Clearly, NRIs can’t invest in PPF account.
The language is quite clear.
The account shall be deemed to be closed 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.
Even if you don’t close the account on becoming NRI, it will be deemed closed and you will earn a rate of interest that is equal to that of Post Office Savings Bank account from that day.
Does this notification apply retrospectively?
For those who become NRI after October 3, 2017, their PPF accounts have to be closed straight away or will be deemed closed from the date they become NRIs. Such NRIs will earn only savings account interest on their PPF balances from the date they become NRI.
What about those who became NRIs earlier and continue to hold PPF accounts?
I am sure there are many NRIs who had opened PPF accounts before becoming NRIs and those accounts are yet to mature.
In my opinion, there shouldn’t be any impact for the period before October 3, 2017. You will get the full interest for the period prior to October 3, 2017.
For the period after October 3, 2017, you may get only savings account interest. I am not sure though. Quite possible the notification applies to only those account holders who become non-resident in the future.
What should you do?
To be on the safer side, if you are an NRI and have a PPF account, do not make any further contributions to your PPF account.
In my opinion, it will be a good option to close the PPF accounts on your next visit to India. If your PPF account can be closed online (don’t think so), you can explore that option too.
Be prepared for operational hassles
Bank officials may not be aware of these new rules.
Therefore, when you approach them for the closure of PPF accounts before completion of 15 years or completion of extension period just because you have become a non-resident, be prepared for confused looks.
It is better to get the clarification from the bank over the e-mail first and subsequently head to the bank branch with the printout of the e-mail for the closure of the PPF account.
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