Because of a new notification, any retirement planning done by non-resident Indians through PPF will go for a toss, experts tell Sanjay Kumar Singh.
Earlier, if you became a non-resident Indian (NRI), you could not open a Public Provident Fund (PPF) account. However, if you had one at the time of becoming an NRI, you could continue with it and enjoy the same benefits as a resident citizen but not extend the account.
From now, goes an October 3 notification, as soon as a person becomes an NRI, his PPF account will be deemed closed.
From the day he turns NRI till the time he withdraws the money, the amount in his account will earn the interest rate payable on a post office savings account, currently four per cent.
A separate notification says the same for the National Saving Certificate (NSC) -- that it would be deemed encashed from the day a person turns non-resident.
Mumbai-based financial planner Arnav Pandya says: "This is to ensure non-residents do not get the benefit of higher interest rates provided by the government to local citizens."
The notification will adversely affect all those who move abroad, even for a short stint of a couple of years, as is common in sectors like information technology. If these employees have a personal PPF account, it will be deemed closed and the balance will earn only four per cent.
Once they come back, say two years later, they will have to restart it to earn a higher rate of return.
Experts think this will prove disruptive. "In the current form of this notification, even if a person goes out of the country for a short spell like two years, his PPF account will be shut down. Any retirement planning he has done through PPF will go for a toss," says Manoj Nagpal, chief executive officer (CEO), Outlook Asia Capital.
Many people in professions like the merchant navy actually calculate the number of days they have been in the country or outside each year and file a tax return based on their non-resident/resident status for that year.
A person is treated as resident if he has been in the country for at least 182 days in a year. Such people could find it difficult to invest in PPF and NSC after the new rules.
Greater clarity is needed on some issues.
"The government needs to spell out which definition of NRI will apply here -- that of income tax or the Foreign Exchange Management Act," says Arvind A Rao, a financial planner.
The notification will also affect NRIs who moved abroad a few years ago but still have a PPF account.
"The notification is applicable to one and all. It says 'the account will be deemed closed with effect from the day he becomes a non-resident'. It will apply retrospectively to even people who left the country in the past," says Rao.
So, if someone left the country five years ago, his account is likely to be treated as closed retrospectively, and he will be paid interest of only four per cent from the time he turned an NRI.
More clarity is required here too.
"How will the money be recovered from these people? The interest has already been credited into their PPF accounts. Will it be clawed back? Or be deducted from future interest payments?" asks Rao.
He adds that the government needs to clarify these issues at the earliest.
So, people moving abroad should close their accounts at the time of moving. "Else, he will earn a return of only four per cent, which is low," says Pandya.
Fixed-income options in which NRIs can invest include bonds and debt mutual funds. Those who are abroad should also ensure they close their PPF account and withdraw their money the next time they are in India.
Lower payouts to NRIs:
- Those turning non-resident will not be paid the interest rate of 7.8 per cent currently payable on PPF and NSC, according to a notification
- From the date they turn non-resident till the time of withdrawal, they will be paid 4 per cent cent interest
- The new rules will affect even those who move abroad to work for short tenures
- Those who moved abroad a few years earlier but still have a PPF account will also be paid the lower rate from the date of turning non-resident
