Moving to US: Can Indians continue their PPF and NPS Tier II investments? Tax expert explains
When an Indian moves to the US on a permanent basis, it does not necessarily mean that they are mandatorily required to close all existing investments in their primary country of residence.
Still, the rules governing Public Provident Fund (PPF), National Pension System (NPS) Tier II, and bank fixed deposits differ, and all account holders should carefully review each investment separately before deciding whether to continue, withdraw, or transfer it entirely.
The primary focus in such cases should be to clearly understand the rules and regulations applicable to a particular investment, such as a fixed deposit, NPS or PPF, at the time an individual completes the transition from the home country to the US. Let us discuss the same in detail.
PPF and NPS Tier II need separate review
It is important to note that an investor’s residency status can affect how existing Indian investments are managed. This makes updating of KYC details and residential status with the relevant bank, post office or NPS provider a very important first step.
Says Nishant Shanker, Tax Controversy & Dispute Resolution, Navraj Global Advisors, “An Indian who settles in the US should not assume that every existing Indian investment must be closed or transferred to family members. PPF, NPS Tier II and bank fixed deposits are governed by different FEMA and product-specific rules, so each must be reviewed independently. The account holder should promptly update residential status and KYC details with the relevant bank, post office or NPS provider and obtain confirmation on whether further PPF contributions are permitted and how an NPS Tier II balance must be dealt with.”
Hence, it is clear that an investor should not presume that the rules applicable to a PPF account will also apply to an NPS Tier II account. Clarity on the same and confirmation from the respective providers is necessary before making further contributions or taking any action on the existing balance.
If needed, one should also not hesitate to seek professional guidance from a certified financial advisor to ensure meaningful, tax-efficient financial planning when faced with such situations.
Significance of checking tax implications before withdrawing or gifting
Existing bank fixed deposits may often be retained after appropriate redesignation, i.e., formal classification based on individual residential status. Still, premature withdrawal or transferring investments to family members solely to reduce tax or reporting obligations may not be the right approach.
On this aspect, Shanker further added, “Existing FDs may often be retained after appropriate redesignation, and premature withdrawal or gifting should not be undertaken merely to reduce Indian tax or filing obligations. Gifts between a daughter/son and their parents are generally not taxable in India, but they must be genuine and documented. Most importantly, US tax residency can create separate tax and reporting obligations, which should be evaluated before any transfer or withdrawal.”
What are the important takeaways?
For Indians settling in the US, the takeaway is to diligently review every investment independently, update residential details, and understand the tax-related implications in both nations.
Secondly, what happens to an individual’s PPF and NPS Tier II investments once they move to the US and whether they can continue with the same, depends on a host of factors, such as when the individual moved to the US.
What were the applicable rules at that time? How were taxes calculated on such accounts? There are several critical aspects that must be examined on a case-by-case basis, and no single fixed rule applies to all. However, the broader classification is as follows, subject to applicable rules:
- PPF (Public Provident Fund): You can keep your existing account active and make deposits until its 15-year maturity, but you cannot open a new account or extend it after maturity once you become an NRI.
- NPS Tier II: You cannot continue or contribute to a Tier II account as an NRI; you must close it, withdraw the funds, or transfer them to your Tier I account.
- US Taxation: While both accounts have tax benefits in India, their earnings and interest are taxable in the US once you become a US tax resident, and they must be reported annually on Form 8938 and the Report of Foreign Bank and Financial Accounts (FBAR).
Hence, having clarity on the applicable rules and seeking professional advice before making withdrawals, transfers, or further contributions can also help in avoiding unnecessary legal and financial complications.
