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NRIs With Investments In PPF And NSC Must Act ASAP

Since last many years, Non Resident Indians (NRIs) are NOT ELIGIBLE to invest in various Post Office Small Savings Schemes such as PPF, NSC, POMIS, KVP, etc.

However, until now, there was one exception to this complete ban.

Resident Indians who had an active PPF (Public Provident Fund) Account and later became an NRI, were allowed to continue investing in the same till its maturity. Of course, the maturity proceeds were Non Repatriable and the option of 5-year extension was also not available.

This relaxation has come to an end:

As per the recent notification issued by the Govt. of India (Notification No. GSR 1237(E) dated 3rd October 2017), this small window for NRIs  to continue subscribing to their PPF Account — has been closed.

This is what the new notification on PPF states:
"If a resident who opened an account under this scheme, subsequently becomes a non Resident during the currency of the maturity period, the account shall be deemed to be closed with effect 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."

ppf-nsc-accounts-of-nris
Dont' worry NRIs if your PPF or NSC Accounts are closed prematurely.

Likewise, Resident Indians who had an active investment in NSC (National Savings Certificate) and later became an NRI, were allowed to avail the benefits of the NSC on maturity... on Non Repatrition Basis.

This relaxation too has come to an end:

As per the recent notification issued by the Govt. of India — Notification No. GSR 1238(E) dated 3rd October 2017 — NRIs will NOT BE PERMITTED to hold their NSCs until maturity.

This is what the new notification on NSC states:
"If a resident Indian having purchased a certificate, subsequently becomes Non-Resident during the currency of the maturity period, the certificate shall be encashed or deemed to be encashed on the day he becomes a non-Resident, and interest shall be paid at the rate applicable to the Post Office Savings Account, from time to time, from such day and upto the last day of the month preceding the month in which it is actually encashed."

In other words, 
a. All existing PPF and NSC accounts — of the people who become Non Resident Indians — will be closed / encashed from the day they become an NRI.

b. Thereafter, these accounts will earn only the Post Office Savings Account interest rate, which is 4% p.a. at present. This effectively brings down the interest earnings of NRIs on their PPF and NSC investments by around 50%.

c. Even this PO Savings Account interest rate will be paid only till the last day of the previous month, based on when the account is actually closed.

SOLUTION
At first instance, this forced premature closure of PPF and NSC accounts, of people who turn NRIs, appears to be a problem.

However, that is not the case:

NRE FDs are a better alternative available to NRIs as compared to both PPF and NSC.

Interest income on both Public Provident Fund and NRE FDs is tax free. But PPF pays higher interest than NRE FDs. So prima facie, PPF appears to be better than NRE FD. This, however, is not true.

Firstly, Public Provident Fund has a 15-year lock-in. Whereas the tenure of NRE FDs is much shorter and also allows premature closure. Secondly, there is an investment limit of Rs.1.50 lakhs per year in PPF. NRE FDs have no such limits on investment amount. As such, NRE FD is a much better alternative to PPF.

Hence, Govt.'s decision to close the doors for NRIs to invest in PPF should be most welcome. They can now move their PPF investment to a better product.

National Savings Certificate pays higher interest than NRE FDs. However, this interest is fully taxable. Vis-a-vis this, the interest income on NRE FDs is tax free. So, on post-tax basis, NRE FDs outshine NSCs.

Again, Govt.'s decision to close the doors for NRIs to continue with their NSC investment till maturity should be most welcome. They can move their NSC investment to a better product.

That apart, Debt Mutual Funds could also be an excellent alternative to PPF and NSC. NRIs must surely explore this option too, to reinvest their PPF and NSC investments that have been closed or encashed prematurely.

Whatever course of action you choose, you must act fast. Else you will earn a mere 4% p.a. interest till you make the change.

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