Dubai: As a Non-Resident Indian (NRI), how does the Indian government apply taxes on my provident fund investments (PF), or in other words, are my PF investments taxed and if yes, by how much?
But first, what are Provident Fund (PF) investments?
A provident fund is a government-managed, mandatory retirement savings scheme used in India, Singapore, and other developing nations. In other words, a provident fund is a retirement fund run by the government.
They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount.
If a participant dies, his or her surviving spouse and dependents may be able to continue drawing payments. Members of provident funds are able to take out a portion of their retirement benefits, typically one-third or one-fourth, in a lump sum up-front.
The remaining benefits are distributed in monthly pay-outs. The tax treatment of lump sum withdrawals also varies between regions, but usually, only a portion of a provident fund's lump sum withdrawals are tax free. Pension fund pay-outs are taxed.
Provident funds differ from another vehicle sometimes used in the developing world, the sovereign wealth fund, which is funded through royalties obtained from the development of natural resources.
In some ways, provident funds resemble a hybrid of the 401(k) plans and Social Security schemes used in the US. They also share some traits with employer-provided pension funds observed in several countries worldwide.
Public Provident Fund (PPF) versus Employee Provident Fund (EPF) – the difference
The Public Provident Fund (PPF) is a popular long-term saving scheme backed by the government of India, which matures in 15 years. Indian citizens can open a PPF account including non-salaried individuals and a minor.
You cannot invest more than INR150,000 (Dh7414) a year and a minimum of INR500 (Dh24.7) is to be contributed in a year. The current PPF interest rate is 7.1 per cent per annum. Your PPF contribution is exempt from taxes and the returns are not taxable as well.
On the other hand, Employee Provident Fund (EPF) is a retirement saving scheme for salaried employees where both the employee and employer make contributions to the scheme. A total minimum investment of 24 per cent of the basic salary is directed towards the EPF.
NRIs and Public Provident Fund (PPF) in India
The Public Provident Fund (PPF) essentially provides safe and guaranteed returns and is widely regarded as one of the most tax friendly investments.
NRIs cannot make fresh deposits to PPF accounts
Under a new scheme announced in December 2019, NRIs are not allowed to make fresh deposits to their PPF account. However, they can continue to hold the pre-existing accounts (opened when they were residents) until maturity. The tax laws remain the same – the proceeds are tax-free in India.
Even though proceeds are tax-free in India, NRIs will need to check how they would be taxed in their respective countries.
Note that Reserve Bank of India’s regulations require NRIs to convert all their resident savings and deposit accounts to non-resident accounts – non-resident external (NRE) or non-resident ordinary (NRO) – upon their departure from India when they plan to settle abroad.
NRIs and Employee Provident Fund (EPF) in India
The purpose of Employee Provident Fund in India is to provide employees with lump sum payments at the time of exit from their place of employment in India. This differs from pension funds, which have elements of both lump sum as well as monthly pension payments.
A worker gives a portion of his or her salary to the provident fund, and an employer should make a contribution on behalf of the employees. The money in the fund is then kept and handled by the government and ultimately withdrawn by the retirees or their surviving families in some countries. In certain cases, a provident fund even pays out to the disabled, who are not in a condition to work.
EPF offers attractive interest rates of 8.5 per cent for the financial year 2020-21. It enjoys ‘Exempt-Exempt-Exempt (EEE)’ status in terms of taxation. This means the maturity amount is tax-exempt under certain conditions. Lastly, the interest accrued on your contributions is also tax-exempt.
Can I enjoy tax benefits if I still have money in EPF, PPF?
However, from April 1, 2021, if you are contributing more than INR250,000 to your PF, the excess interest on the contribution above INR250,000 will be taxed as per the slab rates applicable to the taxpayer.
Nevertheless, EPF is a convenient saving tool plus a low-risk investment due to government-backing and also offers a pension. For many who work at private organisations, EPF is the only retirement planning tool.
Some frequently asked questions among NRI’s on Provident Fund accounts (PPFs and EPFs):
FAQ #1: What are the rules for EPF withdrawal?
As per the norm, here are the following scenarios where you can withdraw 100 per cent of the EPF:
• You have attained 58 years of age
• If you are unemployed for two months or more
• Upon premature death of the subscriber, the entire amount is given to the appointed nominee
• You can also withdraw if you have completed 5 years of service after being unemployed for 60 days, even if you have not attained the age of 58.
You can be permitted to make partial withdrawals under certain circumstances such as medical emergencies, marriage, home loan repayment, buying a house if you meet the requirements.
FAQ #2: When does my PF account become 'inoperative'?
A PF account becomes inoperative and does not earn further interest if the account owner retires after attaining the age of 55 or moves to another country permanently.
Also, a PF account becomes inoperative if the account owner dies and there is no application for withdrawal of the accumulated balance within 36 months.
FAQ #3: When is my EPF amount withdrawal taxable?
When you were employed in India before settling abroad, if you have completed 5 years of service in the India-based firm, you can withdraw your EPF amount with no tax.
If a withdrawal is made before the completion of 5 years of service, additional tax is levied. The tax is deducted at the rate of 10 per cent if you furnish your permanent account number (PAN) in India and 34.6 per cent, if you are not able to furnish your PAN. Tax is not levied if the total amount of withdrawal is below INR50,000 (Dh2,471.5).
FAQ #4: Will my PF account continue to earn interest after becoming an NRI?
When you become an NRI and stop contributing to your PF account, it will continue to earn interest till you are 58 years of age or until the date of withdrawal.
FAQ #5: Should I close my EPF account I have to go abroad for a short duration?
You shouldn't close your EPF account if you are going to work abroad for a short duration. You should avoid withdrawing the balance till maturity if you are going to come back to India. Your total provident fund amount will remain with the Employees' Provident Fund Organisation (EPFO) and will keep earning interest.
Additionally, working in a foreign country will require you to contribute to a retirement scheme or a social security scheme just like the EPF. You may not be able to reap the retirement benefits even if you contribute because of the short duration of your stay abroad. Your money may get trapped in the country where you are not to live in retirement.
Ultimately, the main goal of saving for retirement and making financial investments is to create wealth and achieve financial security so that when we retire we can afford to live comfortably. To build a financially secure future, having a better understanding of your saving schemes and retirement planning tool is crucial.