The PPF & EPF Dilemma: What Every US-Based NRI Needs to Know Before Filing Taxes

Living the American dream while still staying connected to your Indian roots? That’s the sweet spot for many NRIs. But while you’re juggling time zones and tax seasons, there’s something else quietly sitting in your portfolio that could cause a storm in your PPF and EPF accounts.

These accounts may seem innocuous (even reassuring) from an Indian point of view, but they have a twist in the IRS’s eyes. Let’s crack the code on how your beloved Indian retirement savings can make your US tax returns more complicated and what you can do about it.

Why Are PPF and EPF So Challenging for US-Based NRIs

Let’s begin from the basics. PPF (Public Provident Fund) and EPF (Employee Provident Fund) are well-liked long-term savings plans in India. They’re adored for their tax-free appreciation and secure returns.

But here’s where the trouble starts: The IRS doesn’t view them quite so favorably.

In the United States, they are considered foreign financial assets and, therefore, have to be reported if their value exceeds thresholds. More unbelievable is that what is tax-exempt in India, the interest earned, in the US qualifies as taxable income. This happens to be information most NRIs don’t have until it is too late to do anything typically when it’s time for penalties to be paid.

The Forms: FBAR and Form 8938

FBAR, also known as FinCEN Form 114, is filed when the total balance exceeds $10,000 at any time in a calendar year. That is including your PPF and EPF accounts. Even if you never made any use of these accounts, or they have simply been lying dormant accumulating quietly, if the amount ever exceeded that, you will need to file an FBAR. It is not sent along with your tax return but rather separately.

Then there’s Form 8938, which is part of the FATCA (Foreign Account Tax Compliance Act) compliance. This is filed with your IRS tax return and is required if your foreign financial assets exceed a certain amount $50,000 for single filers or $100,000 for joint filers at year-end, with slightly higher limits for peak balances.

Ignoring these forms can lead to massive penalties. We’re talking thousands of dollars — not to mention the stress of dealing with IRS notices.

How Do You Report PPF and EPF in the US?

Let’s break it down. First, gather your statements. You’ll need to know the balance in your PPF and EPF accounts at year-end, the highest balance during the year, and the amount of interest earned. This data will be used for both FBAR and Form 8938, if applicable.

Next, you’ll list the interest income from these accounts on your US tax return. Although you did not take the money out, and even if the interest was tax-free in India, to the US, it is still income. It usually goes in Schedule B, where interest and dividend income would be reported.

FBAR is filed on the BSA E-Filing website, not the IRS website. It’s a different process but just as crucial. For Form 8938, the information gets entered into your Form 1040 filing package.

Seems like a lot? It is which is why most NRIs like to hire cross-border tax experts to avoid errors.

Recent PPF Changes NRIs Should Be Aware Of

There is a second turn in this story. As of October 1, 2024, NRIs are no longer able to earn interest on PPF accounts. The Indian government has chosen to stop NRI interest accrual, and until that point, the rates will be the same as for post office savings accounts.

Also, you cannot open the PPF account beyond maturity. After it matures, you have to close it. And here’s a twist the maturity value can be credited to your NRO account in India only. You cannot convert it to USD or repatriate it freely with RBI permission.

This makes proactive planning even more important. If your PPF account is nearing maturity or you’ve been regularly contributing, now’s a good time to review your strategy. Leaving it untouched may no longer be the best idea.

Should You Withdraw Your EPF?

This is the million-dollar question. The EPF corpus, which many NRIs tend to forget about once they move out of India, keeps growing in interest. While that may sound wonderful, withdrawing it isn’t easy either.

Under US tax law, withdrawal from the EPF can be treated in the same way as pension or social security benefits. That is to say that the distribution can or cannot be taxed depending on your total income and the provisions of the India-US tax agreement. But even if it is not taxed, it must still be reported.

The withdrawal decision needs to take into account not only taxation but also currency exchange rates, your intent to return to India, and long-term investment objectives.

Did you know: That the EPF interest rate in India typically trumps several US fixed income investments? But none of it matters if you are left with penalties due to non-reporting.

Conclusion

Don’t Let Your PPF or EPF Haunt Your Tax Season PPF and EPF accounts are a chapter in your Indian finance life, but while you are settled in the US, they have to be managed with caution. Something that looks like a resting or ‘neglected’ investment may have serious repercussions if you do not report it in the correct manner.

The brightest idea? Begin early, remain aware, and hire experts who are familiar with both sides of the tax system. You don’t have to forgo your Indian investments just be proactive about disclosing them.

FAQs

1. Do I really need to report my PPF account to the IRS if I haven’t deposited anything recently?

Ans- Yes. Even if you haven’t contributed, if the account balance crossed $10,000 at any point, it must be reported on FBAR.

2. Is the interest earned in PPF and EPF taxable in the US?

Ans- Yes. The interest, although tax-free in India, is taxable in the US and must be reported annually.

3. I have both PPF and EPF. Do I file two separate FBARs?

Ans- No. You file one FBAR but list all foreign accounts individually, including your PPF and EPF.

4. Can I close my PPF account and transfer the funds to my US bank account?

Ans- Not directly. You must transfer the maturity amount to your NRO account in India. Repatriation to the US involves RBI approval.

5. What happens if I forget to file the FBAR?

Ans- Non-willful failure can result in penalties up to $10,000 per violation. Willful neglect can lead to even higher penalties.

6. Is Form 8938 mandatory even if I file the FBAR?

Ans- Yes. FBAR and Form 8938 have different thresholds and are filed for different purposes. You may be required to file both.

7. Can the IRS find out if I don’t report my Indian accounts?

Ans- Yes. Under FATCA, foreign financial institutions may report account details to the IRS. Non-compliance is risky.

8. Are mutual funds in India also considered foreign financial assets?

Ans- Yes. Indian mutual funds must also be reported under FATCA and FBAR if thresholds are crossed.

9. Do I report the EPF interest only after withdrawal?

Ans- No. EPF interest must be reported annually, even if you haven’t withdrawn the funds.

10. Where can I get help for filing these forms correctly?

Ans- It’s best to consult a cross-border tax expert who specializes in US-India tax compliance to avoid costly errors.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.