PPF Interest at 4% for NRIs ⬇️: A Tough Blow
New PPF rules: interest rate cuts for NRIs & minors.
On September 30th, the Ministry of Finance announced new rules for Public Provident Fund (PPF) accounts. This significantly impacts NRIs and minors. Further it aims to streamline account management for multiple account holders.
Let’s understand how the rules have changed for NRIs, but first.
What is Public Provident Fund (PPF)?
The Public Provident Fund (PPF) is a long-term, government-backed savings scheme in India that offers tax benefits and attractive interest rates. The current interest rate offered by the scheme is 7.1%.
It has a 15-year lock-in period, making it ideal for those looking to build a secure financial future.
Contributions up to Rs 1.5 lakh annually are tax-deductible under Section 80C, and the interest earned is tax-free. PPF is a safe, low-risk investment option for those seeking stable returns.
PPF Account for NRIs
Before these new rules, NRIs with PPF accounts opened as resident Indians could continue holding their accounts until maturity and earn the same interest rates as resident Indians.
Key Changes for NRIs
👉 Low Interest for NRIs: Starting October 1, 2024, NRIs will earn a reduced interest rate → the Post Office Savings Account (POSA) rate (currently 4%). They can still hold the account until maturity, but it will earn lower returns than a resident Indian.
👉 No Extensions Allowed: NRIs cannot extend their PPF accounts beyond the initial 15-year term. If the account is extended, it will be considered irregular and will not earn interest.
👉 Irregular Accounts: For NRI accounts extended beyond 15 years, the interest rate will be reduced to the POSA rate of 4% until September 30, 2024. After that, no interest will be paid at all.
👉 Primary Account Only: If you have more than one PPF account, you must designate a primary account. Only this account will earn interest at the scheme rate. Any excess funds in a secondary account must be merged into the primary account.
If contributions exceed the yearly limit across multiple accounts, the excess will be refunded without earning interest.
What Should NRIs Do?
👉 Plan for Maturity: As an NRI, you can no longer benefit from interest after the rule change. Thus, plan accordingly. Consider other investment options for your savings once your PPF account matures.
👉 Ensure Compliance: If you still hold more than one PPF account, make sure you have regularized them by merging or closing excess accounts to avoid losing out on potential interest earnings.
Is PPF Still A Good Investment?
Well, may not be.
With the latest changes, PPF accounts for NRIs will earn minimal interest, potentially falling short of even beating inflation. In contrast, mutual funds offer the potential for higher long-term returns and may be a better option for building a larger corpus.
Here’s a graph that compares the potential returns
Scenario 1: You earn 7.1% interest throughout the PPF tenure.
Scenario 2: You earn 7.1% interest for the duration your are a resident Indian (5 years), and 4% interest for the remaining 10 years.
Scenario 3: You invest Rs 1,50,000 per year into mutual funds and stay invested for 15 years.
It’s clear that with reduced returns, PPF accounts are no longer as attractive for NRIs. To keep the account active, you can simply invest the minimum contribution.
A better option would be to shift your investments to mutual funds, which offer the potential for higher long-term returns.
PPF Accounts for Minors
Key Changes for Minors
👉 Interest Rate Changes: Until the minor turns 18, PPF accounts will now earn a lower interest rate of POSA, currently 4%. Once they turn 18, the account will start earning the regular PPF interest rate (currently 7.1%).
👉 Maturity Calculated from Adulthood: The 15-year maturity period for a minor's PPF account will be recalculated from the date the minor turns 18. This means the account effectively gets a fresh 15-year term from adulthood.
👉 Irregular Accounts: If a minor’s PPF account is irregular (e.g., due to excess contributions or multiple accounts), it will earn the POSA rate until the minor reaches 18 and the account is regularized.
👉 One Account Rule: Only one PPF account can be opened in a minor’s name. If multiple accounts are found, only the primary account will earn interest, while additional accounts will not earn any interest.
What Should You Do?
👉 Check Your Minor’s PPF Account: Ensure only one PPF account exists in the minor’s name and that contributions stay within the yearly limit of ₹1.5 lakh to avoid irregularities.
👉 Re-plan for Lower Interest: Minor PPF accounts will now earn lower interest during the minor years, which could impact long-term returns. Consider supplementing with other savings options if needed.