Tax Query: Can NRIs deposit in their existing PPF account and claim tax deduction?

I am a resident of India living in India and am a salaried employee. I also receive house rent of Rs 2 lakh from a property jointly owned with my father. I opened a PPF account eight years ago and am regularly making deposits in the account. However, from 1 May 2019, I am working outside India on a two-year assignment. Can I continue to make deposits in the PPF account and claim a tax deduction for FY 2019-20? 

Under the PPF rules, you will be a non-resident since your stay in India is for less than 182 days. However, the PPF rules allow you to make deposits into your existing PPF account opened when you were a resident in India. Similarly, your PPF account will continue to earn interest. You can keep your PPF account running until its maturity date.

For FY 2019-20, your stay in India is 30 days for the month of April 2019. Your stay outside India is 336 days from 1 May 2019 to 31 March 2020. You are a not ordinarily resident under income tax laws for the following reasons:

  1. Your stay in India is below 60 days for the FY 2019-20
  2. You have been a resident of India for the past 2 out of 10 years

For the FY 2019-20, you will be taxable in India in respect of your salary earned in India for the month of April. You will also be taxable for your share in the rental income and any other income from you earn in India. You can claim the tax deduction for deposits made in the PPF account from your annual income while filing your income tax return in India.

Also Read: Tax Query: Can NRIs claim deduction on donations?

I am a non-resident living outside India for the past 4 years. I have recently made equity investments in Indian companies and mutual funds. In the past, I have taken credit in my NRO account for dividends received from my earlier investments in India. From a tax perspective, should I take credit of the dividends paid by the companies in my NRE account or NRO account? 

A non-resident can make investments in Indian equities and mutual funds through a non-resident external rupee account (NRE account). The NRE account rules allow for a  credit of dividends in case of investment made through the NRE account. Hence, you can credit in NRE account for the dividends on your investments made through the account. The interest earned on your balance in an NRE account is exempt from tax in India. From the FY 2020-21, dividends received from Indian companies and mutual funds are taxable in the hands of the taxpayer. The tax will apply to dividends from your past investments too.

In the case of your earlier investments in India, you have to take the credit of the dividend in your NRO account. The NRE account does not allow for credit of dividends received in respect of investments made otherwise than through an NRE account. The interest earned on your balance in the NRO account is taxable at 30% (plus education cess and surcharge) in India.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in

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