EPF, PPF, NPS and Indian life insurance on a US return

The tax-free or tax-deferred status that these Indian products enjoy comes from Indian law. The US applies its own rules, and for several of them the answer is not clear.

The treatment of EPF, PPF and NPS for US purposes is unsettled and preparers take different positions. What follows are the common ones. Agree your approach with your preparer, then apply it consistently.

Employees' Provident Fund (EPF)

If you worked in India and left, the balance continues to earn interest. A common conservative position is to treat the fund as a foreign retirement arrangement, with interest earned while you are a US resident reported annually. A common practical position is to treat the account as deferring tax until withdrawal, since the plan is approved in India. A withdrawal is generally taxed on the part that is above your own contributions, as ordinary income, and India's exemption after five years of service does not apply in the US. Whichever you choose, the account is a foreign asset to be considered for Form 8938 and possibly the FBAR.

Public Provident Fund (PPF)

PPF interest and maturity are fully exempt in India. In the US the interest is generally taxable each year as it is credited, because it is bank-type interest. NRIs cannot open a new PPF, but an existing account can generally run to its original maturity without extension; check the current rules on further contributions. Treat it as a foreign account for reporting.

National Pension System (NPS)

NRIs may hold NPS accounts. US contributions are not deductible against US income. Whether growth is taxed annually or only on withdrawal is not settled, and withdrawals in India are partly tax-exempt that the US taxes. The investments underneath are mutual-fund-like, so check PFIC exposure (shares and mutual funds).

Life insurance and ULIPs

• Death benefit. Ordinarily not taxable in either country.
• Endowment and money-back policies. The Indian exemption for maturity proceeds (Section 10(10D) of the old Act, which has limits on annual premium relative to the sum assured) has no US counterpart. On maturity or surrender, the gain (what you receive minus premiums paid) is generally ordinary income in the US. Many Indian policies also do not meet the US definition of a life insurance contract, and the tax rules for those are harsher.
• ULIPs. Because the money is invested in funds, a ULIP is often treated as a PFIC or an investment contract and taxed annually. This needs a specific review.
• Reporting. Policies with a cash value are reported on Form 8938. The FBAR generally does not require them.

Gratuity, leave encashment and pension

Lump sums on leaving an Indian employer, and an Indian pension, are taxable in the US when received if you are a resident. Indian tax on them can be credited. The India-US treaty provides that pensions are normally taxed only in the country of residence, which can remove the Indian tax if you are an NRI.

When you move back

When you return to India, your US accounts raise the same question in reverse. The US 401(k) and IRA are covered in the moving-back article.

Questions to put to a preparer

1. How will the balance, the annual growth and the withdrawal be treated?
2. Is it reported on Form 8938 and the FBAR?
3. Is there any trust or PFIC form involved (Form 3520, 3520-A, 8621)?
4. How do we document the position, so that it is the same each year?