Your Indian EPF, PPF and NPS on a US tax return

In India these accounts are among the most tax-favoured things you can hold. Under the Income-tax Act 1961, an EPF balance is exempt under Section 10(12) after five years of continuous service, a PPF is exempt under Section 10(11), and NPS is largely exempt on withdrawal. The exemptions have edges: an EPF withdrawn before five years of service, interest on your own EPF contributions above the yearly limit, EPF interest credited after your service ends, and an NPS annuity can all be taxed. Within those edges, India taxes these accounts little or nothing.

The US does not follow suit. These are not US-qualified retirement plans, so the deferral India grants does not carry across. Instead, US tax tends to treat an EPF or PPF as a kind of foreign trust, and the consequence is that the income these accounts earn, the interest credited, and for an EPF the employer's contributions, can be taxable to you as a US person in the year it accrues, not deferred to withdrawal. So while your Indian statement shows tax-free growth, the US may be taxing that same growth every year.

The part that makes this expensive is the absence of any offset. The foreign tax credit works by crediting foreign tax you actually paid. But India largely exempts these accounts, so you usually paid little or no Indian tax on the growth, which leaves little or no Indian tax to credit against the US charge. You can bear the US tax on the accruals almost in full.

The treaty does not rescue you either. It has a pension article, but the treaty's saving clause lets the US tax its own citizens and residents as if the treaty had not come into effect, and the private-pension paragraph (Article 20(1)) is not carved out of that clause. So a US person generally cannot use the treaty to make an Indian private pension or provident fund tax-free. The carve-out that does exist covers social security benefits and other public pensions (Article 20(2)); whether a statutory EPF counts as one is debated among specialists, and a lump-sum withdrawal may not be a pension at all under the treaty's definition. Unlike some other countries' treaties with the US, the India-US treaty contains no provision that makes Indian retirement accounts tax-deferred for US purposes. Do not plan on the EPF, PPF or NPS being sheltered by the treaty.

On top of the income tax, these accounts usually carry US reporting. Treated as foreign trusts, an EPF or PPF can require the foreign-trust forms (Forms 3520 and 3520-A). Whether those forms are needed depends on whether the IRS relief for tax-favoured foreign retirement trusts in Rev. Proc. 2020-17 covers your account, which your US specialist decides. The balances feed into the foreign-account reports, the FBAR and the Form 8938. Missing those carries heavy penalties of their own, separate from the tax.

The honest position is that how exactly to characterise and report an EPF or PPF for US tax is unsettled among specialists, so this is not a place for a clean do-it-yourself answer; it needs a US cross-border CPA who handles Indian accounts. What a practising CA on the India side does is give that specialist what they need: the year-by-year interest and contribution detail, the account balances and the Indian exemption position, so the US treatment can be applied correctly and the reporting completed. The single most valuable thing is simply knowing the exposure exists, so it is handled, not discovered later.