Hello,
I woke up with this. My question is regarding US tax treatment of interest earned on public provident fund (PPF) in India. PPF is Govt of India scheme with 15 year maturity. Each year it gives interest at 8%. But you can not withdraw that interest directly. Any time after 5 years subscriber can withdraw up to 50% balance. All interest earned on this funds is tax free in India. Also, to withdraw funds I need to physically go to agent bank and they will pay with rupee check.

I am US citizen now, but I had opened account when I was Indian citizen.

1. As per US-India tax treaty, is interest accrued in this account tax exempt?
2. If it is not tax exempt, do I need to pay taxes every year or can I pay when I withdraw funds from account?
3. How is this account considered in US? Is it IRA, bond, pension?

I appreciate your expert advice.

One more thing, The PPF rule,
http://www.indiapost.gov.in/POSBActs/PPFRules1968.pdf

Section 3 of this document mentions..
Provided that if a resident who subsequently becomes Non Resident Indian during the currency of the maturity period prescribed under Public Provident Fund Scheme, may continue to subscribe to the Fund till its maturity on a Non
Repatriation Basis.

The fact this interest is tax-free in India does NOT mean it is tax-free on your U.S. return. In fact, I believe that it will NOT be tax-free on the U.S. return.

The interest seems to be accruing over the term of the bond. You can wait until the interest is disbursed and declare it then, or declare the interest annually as it accrues. Your choice!

It should be treated as interest income in the year it is accrued unless there is some provision under the U.S. and India tax treaty.

Thank you both for you answer. Can I pay taxes on so far accrued income now and onwards till maturity?

Also, PPF rule says, NRI may continue to subscribe to the Fund till its maturity on a Non
Repatriation Basis. Does non-repatriation means I can not transfer money to US till maturity of PPF?

Does any one of you provide services/consultancy in filing such case?

What is the purpose of the tax treaties then?

If you worked hard in India and save your after tax savings into the tax free inventment tools. And then come to US and you lose all your wise investments made in India? You work hard in US and save your after tax savings into tax free investment tools like ROTH IRA or tax free muni bonds in US. Then you become US citizen and then relocate to India on permanent basis. Then India will start taxing you on withdrawals from ROTH IRA and tax free muni bonds from US?

This doesn't make any sense. How the tax treaties are benefiting the people who are US naturalized citizen and also OCI/PIO?

Both Indian IT department and US IRS talk about "worldwide income". If this is just for reporting, that's OK. But if both its for taxing, then one cannot enjoy tax free plans at all, unless you move all your investment to the country of residency.

Another point to be considered here is - if that money is non repatriable then it can not be converted to USD and be brought back to US so how can it be taxable in US ?

The U.S. position that ALL world-wide income of its residents is subject to U.S. income taxes is rather unique among the world's nations, though I have heard that the United Kingdom has also begun to take this position.

It IS understandable when you consider the United States' position as the pre-eminent economic power in the world. If they did NOT take that position, it would be an open invitation for every millionaire to park his/her money in the banks and investments of the country that offered the best deal tax-wise.