The accounts: EPF, VPF, PPF, NPS, gratuity
| Scheme | What it is | India tax treatment | Usual U.S. position |
|---|---|---|---|
| EPF | Mandatory employer scheme: 12% of basic + DA from you, 12% from employer (part of employer share goes to EPS pension). Interest declared yearly by EPFO. | Contributions deductible (80C); interest exempt (up to limits); withdrawal tax-free after 5 years’ service. | Employer share = taxable wages when contributed. Your share = after-tax. Interest = taxable each year. No deferral. |
| VPF | Voluntary extra employee contribution into EPF. | As EPF; interest on employee contributions above ₹2.5 lakh/yr taxable since FY 2021-22. | After-tax contribution; interest taxable annually. |
| PPF | Government small-savings account, 15-year term, individual contributions up to ₹1.5 lakh/yr. | EEE — exempt at every stage. | After-tax contribution; interest taxable annually; not a PFIC. |
| NPS (Tier 1) | Defined-contribution pension invested in fund-manager schemes; 60% lump sum at 60, 40% annuity. | Deductions on contribution; 60% lump sum exempt; annuity taxable. | Unsettled: treated by many as a foreign pension (taxable on growth or at distribution); possible PFIC exposure in the underlying funds. |
| Gratuity | Statutory lump sum after 5 years with an employer: 15 days’ last-drawn basic per year of service. | Exempt up to ₹20 lakh (private sector). | Taxable wages in year received; foreign earned income for FEIE if attributable to qualifying years. |
Why the treaty does not help
Some U.S. tax treaties — the U.K., Canada, Germany, Belgium, the Netherlands — contain pension articles that let a U.S. person defer tax on contributions and growth in a foreign employer plan until distribution. The U.S.-India treaty (1989) has no such provision. Article 20 deals with pensions and annuities paid, not accumulations. So for U.S. purposes an Indian provident fund is just an account that happens to be locked: contributions, growth, and withdrawals are analysed under ordinary U.S. rules, and the Indian “exempt” label carries no weight.
Practitioners disagree about which ordinary rules apply (employees’ trust under section 402(b), foreign grantor trust, or plain account), but the practical result for most salaried expats is the same: nothing is deferred, and the conservative approach is to report the employer contribution and the annual interest as you go.
EPF: contributions, interest, withdrawal
Your 12%
Your own contribution comes out of salary that is already included in your gross wages on the U.S. return. It is not deductible in the U.S. (there is no 401(k)-style exclusion). It becomes basis in the account — money you will not be taxed on again when you withdraw.
The employer’s 12%
Under the common position, the employer contribution is additional compensation to you in the year it is credited. Your Indian Form 16 does not show it as salary (India treats it as exempt), so you have to add it yourself from the EPF passbook. A portion of the employer share (8.33% of basic up to the statutory wage ceiling) is diverted to the Employees’ Pension Scheme (EPS), which pays a small defined pension at 58; most practitioners still treat the full employer contribution as wages, with the EPS portion as basis in a pension that will be taxed under annuity rules later.
Interest
EPFO declares an interest rate each year (8.25% for FY 2023-24 and FY 2024-25) and credits it to the account, usually months after the financial year closes. The common U.S. position is to report the interest for the year it is credited, converted at the IRS average rate for that year. The credit lands in your passbook in one lump, so pull the passbook from the EPFO member portal each year and keep it.
Withdrawal
When you withdraw (resignation, leaving India, or retirement), the U.S. taxes only the part that has not already been reported: in a fully reported account, that is nothing. If you never reported contributions or interest in prior years, the entire withdrawal is taxable on receipt — which is the trap for people who ignored the account for a decade and then cash out. India taxes a withdrawal made before five years of continuous service (TDS at 10% with PAN, 30% without); after five years it is exempt.
The FEIE lever most guides miss
This changes the maths for many people. An American on a ₹40 lakh Indian salary with an employer EPF contribution of ₹2 lakh is still comfortably under the FEIE limit, so the “taxable employer contribution” problem disappears for income tax purposes (though the account must still be reported and the interest is still taxable). If you are instead on the Foreign Tax Credit because Indian tax on a high salary exceeds U.S. tax, the employer contribution is fully taxable in the U.S. and there is no Indian tax on it to credit — a small but real cost of the FTC route. Run both in the FEIE vs FTC calculator with the employer contribution added to salary.
PPF: annual interest, no PFIC
PPF is a government deposit scheme, not a fund, so it is not a Passive Foreign Investment Company and does not need Form 8621. The U.S. treatment is simple and unfavourable: contributions are after-tax, the interest (7.1% in recent years) is taxable ordinary income every year it is credited, and the maturity payout is a return of basis plus already-taxed interest. India charges nothing at any stage, so there is no credit. Report the account on FBAR and Form 8938.
Because of this, a PPF is a poor vehicle for a U.S. person compared with an Indian salary-linked EPF (where the FEIE can cover the employer side) or a U.S. Roth IRA. If you already hold one, the compliance is light — one interest figure a year from the passbook — so there is no need to break it; just stop assuming it is tax-free.
NPS: the grey area
NPS Tier 1 money is invested in schemes run by pension fund managers (equity, corporate bonds, government securities). Two problems for U.S. persons: first, there is no treaty deferral, so growth may be taxable annually or, under the foreign-pension view, at distribution; second, the underlying schemes are pooled investment vehicles that can meet the PFIC definition, which would mean Form 8621 and the punitive excess-distribution regime on the 60% lump sum. Practitioner opinion is split. If you have a material NPS balance, this is a CPA question, not a software question. If you are deciding whether to open one, the honest answer for a U.S. person is: probably not, unless the employer contribution is large enough to be worth the reporting cost.
Gratuity: tax-free in India, wages in the U.S.
Under the Payment of Gratuity Act, an employee with five or more years of continuous service receives 15 days of last-drawn basic (plus DA) for each completed year, paid as a lump sum on leaving. India exempts it up to ₹20 lakh for private-sector employees. For the U.S. it is deferred compensation for services performed in India — ordinary wages, taxable in the year received.
Because it is foreign earned income, it is eligible for the FEIE — but with a timing rule that catches people. Section 911 attributes pay to the year the services were performed, and amounts received after the close of the tax year following the year the services were performed cannot be excluded at all. A gratuity paid in year 8 for eight years of service is, in substance, partly attributable to years 1–6, and that portion is outside the exclusion window regardless of how you qualified. The portion attributable to year 7 and year 8 can be excluded if you qualified in those years and have room under those years’ limits. The same analysis applies to Qatar end-of-service gratuity — see the Qatar gratuity guide for a worked example. For a large gratuity, get a preparer to do the attribution rather than excluding the whole thing.
FBAR, Form 8938, and the Form 3520 question
- FBAR: EPF, PPF, and NPS balances are foreign financial accounts in the view of most practitioners. Include them in the $10,000 aggregate and list each with its maximum balance. An EPF balance after a few years of Indian employment is usually over $10,000 on its own.
- Form 8938: all three are specified foreign financial assets. Include them in the threshold test and list them if you cross it.
- Form 3520 / 3520-A: some preparers take the view that EPF is a foreign trust requiring annual Form 3520 reporting. Others treat it as an employees’ trust or a plain account. Revenue Procedure 2020-17 exempts certain tax-favoured foreign retirement trusts from Forms 3520/3520-A, but EPF’s fit with those criteria (contribution limits, India tax-favoured status) is itself debated. The penalty for not filing a required Form 3520 starts at $10,000, so this is the point where paying a specialist for an opinion is cheaper than guessing.
Timing mismatches and the foreign tax credit
Because India taxes these accounts (if at all) at withdrawal and the U.S. taxes them as they grow, the foreign tax credit rarely lines up. The only Indian tax most people pay is TDS on an early EPF withdrawal (before five years) or on VPF interest above the ₹2.5 lakh threshold. That TDS is creditable on Form 1116 in the year paid, but by then you may have already paid U.S. tax on the same interest in earlier years. Form 1116 carryback (one year) and carryforward (ten years) of unused credit helps only if you have other Indian passive-category income to absorb it. In practice, most expats simply absorb the U.S. tax on EPF/PPF interest as a cost of the account.
Keep a basis ledger
Whatever position your preparer takes, keep a simple spreadsheet from the first year: employee contribution, employer contribution, EPS diversion, interest credited, exchange rate used, and the amount you reported on each U.S. return. When you withdraw — possibly fifteen years later, possibly with a different preparer — that ledger is the only thing standing between you and being taxed twice on the same rupees. The EPFO passbook shows contributions and interest by month; download it every year, because older passbook history is not always retrievable later.
Frequently asked questions
Is EPF taxable in the U.S.?
For a U.S. citizen or green card holder, the common position is yes: the employer contribution is taxable compensation in the year it is made, and the interest credited each year is taxable interest income. Your own contribution is after-tax. The U.S.-India treaty contains no provision deferring tax on EPF. If you qualify for the FEIE, the employer contribution can be excluded along with salary, up to the annual limit.
Is PPF interest taxable in the United States?
Yes. PPF is exempt at every stage in India, but a U.S. person must report the interest credited each year as ordinary income. PPF is a government deposit scheme, not a fund, so it is not a PFIC and does not require Form 8621. The account is reportable on FBAR and Form 8938.
Do I report EPF and PPF on the FBAR?
Most practitioners treat EPF, PPF, and NPS as foreign financial accounts. Include their maximum balances in the $10,000 aggregate and list each account on FinCEN Form 114 if you are over the threshold. They are also specified foreign financial assets for Form 8938.
Can the FEIE cover my employer's EPF contribution?
Yes. The employer contribution is compensation for services performed in India, so it is foreign earned income. If you meet the Physical Presence or Bona Fide Residence test, it is excludable along with your salary up to the FEIE limit. Interest on the account is not earned income and cannot be excluded.
Is Indian gratuity taxable in the U.S.?
Yes. Gratuity is deferred wages and is taxable in the year received. It is foreign earned income for FEIE purposes, but only the portion attributable to the year of receipt and the prior year can be excluded; amounts attributable to earlier service years fall outside the section 911 window.
Does EPF require Form 3520?
It is disputed. Some preparers treat EPF as a foreign trust requiring Form 3520 and 3520-A; others treat it as an employees' trust or a plain account. Because the penalty for a required but missing Form 3520 starts at $10,000, get a written position from a U.S. expat tax specialist rather than relying on software defaults.
Sources and references
IRS Publication 54 · IRS — what counts as foreign earned income · IRS — U.S.-India income tax treaty · IRS Form 3520 · Rev. Proc. 2020-17 (foreign retirement trust reporting relief) · IRS Form 8938 · Employees’ Provident Fund Organisation (EPFO) · National Pension System · Income Tax Department, India.