National Pension Scheme (NPS) for NRIs (Non-Resident Indians) was thrown open in 2015 to enable them to participate in the retirement savings scheme backed by the Government of India. NPS is a Defined Contribution Scheme in which the benefits depend on the volume of contributions made, returns generated by the contributions and the holding period of the contributions.
The crucial criterion for NRI NPS investors is that they have to compulsorily be citizens of India. Overseas Citizens of India (OCIs) are not allowed to invest in NPS even if they are classified as Ordinary Residents for tax purpose.
NPS is a cost-effective, flexible and portable retirement savings scheme subject to EET (Exempt-Exempt-Tax) tax structure. This translates to the contributions and growth/gains are exempted from tax and only the withdrawals are taxable.
NPS for NRIs
Since NPS is open only for NRIs who still hold Indian citizenship, investments in this product are beneficial for only those who want to return and settle in India. NPS is administered and regulated by PFRDA (Pension Fund Regulatory and Development Authority) which provides the guidelines and also manages the entire NPS framework through a set of intermediaries, who are entrusted with activities such as fund management, record keeping, fund transfer and custodial services. Every NRI investor in NPS is issued a PRAN (Permanent Retirement Account Number) card which is a 12-digit unique number.
The attributes of NPS for an NRI are described below:
Eligibility: Should be between 18-60 years of age and be KYC (Know Your Customer) compliant.
Contributions: NRI investors can contribute either from NRE or NRO account. To open the account, minimum contribution is 500 INR. The minimum amount per contribution is 500 INR and the minimum contribution per annum is 6000 INR.
Investment Options: There are 2 sub-accounts provided by NPS – Tier 1 and Tier 2. Opening a Tier 1 is mandatory and Tier 2 is optional.
- Tier 1 Account – This is a permanent retirement account in which the contributions are locked till retirement and the account is subject to Withdrawal and Exit Regulations. A maximum of 25% of an individual’s contribution is allowed to be withdrawn in specified cases in the Withdrawal and Exit Regulations.
- Tier 2 Account – This account can be opened voluntarily as a savings facility. Unlimited withdrawals are permitted for the investor.
Currently, 7 pension funds, including government and private funds are approved by PFRDA. The portfolio fund managers of these pension funds are required to manage the money in 3 different accounts each having different asset profile – E, C and G. Here E stands for Equity, C for Corporate Bonds and G for Government Securities in decreasing order of their risk profiles.
Asset Allocation: NRI investors in NPS get 2 options:
- Active Choice – Here, the investor can choose the asset classes and ratios of allocation.
- Auto Choice – Here, the allocation of the contribution is done on behalf of the NRI investor, based on the age.
NRI investors in NPS have the flexibility to choose the ratio of allocation of their contributions across investment options. Depending on the risk appetite of the investor, up to 85% of the contribution can be allocated to an asset profile for Tier 1 Accounts. For Tier 2 accounts, the maximum contribution to Equity is capped at 50%.
Portability: An NRI subscriber to NPS can move his accumulated funds and also divert the contributions across the recognized pension funds. The asset allocation across the E, C and G options can also be changed.
Exit and Withdrawal: Tier 1 NPS accounts are subject to strict Withdrawal and Exit Regulations while Tier 2 accounts have flexible withdrawal options like a Savings account.
If withdrawal from Tier 1 account is before the age of 60, maximum lump sum withdrawal is 20% of the total corpus. The remaining 80% has to be mandatorily used to buy an annuity recognized by PFRDA. Total withdrawal is allowed if the accumulated corpus is less than 100,000 INR.
If the withdrawal from Tier 1 account is upon attaining 60 years of age, maximum withdrawal of 60% of the accumulated corpus is allowed and the rest 40% has to be mandatorily used to buy an annuity recognized by PFRDA. Total withdrawal is allowed if the accumulated corpus is less than 200,000 INR. Investors can defer withdrawal up to 70 years of age.
Partial withdrawals up to a maximum of 25% of the total corpus are allowed in Tier 1 accounts for the following specific cases:
- Higher education of children
- Marriage of children
- Purchase of residential property
- Treatment of specified illnesses
Since an annuity has to be compulsorily purchased in India on maturity, an NRI investor of NPS will receive the pension in Indian Rupees only. There is no restriction on repatriation of the pension to the country of residence.
On the death of an NRI subscriber, the entire accumulated corpus is paid to the nominee, which can either be retreated or invested in an annuity scheme.
Taxation: If the withdrawals from Tier 1 account is after 60 years of age, withdrawal up to 40% of the total corpus is tax-free. As the annuity purchase from at least 40% of the corpus is mandatory, the annuity received will be taxed at applicable tax slab rates.
Since unlimited withdrawals are permitted in Tier 2 account, the taxes are applied at the time of withdrawal. Any withdrawal within a year of investment is taxed at a marginal rate as Short Term Capital Gains (STCG) and withdrawal after 1 years of investment is subject to 10% tax for C and G options and is tax-free for E option.
Should NRIs invest in NPS Scheme?
NPS is a low-cost investment product with minimal fund management charges and expense ratios. NRIs can consider investing in NPS only if they want to settle in India post retirement. Though the NPS is under EET tax structure, the tax exemptions for the gains made may not be exempt in many countries. Since a part of the lump sum withdrawal and the annuity received are also taxable, an NRI investor in NPS may have to pay Income tax in India and file tax returns if the income exceeds 250,000 INR annually.
Also, NRIs residing in the US and Canada are governed by strict FATCA rules which ensure that they can invest overseas only in an FATCA compliant product. However, NPS is very utilitarian for NRIs residing in Gulf countries which have weak social security systems.
Before subscribing to an NPS Scheme, NRIs should first determine if they would return to India on retirement, if they are comfortable with the post-tax returns of NPS and are aware of how the income/gains from NPS are treated in their country of residence.