Can NRI Invest in NPS: Eligibility Criteria, Tax Perks & Retirement Planning Guide
Are you an NRI individual? Heard of NPS or an NPS scheme?
If you’re looking for NPS for NRIs, this article is the right one for you.
Retirement planning is as important for NRIs in their financial planning, which accounts for contributions towards retirement and social security.
The NPS is a well-regulated and transparent pension scheme and comes with convenient joining options, low fund management charges and flexible investment choices to suit the subscriber’s needs.
But there’s an important question around: can NRIs invest in NPS?
The answer is an emphatic “Yes” under certain NPS eligibility criteria.
Read further on NPS for NRIs below:
What is NPS for NRIs
NPS is a pension scheme managed by the Pension Fund Regulatory and Development Authority (PFRDA). Its main purpose is to offer a source of income after retirement by promoting a plan for routine savings over the career years of an individual. Subscribers can invest in a portfolio of equities, corporate bonds and government securities under the NPS. There is also an option to both enter as well as exit an NPS (read funds and fund manager) instead of the EPF.
NPS for NRIs can be a way to remain invested in India’s growth story and work towards your long-term financial security.
NPS Eligibility for NRIs
It is made clear that NRIs can open an NPS account under PFRDA rules. The following criteria apply:
Overseas Citizens of India (OCIs) can also invest in NPS. But the PIOs are not allowed to invest in NPS.
Tier I vs. Tier II Accounts of NRIs
NPS has two account types:
- Tier I Account is your main retirement account. It is a requirement of all subscribers and provides the maximum tax benefits, but there are limitations on withdrawal regulations until retirement.
- A Tier II account is an optional savings account with no tax benefits, and there are no limits on withdrawals. You are not allowed to open the Tier II accounts under the existing rules for being an NRI.
NPS Tax Benefits for NRIs
NPS can offer higher returns with favourable tax treatment under the Indian Income Tax Act for NRIs as well.
Tax exemption w.r.t. contribution benefits (As per Indian Income Tax Act)
Tax benefits for contributing to NPS Tier I accounts remain the same whether the contributor is a non-resident Indian (NRI) or a resident Indian:
- Section 80C: Deduction of up to ₹1.5 lakh per annum under the overall limit.
- Section 80CCD(1B): NPS contributions have an independent deduction limit of ₹50,000, above the Section 80C benefit.
That is, NRIs are now eligible for an overall deduction of ₹2 lakh in a year, which lowers their taxable income in India. These deductions may also be important for NRIs with respect to income that is taxable in India, e.g., rental income, capital gains, etc.
These tax incentives are limited only to the income derived in India. They don’t save on the tax payable in your country until and unless the DTAA is applied, in which case benefits like this could be realised.
What is E.E.E. Status for NRIs
NPS is given Exempt-Exempt-Exempt (EEE) status. That is to say, the contributions, returns and withdrawals (within limits) are all tax-free as per Indian income-tax rules.
Here’s how it plays out, especially for NRIs:
- At Maturity (Age 60): At the age of 60, an NRI would be able to withdraw up to 60% of the accumulated fund tax-free in India. The other 40% would be used to buy an annuity that pays out monthly retirement income. The annuity received is taxed as per the relevant slab in India.
- Premature Exit (Before Age 60): If an NRI exits the NPS before attaining the age of 60, then only 20% of the retirement corpus can be withdrawn without any file taxes in India, whereas the balance 80% has to be invested in an annuity.
- Partial Withdrawals: When an NRI completes three years in the scheme, withdrawals (up to 25% of contributions) can be made for certain purposes (medical, children’s education/marriage, etc.). These are tax-free under Indian law.
- On Death: If the subscriber passes away, the entire NPS corpus is paid to the nominee without deduction of tax in India.
The local tax implications and the taxation in the jurisdiction of their residence (if they are an NRI) on annuity income or lump sum withdrawal shall be examined by a tax advisor in our country.
NPS for NRIs in Retirement Portfolio
Advantages for NRIs
NPS may be a winner as far as creating a corpus to support retirement income goes.
- With lesser fund management charges, NPS can be one of the cheapest pension products across the globe.
- NRIs may invest 75% of their money in equity, which has capital appreciation prospects.
- Though NPS is rupee-denominated, it can serve as a hedge for NRIs looking to retire in India.
Considerations and Limitations
- NPS proceeds are remitted to the account in the NRE/NRO account. But repatriation (especially of annuity income) comes under RBI and FEMA rules.
- Apparently, NRIs are not capable of opening a Tier II account,s, which restricts liquidity choices.
- Some countries also tax foreign pensions or require reporting of international assets. There are other considerations for NRIs under their local jurisdiction.
Conclusion
NPS for NRIs can be a convenient, low-cost, tax-efficient way to accumulate savings towards retirement aligned to residence in India.
But it’s important to note that though the NPS plan may provide India-based tax savers and retirees with a layer of financial security, they would still need to be aware of which income tax regulations and reporting requirements are relevant in their country of residence. And there are liquidity and repatriation constraints to consider before contributing large sums.
Beginning early and letting that money stay invested, especially with the additional deduction under Section 80CCD(1B), can work in their favour. Algorithm-driven, if we go by the numbers! Open an NPS for an NRI account now!