NPS is a flexible scheme that empowers you to contribute to a part of the government's pension account until you retire, giving you control over your financial future.
The National Pension Scheme (NPS) came into existence in the scheme, demonstrating the Indian government's unwavering commitment to the financial security of all citizens.
What is the National Pension Scheme (NPS) in India?
The National Pension Scheme (NPS) in India is a government-sponsored retirement savings plan designed to provide financial security after retirement.
It was initially introduced for government employees in 2004.
However, since 2009, it's available to all Indian citizens, including self-employed individuals and employees in the private sector and also NRIs.
The PFRDA (Pension Fund Regulatory and Development Authority) regulates the NPS in India.
The National Pension Scheme (NPS) encourages you to systematically save from an early age and plan for your retirement. NPS focuses on accumulating regular contributions to your retirement corpus by offering a low-cost investment opportunity.
NPS is easily accessible, low-cost, and, most importantly, tax-efficient, helping you make the most of your hard-earned money.
Considering there are no disruptions in the market, you can expect the following annual returns based on past 10 years performance,
- Scheme E (Equity): 12-15% returns annually (depending on the market condition)
- Scheme G (Government Bonds): 9-10% returns annually
- Scheme C (Corporate Bonds): 8-10% returns annually
Also, investing in NPS is advantageous because you can claim a deduction of up to INR 1,50,000 under Section 80C of the Income Tax Act, 1961 i.e., if you are opting for the Old tax regime while filing your taxes in India.
NPS offers a partial withdrawal facility. It is necessary to note that there is a minimum lock-in period of three years before applying for partial withdrawal.
Two Phases of NPS
NPS operates in two distinct phases, namely,
Accumulation Phase:
In the accumulation phase, you make a defined contribution that can be withdrawn on maturity.
Withdrawal / Annuity Phase:
Here, you can withdraw up to 60% of the fund during its maturity or upon reaching your retirement age.
However, you must utilize at least 40% of the accumulated corpus to purchase an annuity plan and receive a regular pension thereafter.
What is the NPS Vatsalya Scheme?
The Finance Act 2024 introduced the NPS Vatsalya Scheme, wherein it encourages you to contribute on behalf of minor children.
The minimum investment here is INR 1,000 per year.
And the account is automatically converted into an NPS when your minor child reaches the age of 18.
As an NRI, you are allowed to invest in NPS Vatsalya Scheme.
Types of NPS
There are two types of NPS accounts available. However, NRIs can only invest in Tier 1 accounts.
Tier 1 NPS Account
The fund deposited here remains locked, and withdrawal is subject to fulfillment of certain conditions until 60 years of retirement.
Tier 1 account primarily focuses on your retirement. Hence, the partial withdrawal takes place only after three years.
- For an NRI, the minimum amount per contribution is INR 500.
- To keep your account active, you must invest a minimum of INR 6,000 each year.
Tier 2 NPS Account
Tier 2 account is tailor-made for the resident Indians, hence, as an NRI, you cannot opt for a Tier-2 account. The fund deposited here is a kind of withdrawable savings account and is subject to emergency withdrawal.
A resident individual can open a Tier-2 account only after opening a Tier-1 account.
Can NRIs Invest in the National Pension Scheme in India?
Yes, as an NRI, you can invest in NPS in India if you are in between 18 to 60 years, given that you adhere to the Know Your Customer (KYC) norms.
Persons of Indian Origin (PIO) or Overseas Citizen of India (OCI) are not eligible for NPS accounts.
The Power of Attorney facility is unavailable when opening an NPS account, and you cannot open a joint account.
However, the PFRDA allows you to appoint a nominee for your NPS account.
Features of NPS for NRIs
The following are the features of NPS account for NRIs,
- Diversified Portfolio: NPS holds assets such that the portfolio is diversified across financial securities.
- Risk Mitigation: A prudent mix of investment instruments and asset classes ensures minimal negative impact on your investment during market turmoil.
- Power to Select Right Investment Mix: You are given the power to select an investment mix considering your risk appetite based on whether the NPS account is active or default choice.
- Partial Withdrawal: You remain eligible for partial withdrawal of 25% if you have made contributions into the NPS account for three straight years.
- Repatriation Benefit: You can repatriate your funds easily by investing through an NRE account.
Investment Options for NPS for NRI
As an NRI, you can opt for NPS investments based on two choices, namely,
Active Choice
Active choice offers you the flexibility to decide on the asset classes in which your contributed funds will be invested and the mix of proportions.
The asset classes are primarily segregated into E (Equity), C (Corporate Bonds), and G (Government Securities).
Understanding your risk appetite is crucial as it guides your investment decisions, allowing you to invest in equity (a maximum of 50%), corporate bonds, and government securities.
Auto Choice or Lifecycle Fund
If you prefer not to go with active choice, you are, by default, considered to have opted for auto choice under NPS.
The fund's investments are gradually and automatically adjusted based on your age, ensuring a secure financial future.
As you age, the fund's exposure to Equity (E) and Corporate Debt (C) is reduced and allocation towards government securities is increased - as a risk protection measure.
Benefits of NPS for NRIs
As an NRI, you can largely benefit by contributing to your NPS account in the following ways,
Benefit of Maturity
As an NRI, you can continue to invest in the NPS up to 60 years of age, with the option to defer the lump sum receipt up to 70 years and annuity investment up to a maximum of 3 years after maturity.
During maturity, only 60% of the corpus is disbursed in a lump sum and credited to your NRE or NRO account.
The remaining 40% is not to be withdrawn but invested in a suitable annuity for a regular pension income.
You can choose an annuity scheme from a qualified Annuity Service Provider (ASP).
Tax Benefit
As an NRI, you can claim certain tax deductions when you invest in NPS.
To start with, under the old tax regime, sec 80CCD(1), you can claim tax deduction up to INR 1,50,000.
Also, as per Sec 80CCD(1B), an additional deduction up to INR 50,000 is allowed. However, please note that this exemption is only available if you are filing tax returns in India under the old regime.
On maturity, up to 60% of the NPS Tier I account balance can be withdrawn tax-free. The remaining 40% will get invested into annuity.
Withdrawal Rules for NPS for NRI
If you wish to exit NPS, you must first submit a withdrawal application form and the supporting documents to the concerned Point of Presence (POP).
After authenticating your documents, the POP will forward them to CRA - NSDL.
CRA - NSDL would register your claim and consult NPS Trust before settling the account.
You can withdraw NPS as per the following ways,
On NPS Maturity
Upon reaching 60 years, you can withdraw up to 60% of your corpus, giving you control over your financial future.
For the remaining 40%, you must invest in an annuity from a PFRDA-empanelled service provider offering an annuity plan.
When you invest in an annuity, you receive payments at regular intervals, typically for retirement purposes.
If your corpus is less than INR 2.5 lakhs, you can withdraw 100% of the fund amount.
Premature Withdrawal
If circumstances require, you can exit the NPS scheme prematurely after five years of contributions.
You can withdraw up to 20% as an NRI, providing a safety net, and must utilize the rest (80%) to purchase an annuity.
If the fund deposited is less than INR 2.5 lakh, then you can withdraw the entire amount without buying an annuity.
Note: In case of death of an NRI, the nominee or legal heir shall receive the full corpus amount.
Partial Withdrawal
You can partially withdraw your accumulated pension wealth of up to 25% of your contributions.
The above withdrawal is applicable provided you have made uninterrupted contributions in the last three years since your joining date.
Also, you can withdraw a maximum of three times during the entire subscription.
The reasons for withdrawal must be,
- Higher education for children
- Marriage of children
- For the purchase/construction of a residential house (in specified condition)
- For treatment of critical illness
How Do NRIs Open an NPS Account?
As an NRI, opening an NPS account is easy and consumes less time, given that you have the necessary documents to apply for.
Once you have the documents, you can proceed further by following the below steps,
- Launch the eNPS website and click 'Registration’
- Select NRI as your applicant status.
- Select the account type repatriable (NRE) or non-repatriable (NRO).
- Select PAN and complete your basic details, including passport and bank details.
- Upload the scanned copies of your canceled cheque, passport-size photo, PAN Card, and passport.
- Next, continue to initiate the payment of INR 500 using your net banking or debit card.
- Take a print of the form and add your signature to it.
You are required to forward the signed form to the Central Record-keeping Agency (CRA) within 90 days of your registration. Failure to do so might result in the freezing of your NPS account.
Documents required for investing in NPS for NRIs
You must submit the following documents must be submitted to your bank (Point of Presence) to open an NPS account:
- Fill in the subscriber registration form.
- Copy of Passport
- Copy of PAN
- Aadhaar (optional)
- Passport size photograph
- Signature
- Canceled Cheque
- Proof of Address is required if your local address differs from your passport's address.
NPS Contribution Limits for NRIs
The contribution limit for NPS is as follows,
Minimum Contribution
- You need to invest a minimum of INR 500 per contribution
- The yearly contribution is INR 6,000 to ensure that the account is active
Maximum Contribution
There is no upper limit as to how much you invest into an NPS account in a financial year.
Taxation Limit
Applicable only under the old tax regime.
- As noted earlier, you can claim tax deduction up to INR 1,50,000 annually under Section 80C.
- Additionally, you can claim a deduction of INR 50,000 under Sec 80CCD(1B)
Key Differences Between NPS, ELSS & PPF
The following table highlights the key differences between NPS, Equity Linked Savings Schemes (ELSS, and Public Provident Fund (PPF), the three popular tax savings schemes in India.
Conclusion
Having an NPS account, with its inherent stability, is a prudent choice for NRIs planning for a secure income during retirement in India. However, it's important to note that while NPS offers stability, it lacks the flexibility of mutual funds.
As your investment has a lock-in period, you can opt for partial withdrawal only after completion of the first three years. If you're an OCI or POI planning to invest in India or an NRI seeking higher returns and liquidity, mutual funds are a promising option to consider over NPS.
National Pension Scheme (NPS): Frequently Asked Questions (FAQs)
Can NRIs invest in NPS in India?
Yes, you can invest in an NPS tier-1 account if you are an NRI given that your age is between 18 to 60 years.
Can NRI buy pension plans in India?
Yes, as an NRI, you are eligible to buy a pension plan in India. Among the many, opening an NPS account is safe and secure. However, the liquidity is low.
Can an OCI holder invest in NPS?
No, the Indian government allows only the citizens of India to invest in NPS that includes resident Indians and NRIs.
Is NPS a good option for NRI?
Yes, NPS is a Government of India scheme wherein the returns are generated based on your risk appetite. If your goal is to generate a retirement corpus and income, NPS can be one of the choices.
What happens to NPS if I give up Indian citizenship?
When you give up your Indian citizenship and become a foreign citizen, your NPS account ceases to exist.
Which one is better, NPS or PPF?
The Government of India restricts NRIs from investing in Public Provident Fund accounts but you can seamlessly invest in NPS.
Hence, NPS is an ideal choice for you to opt for. Also, you get to select which investment mix to opt for viz, equity or government bonds or corporate bonds etc.
What happens to my NPS if I become NRI?
Your NPS account remains valid and you can continue contributing to your NPS account after updating your bank account details.
Here, if you plan to repatriate your contributions made as an NRI, you need to contribute through your NRE bank account instead.
Related Blogs
Best Ways for NRIs to Send Money to India
March 14, 2024
6 mins
Best Monthly Income Investments for NRIs
December 26, 2023
