Can an NRI Invest in National Pension Scheme?

The National Pension Scheme (NPS) is a retirement scheme introduced by the government to inculcate the habit of proactively saving money for the retirement phase of an individual’s life. It is managed and facilitated by the Pension Fund Regulatory and Development Authority (PFRDA). This scheme is open to every Indian citizen those who are in the age group of 18 to 65 years.

Tax Benefits of the Scheme

The significant attraction for participation in this scheme stems from the tax benefits associated with it. NPS falls under the Exempt-Exempt Exempt-Tax category whereby the contribution made, the interest earned and (partial) withdrawal from the fund is exempt (subject to certain conditions).

An overview of the tax benefits of investing in the NPS account are as follows:

1. Contribution made to the scheme is allowed as a deduction under section 80CCD(1) subject to lower of:

i. INR 1.5 lakhs (within the overall limit imposed by Section 80CCE for contributions made altogether under Sections 80C, 80CCC and 80CCD); or

ii. 20% of the gross total income.

2. Additionally, under 80 CCD(1B), a deduction of up to INR 50,000 is allowed irrespective of the conditions prescribed in point (1) above. This provision of additional deduction was introduced to further motivate the individuals to invest in NPS account.

Tax Treatment on withdrawal / closure of NPS

Withdrawal on retirement: After the subscriber attains the age of 60, up to 60% of the total corpus can be withdrawn in lump sum and it shall be exempt from tax. The remaining 40% shall be mandatorily used towards purchase of annuity, which shall also be exempt. The annuity income received in the subsequent years, however, shall be subject to income tax.

For example: If total corpus at the age of 60 is 10 lakhs, then 60% of the total corpus i.e., 6 lakhs, can be withdrawn, which shall entirely be exempt. The 4 lakhs that wasn’t allowed to be withdrawn shall be utilized towards annuity purchase and the annuity income that you receive in the subsequent years will be subject to income tax.

Partial withdrawal before retirement: Although it is advisable to continue investing till you attain 60 years of age, it is possible to make premature withdrawals, if you have been investing for at least 3 years. One can withdraw up to 25% of the contribution made, for purposes such as children’s higher education, building a house, medical treatment of self or family members and the like. However, such withdrawals can be made only 3 times, with a gap of at least 5 years between each withdrawal, in the entire tenure. Such partial withdrawal(s) made is exempt from tax.

Closure before retirement: Up to 20% of the corpus can be withdrawn tax free and the balance 80% shall mandatorily be required to be utilized towards purchase of annuity.

Structure of NPS

The structure of NPS is made up of two branches: Tier I and Tier II. Some of the salient features of the two schemes are as follows:

Eligibility: Any Indian citizen between 18 and 65 years of age can open the NPS Tier1 account. On the other hand, to be eligible for an NPS Tier2 account, you must be a member of NPS Tier I.

Lock-in Period: In the case of NPS Tier1, this period lasts till the subscriber is 60 years old. The NPS Tier2 account does not have any lock-in period, which is why you can withdraw the funds anytime you want.

Contributions: The minimum contribution to open a Tier 1 account is ₹500, and ₹1000 for a Tier 2 account. No maximum contributions under the Fund.

Tax Benefits on Contribution: For NPS Tier1, a tax deduction of up to ₹1.5 lakhs is available under 80CCD and ₹50,000 under 80CCD (1B). However, such facilities are not available in the case of NPS Tier2 accounts.

Taxation on Withdrawal: At maturity, the total amount is tax-exempt for Tier 1 account, subject to conditions mentioned earlier. On the other hand, if you opt for a Tier 2 account, the entire corpus gets added to the investor’s taxable income and is taxed at the individual’s slab rate.

Which is better?

Both Tier 1 and Tier 2 have their benefits and drawbacks. Thus, an individual must select one after careful consideration. For instance, Tier 1 accounts are much more rigid, offering fewer opportunities for withdrawal before maturity. Therefore, investors cannot rely on the Tier 1 quantum apart from major emergencies. Tier 2 accounts do not have similar limitations. Here, a subscriber is free to withdraw the amount prematurely to fund various needs. Thus, Tier 2 account holders can better curtail all financial requirements with this accumulated amount.

Can NRI invest in NPS?

Yes. An NRI can open the NPS account (only Tier 1) under the National Pension Scheme for NRI and avail all the benefits associated with the scheme, provided he/she is aged between 18 and 60 and fulfils all the KYC norms demanded by the scheme. However, please note that as per the circular 1 issued by the PFRDA – NPS scheme for NRI does not include the option of Tier 2. It is not available to both NRI and OCI subscribers.

In the case of NPS for NRI, he will need to mention the nature of his bank account from which contribution shall be made at the time of registration– i.e. NRE or NRO. All the conditions and regulations mentioned above for a resident is equally applicable to an NRI.

Process Involved in NRI NPS Account Opening

Step 1: The NRI NPS account opening process begins with the subscriber obtaining the NRI-NPS form online 2 and filling the required details to submit the same along with supporting documents. The form shall be available in the NPS Trust website, through channels of PFRDA and/or at the NSDL E- Gov website.

Step 2: The filled form is to be submitted with the bank that houses his NRI NPS account, where it shall be processed. The details of the bank which has been mentioned, regarding NRE/NRO account, shall be verified and subsequently forwarded to the Central Recordkeeping Agency (CRA).