Deciding to invest in retirement plans is important whether you live in India or abroad. For Non‑Resident Indians (NRIs), the National Pension Scheme (NPS) offers a flexible and regulated way to build a retirement corpus in India. Below is a detailed overview on what NPS is, how to save income tax with NPS, eligibility, investment & withdrawal rules, tax implications, and other key considerations.**
What is NPS?
The National Pension Scheme is a defined-contribution pension scheme launched by the Government of India in 2004. It covers all Indian citizens, including NRIs. Under the NPS, subscribers make regular contributions during their working years.
These funds are invested in different asset classes like equity, corporate bonds, and government securities, by professional fund managers, all regulated by the Pension Fund Regulatory and Development Authority (PFRDA). At retirement, you can withdraw part of your savings as a lump sum, while the rest must be used to buy an annuity that gives you a regular income.
Many investors also use an NPS calculator to estimate their retirement corpus and pension payouts based on their contributions and investment choices.
Who Can Open NPS as an NRI?
To open and maintain an account in the National Pension Scheme for NRI, these criteria generally apply:
Age:
Must be between 18 and 60 years at the time of account opening.
Indian Citizenship:
Only Indian citizens, including those living abroad, are eligible for the NPS scheme for NRIs. Individuals with OCI or PIO status may not qualify, so it's important to check the latest regulations.
Bank Account:
You must have either an NRE (Non-Resident External) account, which allows repatriation of funds, or an NRO (Non-Resident Ordinary) account, which does not allow easy repatriation, to invest in the National Pension System for NRI.
PAN & KYC:
A valid PAN (Permanent Account Number) is required, along with completion of KYC formalities, including proof of identity, address, and a recent photograph.
Account Types & Modes of Investment**
The National Pension Scheme (NPS) has two types of accounts.
Account Types
Tier I:
Tier I is the main and mandatory NPS account designed for long-term retirement savings. NPS offers tax benefits and is open for all Indian citizens, including NRIs. Full withdrawals are restricted until retirement. After retirement, a portion of the corpus must be used to purchase an annuity for regular income.
Tier II:
NPS has a Tier II account as well, which is an optional and flexible savings account linked to your Tier I account. It comes with less rules for contributions and withdrawals, making it suitable for short-term financial goals. However, it does not offer tax benefits like Tier I. Also, NRIs may not be eligible to open a Tier II account as per current rules.
Investment options
Active Choice:
Subscriber chooses how their money is split between equity, bonds, and government securities.
Auto / Lifecycle Choice:
The system adjusts the mix on the basis of your age. You can also switch your fund manager and investment option, usually once a year, as per the rules.
How to Open & Contribute to an NPS Account as an NRI
The National Pension Scheme (NPS) stands out as a strong retirement planning option for NRIs aiming to build a long-term corpus in India.
Step 1. Opening the account
- Use the eNPS online portal or visit a bank branch/POP (Point of Presence) registered for NPS.
- In the registration form, select your status as “Non‑Resident of India”. Provide details about yourself via PAN, passport, bank account (NRE/NRO), country of residence, and/or any other required means.
- Upload required documents (proof of identity, address, photo, and cancelled cheque).
- Make the minimum initial contribution and maintain the contributions annually for keeping the account active.
Step 2. Contributions
- Minimum per contribution is ₹500.
- Minimum annual contribution is ₹6,000 (to keep Tier I active).
- No upper limit on contributions. You can contribute multiple times per year.
Withdrawal & Maturity Rules for NRIs**
Understanding when and how you can withdraw is crucial:
Upon reaching 60 years:
You can take out up to 60% of your NPS savings as a lump sum at retirement, usually without any levy of tax. The rest must be used to buy an annuity, which gives you a regular pension for life.
Before 60 (premature exit):
It is allowed under certain conditions. You may exit prematurely after making contributions for a minimum number of years (e.g., 10 years).
If you exit NPS early, you can usually withdraw only a small portion (around 20%) as a lump sum. The rest must be used to buy an annuity for a regular pension.
In special cases, if your total NPS savings are below a certain limit, you may be allowed to withdraw the full amount.
Partial withdrawals:
You can make partial withdrawals from NPS after 3 years, but only for specific needs such as education, medical treatment, or buying a house. There's a limit on how much you can withdraw and how often you can do it.
How to save income tax with NPS?**
Here’s a simple explanation of how to save income tax with NPS:
Step 1. Contributions to the National Pension Scheme (NPS) qualify for tax deductions under Section 80CCD of the Income Tax Act.
Step 2. You can claim deductions up to ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B), over and above the 80C limit.
Step 3. Partial withdrawals and the lump sum at maturity are often tax-free or taxed at concessional rates, offering further tax benefits.
Using an NPS as part of your retirement planning can be a smart way to save tax while building a retirement corpus.
The National Pension Scheme (NPS) can be a solid investment option for NRIs looking to build a retirement corpus in India. It’s government-backed, offers market-linked growth, and comes with attractive tax benefits, making it a reliable and structured way to plan for retirement.**
Do keep in mind that NPS requires commitment. It’s designed for the long term, with mandatory annual contributions and limited liquidity before retirement. The compulsory annuity at maturity may not suit everyone, especially those looking for flexibility or higher returns post-retirement.
If your retirement plans include settling in India or needing income in Indian rupees, NPS makes sense. But if you plan to retire abroad or want more flexible investment options, it’s wise to balance NPS with other retirement instruments that also match your financial goals.
** Tax exemptions are as per applicable tax laws from time to time.
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