The National Pension System (NPS) is a government-backed retirement savings scheme designed to help individuals build a retirement corpus through regular savings during their working years.
Subscribers to the NPS can invest in a variety of government assets, corporate bonds, and equities. Additionally, they have the freedom to select an investment option with the NPS and a fund manager (such as active or auto allocation).
However, many NRIs are unsure whether they are eligible to open and invest in an NPS account? The answer is yes!
Can NRIs, OCIs and PIOs invest in the NPS?
Non-Resident Indian (NRIs) and Overseas Citizens of India (OCIs) are permitted to invest in the NPS, provided they meet the prescribed eligibility criteria. However, Persons of Indian Origin (PIOs) are not eligible to invest in the NPS.
NPS eligibility criteria for NRIs
Individuals must be an Indian citizen (even if residing abroad). The minimum entry age is 18 years, and the maximum is 70 years at the time of joining the NPS.
Note that NPS contributions must be made through an NRE (Non-Resident External) or an NRO (Non-Resident Ordinary) bank account.
NRIs must comply with KYC norms, including a valid Indian passport, proof of address, and other identification documents.
NPS account types for NRIs
There are two types of accounts under the National Pension System (NPS) — Tier I and Tier II where NRIs can invest.
The Tier I account is the primary retirement account and is mandatory for all NPS subscribers. It offers tax benefits but has restricted withdrawal rules until retirement.
The Tier II account is a voluntary savings account that does not offer tax benefits and allows withdrawals at any time. However, under the current regulations, NRIs are not permitted to open a Tier II NPS account.
NPS tax benefits for NRIs
The NPS can provide a favourable tax structure under the Indian Income Tax Act even for NRIs under the old tax regime.
Contributions made by NRIs to their NPS Tier I accounts are eligible for the same tax deductions as those available to resident Indians:Section 80C: Deduction up to Rs 1.5 lakh annually under the overall limit.
Section 80CCD(1B): Additional exclusive deduction of Rs 50,000 over and above Section 80C for NPS contributions.
Both these tax benefits are provided under the old tax regime.
NPS tax benefits for NRIs: Deductions and withdrawal tax rules explained
NRIs can lower their taxable income in India by claiming a total deduction of Rs 2 lakh throughout a fiscal year. Note that these deductions can be particularly relevant for NRIs who have income taxable in India, such as from rental properties, capital gains or other sources.
These tax benefits apply only to income earned in India.
NPS tax benefits for NRIs
The NPS an Exempt-Exempt-Exempt (EEE) scheme. This means that contributions, refunds, and withdrawals (within certain restrictions) are all tax-free under Indian tax law.
Here’s how this applies to NRIs:
An NRI can withdraw up to 60% of their total corpus in India at age 60 without paying taxes. An annuity, which offers monthly pension income, will be purchased with the remaining 40% . In India, however, the annuity income is taxable according to the relevant slab.
If an NRI exits the NPS before age 60, only 20% of the corpus can be withdrawn tax-free; the remaining 80% must go into an annuity.
After completing three years in the NPS, an NRI can make partial withdrawals (up to 25% of contributions) for specific purposes (e.g., medical expenses, children’s education, marriage, etc.). These are tax-free under Indian law.
In case of the subscriber’s demise, the entire NPS corpus is paid to the nominee and is exempt from tax in India.
NRIs should consult with local tax professionals about the taxation of annuity income or lump sum withdrawals in their country of residence.
