This article is about NPS for NRI, NPS Features, how to open a National Pension Scheme account for NRIs in India, and how it benefits an NRI. This article may contain some jargon and technical aspects which are important to understanding the subject. However, if you find it heavy, please do share your queries in the comments section at the end.
Let us start with the basics first.
The Government introduced the new National Pension Scheme in India or NPS in January 2004 to offer an old-age pension benefit to all citizens of India. People could start contributing to their NPS account from January 1, 2004, and if they attain retirement age (60 years) on or after May 1, 2009, they could buy a pension from their own accumulated corpus.
Nuts and Bolts: The Basics
Like all pension products, PFRDA (Pension Fund Regulatory and Development Authority) is the regulator for NPS. The NSDL e-Governance Infrastructure Ltd. (now called the Protean e-Gov Technologies Ltd.) acts as the CRA or the Central Recordkeeping Agency for NPS. Today there are two more CRAs – K-Fintech and CAMS.
CRA is responsible for the following centralized functions related to NPS and its subscribers:
- Administration
- Customer Service
- Record Keeping
The CRA also issues a Permanent Retirement Account Number (PRAN) to every NPS subscriber and maintains a central database of all Permanent Retirement Accounts (PRAs) and transactions in them.
National Pension Scheme in India- Objectives
The major objectives of National Pension Scheme in India are:
- To attain financial security and independence in an individual’s old age
- To build and maintain adequate retirement corpus
- Encouragement of personal savings and investment for retirement security
- To provide tax incentives to the individual
Who is eligible for NPS?
All Indian citizens aged 18 to 60 years are eligible to open an NPS account. NPS has recently been opened to Non-Resident Indians (NRIs) as well.
NPS for NRI (Non-Resident Indians)
National Pension Scheme for NRIs has opened the doors for NRIs to save for their retirement. NRIs are non-resident Indians or Indian passport holders who stay outside India for employment or any other reasons. Previously, an NRI could invest in other schemes like NRIS, but there was no dedicated pension scheme for NRIs.
Now, after the amendment in 2015, NRIs can apply for an NPS account. The NPS has created opportunities for NRIs to plan for their retirement while maintaining their financial relationship with India.
Benefits of NPS for NRIs
Following are the benefits of NPS for NRIs:
1. Flexibility
NPS provides flexibility to the NRIs in terms of choosing the asset allocation and investment management option. Subscribers can choose from different asset classes like equity, corporate bonds, and government securities. They can also modify their preference based on their requirements and life stages.
2. Portability
Portability is one of the major benefits of NPS. With portability, NRIs can easily withdraw their funds from the NPS account whenever they need. They can also switch between asset classes without any restrictions.
3. Lower Cost
NPS charges are comparatively lower as compared to traditional pension products. The administrative charges, and fund management charges are significantly low in NPS.
4. Tax Benefits
NPS offers tax benefits to subscribers. The contributions made to the NPS account are eligible for a deduction under Section 80CCD(1) of the Income Tax Act. Additionally, there is also a higher deduction limit of Rs. 50,000 under Section 80CCD(1B) for investments in NPS.
5. Liquidity
NPS offers liquidity to the subscribers. They can withdraw a portion of their funds from the account after a certain period. However, there are conditions and limits on partial withdrawal.
6. Retirement Planning
NPS enables individuals to plan their retirement systematically. The corpus generated through NPS can be used to secure their future and live independently after retirement.
NPS Features
Some of the key features of NPS are:
Pension Fund Managers
NPS has multiple Pension Fund Managers or PFMs. NPS has 8 pension fund managers including HDFC Pension Fund Managers, ICICI Prudential Pension Fund Managers, Reliance Pension Fund Managers, SBI Pension Fund Managers, TATA Pension Fund Managers, Birla Sun Life Pension Fund Managers, Axis Pension Fund Managers, and LIC Pension Fund Managers.
The Pension Fund Managers are responsible for managing the investments and the growth of the contributions made by the subscribers. They are regulated by PFRDA.
Asset Classes
NPS offers three asset classes:
- Equity (E): Equity scheme invests in stocks of companies which provide higher returns but comes with higher risk.
- Corporate Bonds (C): Corporate bond scheme invests in high quality corporate bonds which provides moderate return with lower risk.
- Government Securities (G): Government security scheme invests in Government securities which provides stable and lower returns with no risk.
Investment Allocation Models
NPS provides subscribers with two investment allocation models, which are the following:
1. Active Choice
Subscribers can choose their own asset allocation in the ratio of their choice. They can allocate funds between equity, corporate bonds, and government securities in the proportion they want. For example, a subscriber can invest 60% in equity, 20% in corporate bonds, and 20% in government securities.
2. Auto Choice
Auto Choice is also known as Lifespan Funds. In this model, the asset allocation is done automatically based on the age of the subscriber. As the subscriber ages, the allocation is automatically shifted from higher-risk assets like equity to lower-risk assets like corporate bonds and government securities. The distribution is as follows:
- E : C : G (Equity : Corporate Bonds : Government Securities)
- Below 35 years: 100% in Equity (100:0:0)
- From 36-40 years: 80% in Equity, 20% in bonds (80:20:0)
- From 41-50 years: 60% in Equity, 40% in bonds (60:30:10)
- From 51-55 years: 40% in Equity, 60% in bonds (40:35:25)
- From 56-60 years: 20% in Equity, 80% in bonds (20:30:50)
How to Open a National Pension Scheme Account for NRIs
NRIs can open an NPS account in two ways. They are:
1. Online
NRIs can open an NPS account online on the website of their chosen POP-SP (Point of Presence Service Provider). The following documents are required for opening an online NPS account:
- Passport copy
- Visa copy or travel documents
- Proof of Foreign Address
These documents are to be uploaded on the website. After the verification of the documents, the PRAN (Permanent Retirement Account Number) is provided to the subscriber.
2. Offline
NRIs can also open an NPS account offline by visiting any Point of Presence Service Provider (POP-SP). The following documents are required for opening an offline NPS account:
- Passport copy
- Visa copy or travel documents
- Proof of Foreign Address
- Passport-sized photographs (2 nos.)
After verification of the documents, the PRAN is provided to the NRI subscriber.
NPS Contribution Limits
NPS contribution limits are:
- Minimum contribution: Rs. 500 per month or Rs. 6,000 per annum
- Maximum contribution: No upper limit
Subscribers have the flexibility to stop their contributions and restart them later. They can also modify the contribution amount as per their requirement.
NPS Charges
NPS is known for its low charges. The charges levied on NPS are minimal compared to other traditional pension products. The charges that are levied on NPS are:
1. Fund Management Charges
Fund management charges are charged by the Pension Fund Managers for managing the investments and providing advisory services. The fund management charges for different asset classes are:
| Asset Class | Fund Management Charges |
| Equity (E) | 0.03% to 0.15% p.a. |
| Corporate Bonds (C) | 0.02% to 0.10% p.a. |
| Government Securities (G) | 0.02% to 0.05% p.a. |
2. Central Record Keeping Agency (CRA) Charges
CRA charges are levied by the CRA for its administrative services and record keeping. The CRA charges are:
| Nature of Service | Charges |
| Subscription | Rs. 150 |
| Annual Maintenance Charges | Rs. 100 per annum |
| Transaction Charges | Rs. 20 per transaction |
3. Point of Presence (POP) Charges
The Point of Presence Service Provider charges are levied for the services provided by them. The charges depend upon whether the service is used online or offline and the nature of the transaction.
4. Transaction Charges
Transaction charges for different transactions are:
| Web based – Subscription | Nil |
| Web based – Switch | Nil |
| Web based – Partial Withdrawal | Nil |
| Non-web based – Subscription | Rs. 50 |
| Non-web based – Switch | Rs. 50 |
| Non-web based – Partial Withdrawal | Rs. 100 |
5. Fund Switches
Subscribers can switch between asset classes without any charges if done through the website. However, in a year, only one switch is allowed for free. For further switches in the same year, charges applicable as per non-web based transactions are levied.
Frequently Asked Questions on NPS
1. Can an NRI withdraw funds from their NPS account at any time?
An NRI cannot withdraw funds from their NPS account at any time. There are certain conditions for withdrawal from an NPS account. A subscriber can withdraw a maximum of 50% of the balance or the balance of the previous financial year, whichever is lower, after 7 years of opening the account or after attaining the age of 60 years.
2. Can an NRI change their investment allocation?
Yes, an NRI can change their investment allocation as per their requirement. They can switch between asset classes and change their allocation as per their preference. However, switching between asset classes incurs a charge unless done online (with only one free switch per year).
3. What happens to the NPS account if an NRI becomes an NRI?
If an individual, who was a resident Indian and an NPS account holder, becomes an NRI, the NPS account can continue. However, there are certain restrictions on the NPS account of an NRI. The subscriber cannot make new contributions to the account.
4. Is the return on NPS guaranteed?
NPS returns are not guaranteed. The returns on NPS depend on the performance of the pension fund managers and the asset classes in which the funds are invested. As NPS invests in equity, corporate bonds, and government securities, the returns vary depending on the market performance.
5. What are the tax implications of NPS for an NRI?
For an NRI, the contributions made to the NPS account are eligible for a deduction under Section 80CCD(1) of the Income Tax Act. However, the contributions and the returns on NPS for an NRI are taxed as per the tax laws applicable to NRIs.
6. Are there any charges for switching between asset classes?
Yes, there are charges for switching between asset classes. Switching between asset classes through non-web based transactions incurs a charge of Rs. 50. However, if done through the website, only one switch per financial year is free. For further switches, the same non-web based charges apply.
7. What is the minimum age to open an NPS account?
The minimum age to open an NPS account is 18 years. The maximum age is 60 years.
8. Is it possible for an NRI to partially withdraw funds from their NPS account?
Yes, it is possible for an NRI to partially withdraw funds from their NPS account. However, there are certain conditions and limits on partial withdrawal. A subscriber can withdraw a maximum of 50% of the balance or the balance of the previous financial year, whichever is lower, after 7 years of opening the account or after attaining the age of 60 years.
Withdrawal Rules in NPS
The withdrawal rules in NPS are:
1. Partial Withdrawal
A subscriber can withdraw a maximum of 50% of the balance or the balance of the previous financial year, whichever is lower, from the NPS account. However, this partial withdrawal is only allowed after 7 years of opening the account or after attaining the age of 50 years, whichever is earlier. But there is a cap on the number of partial withdrawals. A subscriber can make only 3 partial withdrawals in a financial year.
2. Full Withdrawal
A full withdrawal or final withdrawal is allowed only when the subscriber attains the age of 60 years. After attaining 60 years, a subscriber must withdraw the funds from the NPS account. However, the rules regarding the utilization of these funds vary.
If the corpus is less than Rs. 5,00,000, the subscriber can withdraw the entire corpus as a lump sum.
If the corpus is Rs. 5,00,000 or more, the subscriber is mandated to purchase an annuity with at least 40% of the corpus. The remaining 60% of the corpus can be withdrawn as a lump sum.
3. Early Withdrawal
Early withdrawal in NPS is allowed only in certain circumstances. Some of the scenarios where early withdrawal is allowed are:
- When the subscriber has zero balance
- When the subscriber is suffering from serious illness
- When the subscriber needs funds for pursuing higher education
- When the subscriber faces financial hardship
NPS Charges Deducted
The charges for using various facilities in NPS and the mode of deduction are as follows. The charges for using various facilities in NPS are deducted depending on the mode or the manner in which they are deducted/charged.
For example, where the mode of the deduction is “Through NAV cancellation,” the charges are deducted by selling/deducting fractional units from the subscribers’ account. In case of other charges, they are charged upfront with the transaction or the service delivery.
In most cases, the charges for using an online facility are lesser compared to using the physical network of the POP-SP
