Dubai: With National Pension Scheme (NPS), a retirement plan offered by the Indian government to both residents and non-residents, there have been many changes made since its existence in 2004, so it has become a bit complex for people to understand. Here’s what it entails for NRIs.
“The voluntary contributory pension system, applied from 2004 and expanded to all Indian citizens from 2009, not only provides tax benefits to all Non-Resident Indians (NRIs), there are no lower or upper limits to the number of contributions per year,” said India-based tax consultant Brijesh Meti.
“The investment avenue is yet another low-risk, decent-return alternative to making fixed deposits (FDs) in your non-resident Indian bank accounts. National Pension Scheme (NPS) providers in India have consistently provided a trailing 5-year and 10-year return in the 7.5 to 9 per cent range.”
With interest rates rising, NPS investments are considered secure, and the interest rates offered are higher than those offered by short-term investments like one-year FDs. Moreover, there are tax savings up to INR150,000 (about Dh7,000) and an additional INR50,000 or Dh2,000 in certain cases.
The remaining 40 per cent is used for purchasing an ‘annuity’, meaning the portion of your savings is converted into a pension scheme that gives you a guaranteed income every year for the rest of your life, or for a specified period. The annuity is bought from a life insurance company in India.
If you have INR450,000 (Dh20,000) retirement pot or ‘corpus’, you can withdraw the entire sum after retirement. If it exceeds INR1 million (Dh44,000), the tax-free withdrawal limit is INR600,000 or Dh26,500). For the rest INR400,000 (Dh17,700), you must get an annuity plan.
Can NRIs use NPS after returning to India?
“While most Indian expats are aware they can open an NPS account, a frequent query is what happens after returning to India. If you become a resident again, you can continue to invest in your account and get the benefits,” said Anil Pillai, a former Indian banker who is now based in the UAE.
NPS accounts are of two types. In one type of account, ‘Tier 1’, savings are locked until retirement. If you retire before the age of 60 you may take 20 per cent of the investment as cash and tax-free. The rest is invested into an annuity (an investment that pays you a fixed yearly amount).
If retiring after 60, then a minimum of 40 per cent must be invested into an annuity and the balance can be withdrawn lump sum (tax-free). If you are an NPS account holder, you’re allowed to open the second type of account, which is a ‘Tier 2’ account.
Tier 2 accounts allow you to deposit and withdraw money as you wish. As an NPS investor, you have two investment choices: You can decide where to invest and how much, and the second option is whether or not you want investment done on your behalf as per your age.
2. The withdrawal from the NPS can be deferred till the age of 70, during which contributions can be made during this time
3. Annuity purchase can be deferred up to 3 years
4. Up to 25 per cent can be withdrawn if you’re a subscriber (for at least 10 years) in case of certain urgent cash requirements
No limit for maximum contribution
While there is no minimum contribution requirement per year, Pillai added that it is recommended that a contribution of at least INR1,000 (Dh44.21) per year is made to ensure reasonable pension after retirement.
“As 50 per cent of investment money is allocated to stocks, which offers higher returns compared to other investments. NPS gets matured at the age of 60 years. However, you can withdraw the corpus amount if it is lesser than INR200,000 (Dh9,987),” Pillai added.
“Most NPS schemes invest in dividend-yielding securities like bonds, REITs, and Overnight funds, as well as shares of listed Indian companies. While lock-in restrictions exist, most products allow withdrawal by the retirement age of 60 years.”
A real estate investment trust (REIT) is a company that owns or finances income-generating real estate. Modelled after mutual funds, REITs pool the funds of investors and earns them dividends from the real estate investments—without having to buy or manage any properties themselves.
Overnight funds are pools of investment that invest in bonds that mature in one day and earns you returns in the form of interest payments. They are suitable option for those investors who want to invest their money in a fund but only for a short time. They are less risky compared to stocks.
“These schemes also allow you to exit it pre-retirement in cases like marriage and higher education of children and for the treatment of an emergency illness,” said Meti.“But once NRIs return to India with their residency status changed, NRIs need to close their NRI NPS account and start a new one.”
Key takeaways
National Pension Scheme or NPS is an investment opportunity for NRIs planning to retire in India, which provides pension in form of an annuity or yearly pay-outs post retirement. When it comes to returns, NPS seems a better choice than other investments, with returns up to 9 per cent.
“In any retirement portfolio, a NPS has its own place and associated benefits. Even though there are other investments that offer a safety cushion for your investments, NPS offers a double benefit of capital safety and appreciation of investments,” added Meti.
“Also another common question among NRI retirees is whether they can invest in automated ‘Tier 2’ NPS [explained above]. They can do so as long as they are Indian Citizens. Any unlikely change in citizenship will make them ineligible to invest in NPS.”
The key takeaway is that NRIs can choose NPS to receive regular incomes after they retire. The NPS scheme not only helps NRIs plan for their retirement, but as this investment avenue helps save some taxes too, it is widely considered a reliable investment option.
