It’s been nearly 30 Million NRI & Person from Indian Origin (PIO) are residing outside INDIA. As per Income tax, the term says non-resident refers only to the tax status of a person who, as per section 6 of the Income-tax Act of 1961, has not resided in India for a specified period for the purposes of the Income Tax Act. The rates of income tax are different for persons who are “Residents” and “Non-Residents”. For the purposes of the Income Tax Act, “residence in India” requires to stay in India of at least 182 days in a financial year or 365 days spread out over four consecutive years AND at least 60 days in that year. According to the act, any Indian citizen who does not meet the criteria as a “resident of India” is a non-resident of India and is treated as NRI for paying income tax. The Basic Purpose of the article is how NRI can invest in NPS.
Basically, every Indian seeks for best investment opportunities for more return and minimal Risk. It probes about what, when, where, how and benefits, such as return on investment, it brings along with, Certainly, the NRIs wants to save taxes and earn more income by reducing risk.
The ability of NRIs to invest in the National Pension Scheme (NPS) was started in 2015 to enable them to participate in the retirement savings scheme backed by the Government of India.
WHAT- is NPS???
The NPS stands for National Pension Scheme. NPS is a Defined Contribution Scheme in which the benefits of the generation of return depend on the volume of contributions made and the holding period of the contributions. This scheme aimed at inciting interest for investment in India by the resident and non-resident. It ensures foreign income deposition in India along with additional tax benefits.
WHO- Eligibility of Non-Residents to open an NPS account?
The NRIs can enroll themselves for this pension scheme, depends on Eligibility. Like other permanent natives, the emigrants with Indian passport can claim for the durable leverages, including tax reduction. Overseas Citizens of India (OCIs) are not allowed to invest in NPS even if they are classified as Ordinary Residents for tax purpose.
As far as the age is concerned, any resident or non-resident who is in between 18 years and 60 years of age with KYC Compliant can undergo the NPS formality.
This scheme is valid for individual non-residents. There is no provision of opening a joint account.
Since the National Pension Scheme is accessible only for NRIs who still hold Indian citizenship, Non-resident Indian (NRI) investments in this product are beneficial for only those who want to return and settle in India. NPS is administered and regulated by PFRDA (Pension Fund Regulatory and Development Authority) which provides the guidelines and also manages the entire NPS framework through a set of intermediaries, who are entrusted with activities such as fund management, record keeping, fund transfer, and custodial services. Every NRI investor in NPS is issued a PRAN (Permanent Retirement Account Number) card which is a 12-digit unique number.
How- to Invest?
NRI investors can invest either from NRE or NRO account. To open the account, the minimum contribution is 500 INR and the minimum contribution per annum is 6000INR. The Funds can be Transferred through a non-resident external account (NRE) or non-resident ordinary account (NRO).
An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. These incomes include rent, dividend, pension, interest, etc
The investor can invest with a desirable amount of INR 500 or More. It means that the saving could be limitless, as there is no present upper limit in this scheme.
ALSO, REFER NPS CALCULATOR
There are 2 sub-accounts provided by NPS – Tier 1 and Tier 2. Opening a Tier 1 is mandatory and Tier 2 is optional.
- Tier 1 Account – This is a permanent retirement account in which the contributions are locked till retirement and the account is subject to Withdrawal and Exit Regulations. A maximum of 25% of an individual’s contribution is allowed to be withdrawn in specified cases in the Withdrawal and Exit Regulations.
- Tier 2 Account – This account can be opened voluntarily as a savings facility. Unlimited withdrawals are permitted for the investor.
Currently, 7 pension funds, including government and private funds are approved by PFRDA. The portfolio fund managers of these pension funds are required to manage the money in 3 different accounts each having different asset profile – E, C and G. Here E stands for Equity, C for Corporate Bonds and G for Government Securities in decreasing order of their risk profiles.
Asset Allocation: NRI investors in NPS get 2 options:
- Active Choice – Here, the investor can choose the asset classes and ratios of allocation.
- Auto Choice – Here, the allocation of the contribution is done on behalf of the NRI investor, based on age.
NRI investors in NPS have the flexibility to choose the ratio of allocation of their contributions across investment options. Depending on the risk appetite of the investor, up to 85% of the contribution can be allocated to an asset profile for Tier 1 Accounts. For Tier 2 accounts, the maximum contribution to Equity is capped at 50%.
Portability: An NRI subscriber to NPS can move his accumulated funds and also divert the contributions across the recognized pension funds. The asset allocation across the E, C and G options can also be changed.
Exit and Withdrawal: Tier 1 NPS accounts are subject to strict Withdrawal and Exit Regulations while Tier 2 accounts have flexible withdrawal options like a Savings account.
If withdrawal from the Tier 1 account is before the age of 60, the maximum lump sum withdrawal is 20% of the total corpus. The remaining 80% has to be mandatorily used to buy an annuity recognized by PFRDA. Total withdrawal is allowed if the accumulated corpus is less than 100,000 INR.
If the withdrawal from Tier 1 account is upon attaining 60 years of age, maximum withdrawal of 60% of the accumulated corpus is allowed and the rest 40% has to be mandatorily used to buy an annuity recognized by PFRDA. Total withdrawal is allowed if the accumulated corpus is less than 200,000 INR. Investors can defer withdrawal up to 70 years of age.
Partial withdrawals up to a maximum of 25% of the total corpus are allowed in Tier 1 accounts for the following specific cases:
- Higher education of children
- Marriage of children
- Purchase of residential property
- Treatment of specified illnesses
Since an annuity has to be compulsorily purchased in India on maturity, an NRI investor of NPS will receive the pension in Indian Rupees only. There is no restriction on repatriation of the pension to the country of residence.
On the death of an NRI investor in the NPS, the entire accumulated corpus is paid to the nominee, which can either be retreated or invested in an annuity scheme.
- How much can you pay?
Taxation: If the withdrawals from the Tier 1 account is after 60 years of age, withdrawal up to 40% of the total corpus is tax-free. As the annuity purchase from at least 40% of the corpus is mandatory, the annuity received will be taxed at applicable tax slab rates.
Since unlimited withdrawals are permitted in Tier 2 account, the taxes are applied at the time of withdrawal. Any withdrawal within a year of investment is taxed at a marginal rate as Short Term Capital Gains (STCG) and withdrawal after 1 year of investment is subject to 10% tax for C and G options and is tax-free for E option.
- How much exemption do you get being an NRI?
The scheme provides an additional annual exemption worth INR 50,000 every year (Tier 1 account). Section 80 CCD (1B) of the Income Tax allows the exemption if your annual income is over and above INR 1.5 Lakh.
- How much can you derive benefit from this scheme?
Those who have been subscribed as a Corporate Subscriber, u/s 80CCD (2) of the Income Tax Act are legally eligible for claiming extra benefits.
- Tax Benefit for the Corporate Subscriber:
The contribution from an employer to benefit employee up to 10 percent of salary (Basic + DA) is deductible from taxable income without any monetary limit.
- Benefit for the Corporates:
The contribution by the employer towards NPS up to 10 percent of salary (Basic + DA) can be deducted from the profit and loss account.
- Tax Benefit on Partial Withdrawal:
The investor is allowed to withdraw a certain amount from the NPS Tier 1 account before 60. If the withdrawal is up to 25 percent of the subscriber contribution, the amount will be exempt from tax.
- Tax Benefit on Annuity Purchase:
If the account holder invests in an annuity with NPS amount, the whole amount will be exempt from the tax. But their annuity income earned in the trailing years will be a subject to pay tax.
- Tax Benefit on Lump Sum Withdrawal:
If the NPS account holder reaches 60 years of age, he should pay tax on 60 percent of the total corpus withdrawal amount. The rest amount shall be tax-free.
How can they open this account online?
The emigrant Indians can open this pension account without any dilemma. Here is the way to open this account:
- Go to the “National Pension System Trust” or PFRDA website.
- Out of the three options, select New Registration (if you’re opening it for the first time).
- Enter your PAN card number along with other personal details.
- As you submit, an acknowledgment number will pop up. Save it for later use.
- Now, enter the bank details in the next step.
- Click “Save and Proceed”.
- Decide among four available allocations, i.e. Equity Funds (for saving up to 50% of your money), an Alternative Investment Fund (for putting not more than 5 % of your money), Government Security Fund and a Corporate Bond Fund.
- Follow up by filling nominee details.
- Upload a canceled cheque of your account, a photograph and a specimen of your signature.
- Start by depositing at least INR 500.
- Upon successful payment, a Permanent Retirement Account Number (PRAN) will be generated with a receipt.
- Once you’re done with the online formalities, you need to print the form. Stick a photograph and affix signature.
- Go to the Central Recordkeeping Agency (CRA) for verifying your account details.
- The CRA will verify and activate the PRAN number.
What should you have to open this account in India?
- Active Mobile number
- An email id
- An active bank account with a net banking facility
- PAN Card
What if the NRIs want to exit from the NPS investment prematurely?
If the NRI draws out before maturity (before 60 years of age), a minimum of 80 percent will be annuitized. He can withdraw only the balance amount in the lump sum. If the corpus is less than 1 lakh, he can withdraw the pan amount.
If the NRI dies, the nominee will be able to acquire 100 percent of the corpus amount in a lump sum.
Should??? – Invest in NPS Scheme?
NPS is a low-cost investment product with minimal fund management charges and expense ratios. NRIs can consider investing in NPS only if they want to settle in India post-retirement. Though the NPS is under EET tax structure, the tax exemptions for the gains made may not be exempt in many countries. Since a part of the lump sum withdrawal and the annuity received are also taxable, an NRI investor in NPS may have to pay Income tax in India and file tax returns if the income exceeds 250,000 INR annually.
Also, NRIs residing in the US and Canada are governed by strict FATCA rules which ensure that they can invest overseas only in a FATCA compliant product. However, NPS is very utilitarian for NRIs residing in Gulf countries which have weak social security systems.
Before subscribing to an NPS Scheme, NRIs should first determine if they would return to India on retirement if they are comfortable with the post-tax returns of NPS and are aware of how the income/gains from NPS are treated in their country of residence.
The crucial criterion for NRI’s investing in the National Pension Scheme (NPS) is that they have to compulsorily be citizens of India. Overseas Citizens of India (OCIs) are not allowed to invest in NPS even if they are classified as Ordinary Residents for tax purpose.
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