NPS for NRIs: Your A-Z guide

📝  Table of contents
What is NPS? Can NRIs invest in NPS? NPS withdrawals Opening an NRI NPS NPS benefits NPS fees for NRIs

What is NPS?

NPS stands for National Pension Scheme and was set up by the national government of India in 2004. 

It is a voluntary retirement plan that is open to all eligible individuals in India to save and prepare for retirement. An individual can make annual contributions to their NPS account and the funds are invested until ready to be distributed at retirement. 

NPS is open to:

• Individuals
• Non-Resident Indians (NRI) 
• Unorganised Sector Workers - Swavalamban Yojana
• State government employees
• Central government employees
• Corporates

So Indian citizens who are working informally, in the public sector or private, can avail NPS for retirement savings. Also, and importantly for freelancers, you can contribute to NPS as a self-employed individual.¹

The investment of NPS is led by a PFM, a pension fund manager, who allocates the money across equities, corporate debt, alternative investments, and government securities. However, your specific allocation will be based on your risk tolerance. 

Because an NPS is an investment vehicle, the returns on the account are market-driven. There are no guaranteed fixed returns on an NPS, but long-term returns can possibly be between 9-15% based on the record. ² 

When you are looking to open an NPS account, and more on that later, you’ll see that you have 2 options to choose from:

• Tier 1: A required account specifically for retirement contributions for NPS that has tax benefits but is harder to get liquidity 

• Tier 2: An optional account, after a Tier 1 account is opened, that is for general investments and has more flexibility

Here is a quick table on the differences between a Tier 1 and Tier 2 NPS account for an NRI:³

	Tier 1	Tier 2
Required for NPS?	Yes	No, optional
Opening contribution	₹500	₹1,000
Minimum annual contributions	₹6,000	₹2,000
Minimum contribution amount	₹500	₹250
Option to break account	Only at age 60 or above	Anytime
Number of contributions  per year	Minimum 1 contribution	Minimum 1 contribution
Tax deductions for contributions	Deduction under Section 80CCD	None
At maturity	Entire amount tax-exempt	No specific provisions

So in most cases, you can look at the Tier 1 account as an account for retirement planning, while the second can be looked at as an investment account that is more flexible for its use. 

Can I invest in NPS as an NRI?

Yes, NRIs can invest in the NPS scheme for Tier 1 and Tier 2 accounts. While many aspects are similar to that of resident Indians, contribution amounts and funding sources do differ. Operationally, an NRI NPS account and a resident NPS account are the same. ⁴

Eligibility for NRIs to invest in NPS

Here is a quick rundown of the eligibility criteria for NRIs to invest in NPS accounts:

• Must be 18-60 years old 
• Must have an Indian banking relationship
• Must have a PAN card
• Funds must come from an NRE or NRO account
• Minimum contributions must be made
• Forms must be submitted at a respective bank branch in India or online with an Aadhaar or Virtual ID

⚠️ OCIs (Overseas Citizens of India) and PIOs are not eligible for NPS

Can I withdraw from an NPS?

Yes, you can withdraw from a Tier 1 or Tier 2 NPS account. 

For a Tier 1 account, you can withdraw from an NPS on your retirement or resignation. It can also be withdrawn in its entirety by your beneficiaries at your passing. If you are 60 years old and withdrawing, there are some caveats:

• A minimum of 40% of the savings must be used to purchase a life annuity from an approved annuity service provider
• If the total amount in the NPS account is less than ₹5,00,000 then you can withdraw the full amount

If you are not ready to withdraw for retirement at age 60, you can also defer the retirement age to 70 and continue contributing to the account. 

If you aren’t 60 yet and looking to withdraw, 80% of the funds are required to go to the purchase of an annuity and the remaining can be taken in a lump sum.  But this is only an option once you have had your NPS for 10 years. 

Partial withdrawals are allowed but only for specific reasons:

• Higher education fees for children
• Children’s wedding and marriage costs
• Purchasing or constructing a home or flat
• Medical bills for illness

And you are not able to take out more than 25% for partial withdrawals and this can only happen 3 times in the life of the NPS account. 

If you’re looking to move ahead with an NPS account withdrawal, here are the forms required:

1. Original PRAN card
2. Attested copy of a passport, Aadhar card, PAN card, driving license, or voter ID card
3. Attested copy of a proof of address such as a passport, Aadhar card, voter ID card or driving license
4. Voided check with your name, bank account number, IFSC number

For Tier 2 accounts, it is far simpler with just a submission of the UOS-S12 form. This takes about 1-2 business days for processing and the value of your account is taken based on the net asset value (NAV) on the day it is processed. The funds are then transferred to your bank account within 3 business days. 

All withdrawals are in Indian Rupees and they can be repatriated out as a lump sum once all taxes are paid.⁵

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How to open an NPS account for NRIs

Here is how to an NPS account online if you are an NRI:⁶

1. Head to the NSDL website for eNPS registration
2. In Applicant Type, select Individual Contributor
3. In Status of Applicant, be sure to click on Non-Resident Indian
4. Complete the required fields 
5. Authenticate OTP 
6. Complete e-signature and forms for submission

You can also complete the process manually by the following steps:⁷

1. Download the NRI NPS Form 
2. Complete the forms
3. Submit your completed forms to the NRI bank branch in India
4. The bank will then confirm and verify your NRE/NRO account details 
5. Make the starting contribution payment by check or with your local NRI bank branch
6. Your application form and supporting documents are digitized 
7. Receive your unique PRAN or Permanent Retirement Account Number by email or SMS
8. Your process is complete and contributions can be made online

⚠️You can not open multiple NPS accounts, besides one Tier 1 and one Tier 2. And NPS accounts can not be opened jointly. Also, you can only open a Tier 2 account after a Tier 1 account is opened

Here are a few of the banks with whom you can open an NRI NPS account:

• HDFC
• ICICI
• State Bank of India
• DBS
• Axis Bank

There are additional banks that can open NRI NPS accounts and it is recommended to open the account with the bank that you hold your existing NRE/NRO bank account with. 

Benefits of NPS for NRIs

A NPS account can be beneficial, especially for NRIs that are looking to retire back in India. Let’s look at some of the benefits:⁸

• Low opening and contribution cost
• Steady annuity income at retirement
• High transparency on the account
• Your PRAN stays the same even if your work changes
• Flexible so you can change your risk tolerance and asset allocation
• Exposure to Indian investments and market upswings

One of the largest benefits is with your tax liability in India. 

Tax benefits of NPS for NRIs

First, any lump sum withdrawal or pension payments once you are in retirement is seen as income and is subject to income taxes. Payments are considered as current account transactions and not capital account transactions. 

But 2 main tax benefits can be claimed:

1. Any NPS account holder can claim a tax benefit of up to ₹1,50,000 under Section 80 CCE
2. In addition, Tier 1 account holders can get an additional deduction for investments up to ₹50,000 under subsection 80CCD (1B)

Payouts from the NPS account at retirement will happen in Indian rupees but an NRI that is still abroad can repatriate the funds. ⁹

What happens to an NPS account when a resident becomes an NRI?

When you are going from an Indian resident to an NRI, it is best to talk to your bank first. You will need to change your regular bank accounts to NRE/NRO accounts which can then be used to fund your NPS. In some cases, you may need to open up a new NPS account as an NRI.

NPS account fees for NRIs

There are fees associated with opening an NPS account. Here is what you can expect:¹⁰

Type	Fee
Account opening fee	₹125
Personal Retirement Account opening fee	₹50
Per contribution fee	0.25% with a minimum fee of ₹20 and maximum of ₹25,000
Annual account maintenance fee	₹190
Annual Pension Fund Manager investment management fee	.01%
Transactions in account	₹4
Non-financial transactions with the bank or provider	₹20

A few of these fees will be paid to your bank upfront, while others will be deducted from your account annually. These fees are subject to change. 

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Sources used for this article:

1. NPS
2. NPS Investment 
3. Tier 1 vs Tier 2
4. NPS for NRIs
5. Withdrawals
6. Online account opening
7. Manual account opening
8. Benefits of NPS
9. Tax benefits
10. Charges

All sources checked as of 7 February, 2022