BackNPS to attract NRI investments
The retirement product may be pitched as an alternate means of investing and building a corpus in India
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The National Pension System (NPS) is an investment option for non-resident Indians as well. The Pension Fund Regulatory and Development Authority (PFRDA) recently sought clarification on the eligibility of NRIs to invest in the NPS. “NRIs were always allowed to invest in NPS but it wasn’t a stated item under the Fema (Foreign Exchange Management Act) guidelines. The RBI (Reserve Bank of India) has clarified to us that NRIs can invest in NPS, and we have asked the government to notify the change so that it’s clear," said a PFRDA official who didn’t want to be named.
But does it make sense for NRIs to invest in the NPS?
How NPS works
NPS is a defined contribution pension plan that needs you to keep contributing till 60 years of age. The minimum contribution to the pension (or Tier I account) is 6,000. Investments are market-linked and you can choose any of the three funds currently on offer—government securities fund, fixed-income instruments other than government securities fund and equity fund. Maximum equity exposure is 50% and only through the index funds. At 60 years of age, you can have up to 60% of this money and buy an annuity product, it offers pension, with the rest.
For early exits from NPS before 60 years of age, you will have to use 80% of the accumulated corpus to buy an annuity. However, you can also make a partial withdrawal up to 25% of the contributions after 10 years of being in the scheme for specific purposes.
While the Tier I account is basic, the Tier-II account works like a savings account to offer liquidity.
How to invest?
An NRI can invest in NPS through a rupee denominated non-resident (external) rupee (NRE) account or non-resident ordinary rupee (NRO) account or local sources. Given that almost all banks in India work as distributors (called “points of presence" or PoP) for NPS, you can approach your bank to open an NPS account. You will need to fill the registration form and submit a copy of your passport and proof of address in India in case the local address is different from the address in your passport. According to the PFRDA official quoted earlier, know-your-customer (KYC) process done by bank will suffice to open an NPS account. “Even for residents, we accept the KYC done by their banks, after verification. For NRIs, since they would have an account with a bank in India with an overseas branch, we will accept the KYC done by the banks. The PoP functions will be extended to the overseas branch as well," said the official.
Once your account is open you will get a permanent retirement account number and your NPS account becomes completely portable.
Should you invest?
NPS is a low-cost investment product; the fund management charge is 0.01% currently, the expense ratio is a maximum of 3% for mutual funds and fund management charge for unit-linked insurance plans is up to 1.35%. But financial planners recommend limited exposure to NPS due to the tax rules and the fact that you can invest only 50% in the equity option right now.
NPS faces the exempt-exempt-taxed treatment. Contributions to NPS qualify for a tax deduction under Section 80CCD of the Income-tax Act, 1961; 10% of the salary (or total income) contributed to NPS is eligible for a tax deduction up to 1.5 lakh. Over and above this, you get an additional deduction of 50,000, taking the total deduction benefit to 2 lakh. But the 60% that you can keep on maturity is taxable. The annuities are taxable too.
For NRIs, too, the advice is the same. “NRIs have the same tax treatment for NPS. So, under current circumstances, they should invest only a part of their money in NPS and only if they are sure to spend their retirement years in India. For those who will not be coming back or are undecided, NPS would not be the right investment," said Suresh Sadagopan, a Mumbai-based financial planner.
For now, PFRDA is targeting NRIs who intend to come back. “There is a significant size of working population abroad that is looking to come back and doesn’t have a strong social security net, for instance, people working in West Asia, including the Gulf areas. This section also contributes significantly to remittances, which will help bring in foreign currency on a long-term basis and develop long-term assets in the country," said R.V. Verma, whole time member, (finance), PFRDA. “While we are targeting such segments for now, NPS will also target the well-to-do NRIs in terms of an alternate means for sound and safe investment in India," he added.
To make NPS attractive, PFRDA is planning to pitch for favourable tax treatment for those investing in NPS through their NRE accounts. For instance, interest income from the NRE account or NRE fixed deposits are non-taxable and PFRDA wants the same to be extended to NPS corpus so that NRIs are encouraged to invest in the retirement instrument rather than in fixed deposits, and go on reinvesting it to meet long-term goals.
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