The Reserve Bank of India (RBI) has officially announced on 29 October, 2015 that the NRIs or non-resident Indians can now subscribe to National Pension Scheme (NPS) as an investment option. The new directive is aimed providing the necessary social security cover. Over 11 million NRIs in around 192 countries are set to benefit from the move announced by the RBI.
What does National Pension Scheme mean?
National Pension Scheme (NPS) is a voluntary, defined contribution retirement savings scheme launched by the Government of India, designed to enable systematic savings during the subscriber's working life. The NPS is governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA). The other noticeable feature of NPS includes, it being a low cost, tax-efficient, flexible and portable retirement savings account.
How does the National Pension Scheme work?
The eligibility is open to all NRIs, between 18-60 years complying with the Know Your Customer (KYC) guidelines. The minimum contribution at the time of opening the account will be Rs. 500 and the minimum amount per contribution is Rs. 500 per month or Rs. 6,000 per annum. NRIs can choose between three funds - government securities fund, fixed-income instruments and equity fund.
The investments made via NPS matures when one turns 60. At 60 years of age, one can receive 60% of its money and pension offers as well. At the time of a normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme either to purchase a life annuity from a PFRDA em-paneled life insurance company or withdraw a part of the accumulated pension wealth as a lump-sum. One can use 80% of the accumulated corpus to buy an annuity in case of early exits from the NPS. The scheme also offers the option of partial withdrawal up to 25% of the contributions after 10 years of being a part of it. However, if the corpus amount is less than Rs 2 lakh, one is allowed to withdraw the whole sum. If the corpus limit exceeds, the subscriber must put at least 40% of the corpus into an annuity. This move will allow getting the pension on the monthly basis.
What is the Investment procedure?
One must be aware that most Indian banks work as distributors of ‘points of presence’ (PoP) for the NPS. An NRI investor can invest in the NPS through a rupee denominated non-resident rupee (NRE) account or a non-resident ordinary rupee (NRO) account. In case of the NPS accounts, PFRDA needs to assure itself that the know-your-customer (KYC) process is done by the banks. A permanent retirement account number will be provided to each NRI to avail the NPS facility.
NPS is a low-cost investment product, which helps the subscriber to qualify for tax deduction benefits that are listed under Section 80CCD of the Income-tax Act, 1961. If one invests 10% of its total income in the NPS, he or she is eligible for a tax deduction up to Rs.1.5 lakh. Media reports also suggest that PFRDA is planning to pitch for a favourable tax regime for those investing in the NPS through their NRE accounts.