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To provide income security post retirement for non-resident Indians (NRI), the Reserve Bank of India has allowed them to invest in the new pension scheme. These investments are to be made through regular banking channels, as per the Pension Fund Regulatory and Development Authority (PFRDA) guidelines.
Understand the New Pension Scheme
The national pension scheme (NPS) is a pension plan where investors contribute until the age of 60. Tier I account holders need to invest a minimum amount of INR 6,000 annually. Investments are done in market-linked products and investors can choose from 3 funds that are currently offered.
When the investor reaches 60 years, he can withdraw up to 60% of the funds. The remaining amount is used to purchase an annuity product. Earlier exits require investors to use 80% of the funds to acquire annuity products. After 10 years, investors can withdraw 25% for specific purposes. Check an online tax calculator to learn more.
NRIs can invest in the national pension scheme through rupee denominated non-resident external accounts (NRE) or non-resident ordinary rupee accounts. Most Indian banks are designated points in presence (PoP) and NRIs can open the account with their banks. Contributions can also be made in foreign currencies through banking channels in the resident countries. As per current norms, there are no restrictions on the repatriation of the accumulated savings or the annuities.
An application form must be submitted with passport documentation and an Indian postal address. When the account is opened, the holders receive permanent retirement account numbers giving complete portability of the NPS account.
Does Investment Make Sense?
The NPS is a low-cost investment avenue making it an attractive option. However, most financial advisers recommend limited investment in the scheme to enjoy the NPS tax benefit. This scheme adheres to the exempt-taxable doctrine. Contributions are tax deductible up to INR 1,50,000, with an additional deduction of INR 50,000 also available. However, the 60% amount retained on maturity and the annuities received are both taxable.
The NPS tax benefit for NRIs is the same as for resident Indians. Therefore, investing in this scheme makes sense only if they plan to reside in India post-retirement.
Currently, the tax exemptions provided are such that only NRIs planning to return to the country are targeted for investing in the scheme. NRIs without a strong social security net can take advantage of these exemptions. Moreover, NRIs sending high remittances are targeted to increase foreign currency being brought into the country.
In order to make the NPS more attractive, the PFRDA plans to pitch favorable tax treatment for investors who invest through NRE accounts. Provision of certain benefits like tax exemptions on the NPS corpus are expected to encourage NRIs to increase their investments in the scheme.
For understanding more about the NPS and tax benefits, check the online tax calculators provided by leading banks like Kotak Mahindra.
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