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Can NRIs invest in NPS?

NRIs can invest in the NPS Tier 1 account which is the retirement account and enjoys tax benefits. They are however not allowed to invest in the Tier 2 account which is the more flexible, wealth building account. In this blog post, we look at the different aspects of NRI investment in NPS. We also look at the question of how NRIs can open an NPS account and what to do if citizenship status changes.

Before you read this post, we strongly suggest that you through our NPS overview post: NPS details: All you want to know about this retirement planning scheme. In the current post, we will be building upon the information already provided in that article to highlight the NRI specific aspects of NPS.

A brief overview of the NPS scheme, Tier 1 and Tier 2 accounts

The National Pension Scheme or NPS is a retirement-saving scheme run by the Government of India and regulated by the PFRDA. In NPS, all subscribers have a PRAN or a Permanent Retirement Account Number. Under a PRAN, a subscriber can have two kinds of accounts:

Tier 1 account: 

This is the retirement account. It is the primary NPS account and any NPS subscriber must have a Tier 1 account.

NPS Tier 1 is a defined-contribution retirement account. Subscribers contribute towards NPS Tier 1 account during their working life. Only these contributions are known in advance. These savings are invested in various market-based instruments. Returns are not fixed but linked to the performance of Indian equity and debt markets. The final corpus is available to the subscriber on retirement or exit from the NPS scheme.

Since the governments want to encourage retirement savings so it offers several tax benefits for NPS Tier 1 account to incentivize participation. NPS Tier 1 account has an EEE (Exempt-exempt-exempt) tax status.  At the same time, there are multiple restrictions on NPS Tier 1 investment such as restrictions on early withdrawal, annual minimum contribution requirements and the requirement to necessarily use a part of the final corpus to buy an annuity for retirement.

Tier 2 account

This is a wealth-building account. It is an optional NPS account and can only be opened if the subscriber also has a Tier 1 account.

NPS Tier 2 account does not have any special tax benefits, but it allows investors to access the same investment options as the Tier 1 account without any restrictions on withdrawal, contributions, etc.

To know more about NPS including more details on NPS Tier 1 and Tier 2 accounts, you can read: NPS details: All you want to know about this retirement planning scheme

NRIs are eligible for NPS Tier 1 but not Tier 2

All citizens of India (including NRIs) between the age of 18 and 65 can invest in the NPS Tier 1 account. However, they cannot invest in the Tier 2 account.

If the status of an account holder changes from Resident Indian to NRI, then they will have to close their Tier 2 account. They can, however, continue with the Tier 1 account under the same PRAN.

OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) cardholders and HUFs are not eligible for opening of the NPS account. If there is a change in the citizenship status of NRIs to PIO or OCI, then they need to close their NPS Tier 1 account.

NRI tax benefits on NPS account

Since NRIs are eligible to invest in the Tier 1 account, they can also enjoy all the accompanying NPS tax benefits. You can check our post, NPS Tax Benefit explained with Examples - Updated for 2019, for a detailed discussion on this. Most of the discussion there is also relevant for NRIs.

We would like to highlight a few differences here concerning tax benefits on contributions. The following provisions apply to NRIs:

Tax benefit on self-employed: 

NRIs are eligible for tax deduction up to 20% of gross income earned from Indian sources under Sec 80 CCD(1) within the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Additional Tax benefit:  

NRIs are also eligible for additional tax benefit under Section 80CCD 1(B) of IT Act, subject to a maximum of Rs. 50,000/-.
Tax rules during investment and withdrawal are similar to Resident Indians

NRI contributions to NPS

NRIs can contribute to the Tier 1 account both from their NRE and NRO accounts. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time.

NRI investment options under NPS

All Tier 1 investment options are also available to NRIs. We have done an in-depth post on NPS investment options: Build the best NPS portfolio for your needs, which you will find useful.

NPS withdrawal rules for NRIs

Withdrawal rules for NRIs are the same as resident Indians and you can read about NPS withdrawal rules in our dedicated post.  The three exit options available to NRIs are:

  • Normal exit: Exit upon attaining the age of 60 years (with provisions for continuation and deferral)
  • Premature exit: Exit before the age of 60 years
  • Exit due to death of the subscriber

Rules for all these three forms of exit and for partial withdrawal are the same as those applicable for Resident Indians.

Repatriation status of NRI NPS funds on exit or withdrawal

Any NPS funds that are paid out, whether as lump sum or annuity, shall be paid out in INR. However, there is no restriction on repatriation of this amount. Withdrawal of lump sum or payment of pension income is treated as a current account transaction, not as a capital account transaction.

Power of Attorney for operating NPS account

At present, NRIs cannot use POA facility for NPS.

How can NRIs open NPS account?

Having so far discussed how NPS applies to NRIs, we next look at the question of how NRIs can open their Tier 1 account.   The process for NPS account opening for NRIs is similar to Resident Indians. They can open their NPS account either online or offline. One point to note in this regard is that it is recommended that NRIs choose the bank with which they have their NRE or NRO account as their POP for KYC verification.

How NRIs can open their account online

NRIs can open their NPS account, using the eNPS portal offered by both the CRAs- NSDL and Karvy. We have answered the question of how to open your NPS account online (with screenshots included) in an earlier blog post.  While the process described there, is applicable for Resident Indians, you should go through it since the process is almost similar for NRIs. In this section, we highlight only the differences between the NPS account opening process for NRIs vs. Resident Indians.

Both the portals, Karvy and NSDL, give you the option to select your residential status (Resident Indian or NRI) at the registration screen itself. We provide screenshots from both portals below. On the same screen, you need to select your POP, which we recommend should be the bank with which you have an NRI account.

NSDL eNPS Registration Screen

Screenshot of eNPS online registration screen on NSDL portal

Karvy eNPS Registration Screen

Screenshot of eNPS online registration screen on Karvy portal

If you chose your status as NRI, then you will need to submit a few additional pieces of information and documents:

  • You need to select the type of bank account i.e. NRE or NRO and provide details 
  • You need to select the preferred address for communication i.e., Overseas Address or Permanent Address (communication at overseas address would entail extra charges)
  • Additional documents to be submitted (1) Scanned copy of passport 
  • Additional documents to be submitted (2) Proof of Address if the local address is different from the address in your passport.

How to open NPS account for NRIs offline

To open the NPS account offline, NRIs need to visit a POP branch in person.  As we have mentioned before, the POA (Power of Attorney) facility is not available for NPS. It is best to choose the bank with which you have an NRI account as your POP.

To apply for the NPS account offline, the applicant needs to submit a copy of the filled form, supporting documents and the first contribution amount together with the NCIS slip at the POP branch. We have described the process of Getting your offline application ready with supporting documents for resident Indians before.  We strongly recommend that you go through that post first, since here we will only be highlighting the differences in the NRI process.

There is a separate form for NRIs to open the NPS account – NRI Common Subscriber Registration form or NRSF form. We have attached below a screenshot of the NRI Subscriber Registration form (NSRF form) from Karvy.

A screenshot of the NRI subscriber registration form for opening NPS account by NRIs

However, you should download the latest form from the CRA websites:
NSDL link to NSRF form
Karvy link to NSRF form

The NRSF form and its annexures are almost the same as the CRSF  form (for resident Indians) and its annexures but with 3 differences which we highlight here:

  1. The applicant needs to provide his/her passport details on the passport in the Proof of Identity section and also submit a copy of the same.
  2. The applicant needs to provide details of two addresses: The current address (which will be an overseas address) and a permanent Indian address. They can choose which of these addresses they would like to keep as their preferred address of communication. No proof of the overseas address is required but the applicant needs to submit proof for the Indian address. If the local address is the same as the address on the Passport, then no additional proof of address is required. Else a separate proof needs to be submitted. The list of documents that can be submitted as proofs of address is the same as for resident Indians. 
  3. The NSRF form has only two annexures, unlike the CSRF form which has three. It does not have the Annexure for opening Tier 2 account since NRIs cannot open the Tier2 account.

NPS account and change of Resident status 

We look at what happens to the NPS account, in case there is a status in residential status.

From Resident Indian to NRI

In this case, any Tier 2 account that a person has needs to be closed down using the Withdrawal from Tier 2 – S12 form. Alternatively, the subscriber can also opt for a one-way switch of funds from Tier 2 to Tier 1 account using the Form for One-way switch S-13.

For the Tier 1 account, there is no specific form to be filled in case of a change in residential status, but you may have to fill the Subscriber Modification – S2 form for specific details such as correspondence address, bank account details, etc.

In any case, it is good practice to inform your POP of the change in residential status in writing within a reasonable period, together with a copy of your passport.

From NRI to Resident Indian

In this case, again, you need to inform your POP of the change in residential status. Once that is acknowledged, you can submit an application for opening at Tier 2 account.

From NRI or Resident Indian to OCI/PIO  

In this case, all NPS accounts - Tier 1 and Tier 2 need to be shut down.

Conclusion

NRIs are eligible to invest in NPS Tier 1 account and enjoy the related tax benefits. In this post, we discuss the various aspects of  NRI investment in NPS including how NRIs can open NPS account.

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