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NRI Investment in National Pension Scheme (NPS)

The National Pension System (NPS) in India is a voluntary, long-term retirement savings scheme established by the Government of India. It is open to both Indian residents and Non-Resident Indians (NRIs), allowing them to invest for their retirement and receive a regular pension after retirement. NRIs are eligible to open an NPS account. However, the account can be opened only on a non-repatriable basis, which means the funds invested cannot be taken out of India. Any Indian Citizen, resident or non-resident, and Overseas Citizen of India (OCI) between the age of 18–70 years can join NPS and continue or defer their NPS Account up to the age of 75 years with minimal documents like PAN card and Aadhaar card. When investing in NPS, you need a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account. The contributions accumulate over a period of time till retirement grows with market-linked returns.

Partial withdrawal

Here are the Interim Withdrawal Conditions:

The NPS provides for partial withdrawals before the retirement age under specific circumstances. These circumstances include:

a. Higher Education: NRIs can withdraw partially to fund higher education for themselves, their children, or legal guardians. This withdrawal can be made up to 25% of the subscriber’s contributions.

b. Home Purchase or Construction: NRIs can withdraw up to 25% of their contributions from the NPS account for purchasing or constructing a residential property.

c. Medical Treatment: Partial withdrawals are permitted for medical treatments of specified illnesses for the subscriber, children, legal guardians, and dependent parents. This withdrawal can be up to 25% of the subscriber’s contributions.

d. Marriage: NRIs can make partial withdrawals for the marriage of their children. The withdrawal can be up to 25% of the subscriber’s contributions.

Here’s the Maximum Withdrawal Limit:

The maximum amount that can be withdrawn under these conditions is 25% of the subscriber’s contributions. The contributions made by the employer and the appreciation of contributions are not eligible for withdrawal.

Here’s the Frequency of Withdrawals:

NRIs are allowed to make partial withdrawals under the mentioned circumstances only a maximum of three times during the entire tenure of the NPS account. Each withdrawal is subject to a minimum gap of five years from the previous withdrawal.

What are the types of accounts? 

NRIs can open two types of NPS accounts:

Tier I Account: This is a mandatory pension account where withdrawals are limited and subject to certain conditions. A portion of the accumulated amount must be used to purchase an annuity.

Money in this account is locked until retirement. If you retire before 60, you may take 20% of the investment as cash (tax-free). The remaining 80% is invested into an annuity (an investment that pays you a fixed yearly amount). If retiring after 60, a minimum of 40% must be annuitized, and the balance can be withdrawn as a lump sum (tax-free).

Tier II Account: This voluntary savings account allows investors to withdraw funds as and when needed. There is no requirement to purchase an annuity. Only tier 1 account holders are allowed to open a tier 2 account. Tier 2 accounts allow you to deposit and withdraw money as you wish. You can choose from many types of investments: Equities, Corporate Bonds, Government Bonds, etc., to help you create an effective investment strategy.

What is the taxation under NPS?

Tax Treatment on Withdrawals

The tax treatment of withdrawals from NPS for NRIs depends on whether the withdrawals are made before or after the retirement age.

Withdrawals at Retirement Age

When an NRI subscriber reaches retirement age (currently 60 years), they must use at least 40% of the accumulated corpus to purchase an annuity, which provides a regular pension. The remaining 60% can be withdrawn as a lump sum or in a phased manner. The annuity income received is taxable in the year of receipt, and the lump sum withdrawal may be subject to taxation.

Tax on Lump Sum Withdrawal

The lump sum amount withdrawn from the NPS corpus is subject to taxation in the year of withdrawal. The taxation depends on whether the NRI subscriber has claimed tax deductions on the contributions to the NPS account during the accumulation phase.

a. Deductions Claimed: The lump sum withdrawal amount is taxable if the NRI subscriber has claimed deductions under Section 80CCD (1) and Section 80CCD (1B) under their contributions. It is added to the subscriber’s total income and taxed at the applicable income tax slab rates.

b. Deductions Not Claimed: If the NRI subscriber has yet to claim deductions on contributions (meaning they have not availed tax benefits on contributions during the accumulation phase), only 40% of the lump sum withdrawal is taxable. The remaining 60% is tax-free.

Premature Withdrawals

If an NRI withdraws from NPS before the retirement age, the withdrawn amount is treated as income and is subject to taxation at the individual’s applicable income tax slab rates.

Tax on Annuity Payments

The annuity received by NRIs from the purchased annuity plan using the NPS corpus is subject to taxation at the individual’s applicable income tax slab rates in the year of receipt.

Double Taxation Avoidance Agreements (DTAA)

NRIs residing in countries with a Double Taxation Avoidance Agreement (DTAA) with India may benefit from provisions within the agreement. These provisions can help prevent the same income from being taxed twice in India and the NRI’s resident country.

Tax on Interim Withdrawal

The amount withdrawn as an interim withdrawal is subject to tax if it is at most 25% of the subscriber’s contributions. If the withdrawn amount exceeds this limit, the excess amount is taxable in the year of withdrawal.

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