NPS useful only if NRI settles in India after retirement
Non-resident Indians (NRIs) have one more investment option to choose from. The Reserve Bank of India (RBI) has allowed NRIs to invest in the National Pension System (NPS), under Foreign Exchange Management Act. NPS will allow NRIs to invest in a mix of equities and debt and save for their retirement. But, will it be attractive for this class of investors?
The subscription amounts shall be paid by NRIs by inward remittance through normal banking channels or out of funds held in their non-resident external, foreign currency non-repatriable, or non-resident ordinary (NRO) accounts. There shall be no restriction on repatriation of the annuity or accumulated savings, says RBI.
According to Sumit Shukla, CEO of HDFC Pension Fund, the advantage of NPS is the higher returns compared to investments in developed markets. “In the past 10 years, the average returns have been around 10 per cent. NPS is a long-term product and very cost-effective. NRIs can build a good corpus and also repatriate the money easily. They can also get benefit of the additional tax exemption of Rs 50,000 over and above the instruments under 80C,” he says.
NPS will make sense only if the investor is sure of coming to India after retirement, due to the restrictions on withdrawal, says Manikaran Singal, a Chandigarh-based financial planner. “If NRIs in the US plan to settle down there after retirement, NPS does not make sense. They will have to disclose the investment and the annuity under Fatca (Foreign Account Tax Compliance Act). It is more suitable for NRIs in the Gulf countries because they are not subjected to any kind of tax.”
Today, NRIs in the US and Canada find it difficult to invest in mutual funds in India due to the tough compliance laws under Fatca. According to this law, financial institutions in any part of the world should report to the US government any transaction of their clients who are tax-payers in the US. This means, if NRIs based in the US invest in financial products in India, these institutions have to comply with Fatca laws.
The additional tax exemption can be useful for NRIs who have investment income in India, says Divakar Vijayasarathy, founder and CEO of Meeturpro.com. For instance, interest earned on NRO accounts attracts taxes according to the income bracket. And, it is essential to maintain an NRO account if you have rental income or income by way of dividends in India.
“NPS is largely targeted at NRIs in Gulf countries because they don’t have options to settle in those countries after retirement. They have to come back to India after 30-35 years of working life. So, they can use NPS to build a retirement corpus,” says Vijayasarathy.
Since a retirement corpus requires stability, NPS, which offers a combination of equity and debt, is a good option in your portfolio. The pension generated from the annuity does not exceed the taxable income limit. “Until returns from NPS are exempt from tax, similar to Provident Fund, investors will have to pay tax on the annuity income,” says Singal.