Should NRIs Invest in the National Pension Scheme?

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 2 Comments

Published: October 30, 2015 at 8:58 am

Last Updated on September 4, 2018

Should NRIs Invest in the National Pension Scheme? A discussion on why the National Pension Scheme (NPS) is not a good option for NRIs to invest in. RBI has allowed NRIs to invest in the National Pension Scheme. While such a move would be beneficial for the country, I don’t think investing in the NPS is an efficient investment option for the NRIs or RIs for that matter.

NPS is not tax efficient for individual subscribers

In current form, the NPS is not tax efficient for individual subscribers. While equity mutual fund investors enjoy tax-free long-term capital gains, NPS subscribers will have to pay tax as per slab on nor just the capital gain, but also on the amount invested.

When an NRI wants to return back to India (why else would they consider NPS?), their tax slab is likely to be 30% (or higher).

Double Taxation

The issue of double taxation has to be factored in.  For resident Indians, there is no tax on NPS unless they withdraw. Can the same be applicable for NRIs? I think they would need to file income tax return in the country of residence and  disclose  gains from NPS each financial year.

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Take the case of NRO deposits: 30% tax in India and 10% tax in US due to the double taxation avoidance agreement.

For NRE deposits: tax-free in India and 40% tax in the US.

The rules for NPS are not yet clear at this point, but it is likely that they would be some tax to be paid in the county of residence each financial year.  I don’t think this is an efficient way to invest money.

Do you want to be told when you should retire?

If you quit  NPS before the age of 60, 80% of the corpus will be annuitized to create a pension which is constant and would be taxed as per slab.

If you quit NPS after the age of 60, 40% will have to be annuitized.

As an NRI, don’t you think you will have enough funds (after taxes) to create your pension that would keep pace with inflation?  Here is an Illustration: Generating inflation-protected post-retirement income

NPS is an ill-liquid, tax-inefficient product. Even if it becomes tax-free at both ends, I will not recommend a product with a lock-in.

Direct equity or mutual fund investments (where allowed) after tax in the country of residence, combined with NRE deposits seems like a much better option for Indian-centric investments.

Do not listen to bank who might start to push NPS. If want to help India’s growth, invest in Indian equity (directly or via mutual funds). A contribution to the prime minister’s relief fund would be more beneficial than investing in NPS.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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