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.
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.
❖
About the Author
M. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.Content Policy
Freefincal has original unbiased, conflict-of-interest-free, topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content. We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.Create a "from start to finish" financial plan with this unique open-source robo advisory software template
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
Do check out my books
You Can Be Rich Too with Goal-Based Investing
My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earnerThe ultimate guide to travel by Pranav Surya
This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)Free Apps for your Android Phone
All calculators from our book, “You can be Rich Too” are now available on Google Play!Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)
Sir, what about Tier II of NPS investment, which could be withdrawn whenever one wishes without annuity condition. But i am not sure about its tax treatment.. would be helpful if you give your thoughts on Tier II
Let them make the tax treatment clear. Then we can consider it.