Should NRIs Invest in the National Pension Scheme?

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 author of freefincal.comM. 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.

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Updated: September 4, 2018 — 10:57 am

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  1. 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

    1. Let them make the tax treatment clear. Then we can consider it.

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