NPS an option for conservative NRIs

Before taking advantage of the facility, they should weigh the currency and tax implications

The Pension Fund Regulatory and Development Authority (PFRDA), which regulates the National Pension System (NPS), has extended the eNPS facility to non-resident Indians (NRIs). So far, NRIs could enrol for NPS by visiting a bank branch, but now they can do so online from the country of their residence, provided they have an Aadhaar or PAN card. Before an NRI decides to invest in the scheme, she should weigh the pros and cons.

One advantage is that NPS is a dedicated retirement product. “The principal can't be accessed, so it does not get used for any other purpose and remains safe for your retirement,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Access to an Indian financial advisor is difficult for NRIs. The auto choice option, which automatically manages the asset allocation to equity and debt with change in age, is an efficient solution for them. The NPS is also a low-cost product compared to the other options.

Before NRIs decide to take the plunge, they should, however, take into account the disadvantages of the product too. The maximum exposure to equities is limited to 50 per cent. “For a young NRI looking to build a long-term retirement corpus, the 50 per cent allocation is restrictive and could well compromise return,” says Hemant Rustagi, chief executive officer, Wiseinvest Advisers.

 

Another issue with NPS is the lack of flexibility at the time of maturity. At least 40 per cent of the corpus has to be compulsorily put into an annuity. Returns from annuities in India tend to be low, and these are also taxable. If you build a retirement corpus via diversified-equity funds, the amount that comes into your hands is tax-free and you have the flexibility to withdraw the amount you need via a Systematic Withdrawal Plan (SWP).

NRIs who are not very active investors and are conservative (and, hence, satisfied with the 50 per cent equity exposure) can invest in NPS. It is also better suited for those who plan to retire in India eventually. For an NRI who doesn't intend to return, the money will have to be repatriated to the country she is settled in.

 

"If over the investment period the rupee depreciates against the currency of the country that the NRI is settled in, his net return will take a hit,” says Rustagi. For NRIs who have retired abroad, the pension will be generated in India via an annuity. Sending it abroad each month will also be operationally inefficient. NRIs who intend to settle abroad should also be aware of the taxation norms of the country they are based in. “Besides the maturity corpus being taxed in India, the income from annuity could also be taxed in the country they are based in,” says Dhawan.

About 25-30 per cent of an NRIs total portfolio may be invested in NPS. The rest should be invested in growth-oriented assets that offer liquidity, such as diversified equity funds and balanced funds.

Having invested in NPS, NRIs should keep an eye on their fund manager's performance and switch if they underperform. They should also remember investing the minimum amount each year.