Non-resident Indians have special difficulties in making retirement plans, especially in balancing their investments across jurisdictions. The National Pension Scheme, which is governed by the Pension Fund Regulatory and Development Authority (PFRDA) is an option that can be considered by individuals who want to be exposed to the capital markets of India and at the same time accumulate a retirement corpus.

This guide discusses the NPS framework in relation to non-residents, including mechanics, eligibility restrictions, tax treatment, and practical considerations in portfolio allocation.

Understanding NPS and Its Relevance for Non-Residents

The National Pension Scheme is a voluntary, defined contribution scheme in which the subscribers amass wealth throughout their working years. When one retires, some of it is taken out as a lump sum and the rest buys an annuity that offers periodic income.

Three factors make NPS particularly relevant for NRIs and OCIs. First, the scheme maintains exceptionally low fund management charges, capped at 0.30% annually on assets under management - substantially below typical mutual fund expense ratios. Second, the structure permits market-linked growth through equity exposure, unlike conventional pension products offering fixed returns. Third, the tax architecture provides deductions on contributions and partial exemptions on withdrawals under India's Income Tax Act.

For individuals maintaining financial ties with India while residing abroad, NPS offers a regulated vehicle for rupee-denominated retirement savings. However, this comes with specific constraints around liquidity, mandatory annuitization, and repatriation that require careful evaluation.

Eligibility Criteria and Account Classification

• Both Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) can open NPS accounts. Indian citizenship or OCI status is mandatory; PIOs are not eligible.​

• Age of entry: 18 to 70 years.

• KYC compliance requires PAN, Indian and overseas address proofs, and Indian bank account.

• NPS is for individuals only: Hindu Undivided Families and entities cannot participate.​

Note: NRIs and OCIs can open only a Tier I account (mandatory retirement account). The optional Tier II account is not available for NRIs or OCIs due to regulatory restrictions. Unlike residents, this means all NRI/OCI participation is subject to the lock-in and exit structure of Tier I.

Tier I and Tier II: Structural Differences

The scheme segregates accounts into two categories with distinct characteristics:

Account Opening and Funding Mechanisms

The e-NPS platform streamlines enrollment for non-residents through Point of Presence entities, typically banks authorized by PFRDA. The digital process requires PAN details, bank account information, and completion of the registration workflow.

Critical documentation includes passport copies, PAN card, address proofs for both Indian and foreign addresses, and particulars of the linked bank account. The entire process can be completed remotely without requiring physical presence in India.

NRE vs NRO: Repatriation Implications

The choice of funding source determines the ultimate repatriation status of the accumulated corpus:

NRE Account Contributions

Funds routed through a Non-Resident External account generally retain repatriable status. Upon exit, the principal corpus (excluding the annuity portion) maintains this classification for outward remittance purposes, though still subject to the USD 1 million annual limit under Foreign Exchange Management Act regulations.

NRO Account Contributions

Money contributed via Non-Resident Ordinary accounts carries non-repatriable status. At withdrawal, these funds fall under FEMA's remittance caps. For those planning eventual repatriation of the full corpus, NRE funding proves more straightforward, though both routes ultimately face the million-dollar annual ceiling.

Understanding the nuances between NRE and NRO accounts becomes essential when planning repatriation strategies.

Asset Allocation Framework and Performance Metrics

NPS divides investments across four asset classes:

• Class E (Equity): Index-tracking equity investments in Indian stock markets

• Class C (Corporate Bonds): Investment-grade corporate debt securities

• Class G (Government Securities): G-Secs and similar sovereign instruments

• Class A (Alternative Investments): Smaller allocation to alternative asset funds

Subscribers choose between two allocation approaches - Active and Auto Choice

Historical Returns and Competitive Positioning

As of January 2025, Scheme E (Equity) Tier I delivered five-year annualized returns between 15.62% and 17.25% across various pension fund managers. 

Scheme G (Government Securities) generated more conservative returns in the 6.85%-7.14% range over the same period.

Compared to alternatives:

• NPS vs Mutual Funds: Both allow up to 100% equity, but mutual funds have higher costs; NPS uniquely offers the extra ₹50,000 deduction under 80CCD(1B).

• Learn more about investing in mutual funds here.

• NPS vs Fixed Deposits: NRI fixed deposit rates currently hover around 7.0-7.5% (as of Oct 2025) annually with capital protection. For long accumulation periods, NPS equity options have historically outperformed, though with accompanying volatility.

• Traditional Pension Plans: Insurance-linked pension products typically carry higher charges (2-3% annual management fees) and lower transparency compared to NPS's regulated, low-cost structure.

Tax Treatment and Cross-Border Considerations

India's Income Tax Act provides NPS with an Exempt-Exempt-Taxable structure, creating incentives at the contribution and accumulation stages.

Contribution Deductions

Under the old tax regime (the new regime eliminates most deductions), NPS offers:

• Section 80CCD(1B): An exclusive ₹50,000 deduction for Tier I contributions, separate from the ₹1.5 lakh Section 80C umbrella covering PPF, ELSS, and similar instruments

• Section 80CCD(1): Additional deduction of 10% of salary (basic plus dearness allowance) within the overall ₹1.5 lakh Section 80C limit

NRIs/OCIs filing Indian tax returns can claim these, up to ₹2 lakh total.

Withdrawal and Annuity Taxation

At age 60, up to 60% of the accumulated corpus can be withdrawn as a tax-exempt lump sum. The remaining 40% must purchase an annuity. This annuity income subsequently attracts tax at applicable slab rates.

Partial withdrawals (capped at 25% of contributions after three years) for specified purposes - housing, education, medical treatment - also receive tax-exempt status.

Double Taxation Avoidance

Since the corpus settles in India, NRIs must navigate tax obligations in both India and their country of residence. While the lump sum enjoys exemption in India, annuity payments constitute taxable income. Many countries also tax this annuity income.

Double Taxation Avoidance Agreements between India and other nations provide relief mechanisms, typically through foreign tax credits for Indian taxes paid. The specific treatment varies by country and individual circumstances. The NPS corpus gets credited to the NRO account, with repatriation subject to RBI limits.

To understand more about DTAAs, click here.

Risk Factors and Practical Limitations

Several constraints merit consideration before committing to NPS for NRIs:

1. Liquidity Lock-in

The corpus remains inaccessible until age 60 except for limited partial withdrawals. This 30-40 year lock-in for younger subscribers eliminates flexibility for emergencies or opportunities requiring capital.

2. Mandatory Annuitization

The 40% annuity requirement at normal exit cannot be waived (except when total corpus remains below ₹5 lakh). Annuity rates in India have historically disappointed, often yielding 5-6% annually on the annuitized portion. This mandatory conversion reduces control over the retirement corpus.

3. Premature Exit Penalties

Voluntary exit before age 60 demands 80% annuitization if the corpus exceeds ₹2.5 lakh - far harsher than the 40% rule at normal retirement. This structure severely penalizes early withdrawal.

4. Currency Exposure

The rupee-denominated investment exposes NRIs to exchange rate risk. A weakening rupee at withdrawal time reduces the foreign currency value of repatriated funds. Subscribers cannot hedge this currency risk within the NPS framework.

5. Citizenship Dependency

Renunciation of Indian citizenship forces immediate account closure. For individuals considering citizenship changes, this represents a material risk to the retirement plan.

6. Limited Fund Manager Flexibility

While NPS permits annual fund manager switches, the universe remains limited to PFRDA-approved entities. Unlike mutual funds, there's no option to move to specialized or boutique managers with differentiated strategies.

Rupeeflo serves as a comprehensive financial services platform specifically designed for non-resident Indians. The platform enables NRIs to open bank and DEMAT accounts, invest in Indian securities, manage taxation, and navigate regulatory requirements - all without visiting India. For those seeking expert assistance with NPS enrollment, portfolio diversification strategies, or broader wealth management needs, Rupeeflo provides the digital infrastructure and professional support necessary for informed financial decisions across borders.

Frequently Asked Questions

1. Can a Tier II account be opened independently without Tier I?

No. Tier II operates only as an adjunct to an active Tier I account. The primary retirement account must be established first.

2. What happens if an NRI returns permanently to India?

The account transitions from NRI to resident status. The Permanent Retirement Account Number (PRAN) remains unchanged, and all existing balances continue without disruption. The subscriber becomes subject to resident tax rules going forward.

3. What is the minimum annual contribution requirement?

Tier I mandates ₹1,000 annually. Failing to meet this freezes the account until a reactivation penalty is paid alongside pending contributions.

4. Can the entire lump sum at age 60 be repatriated abroad?

The 60% lump sum portion gets credited to the NRO account. Amounts originally contributed through NRE accounts generally retain repatriable status, though the total remittance still falls under the USD 1 million annual FEMA limit. Proper documentation of the contribution source becomes essential for repatriation.

5. Is complete withdrawal without annuity purchase ever possible?

Yes, when the total accumulated corpus at age 60 remains at or below ₹5 lakh. In such cases, 100% lump sum withdrawal is permitted without mandatory annuity purchase.