A better work environment, increasing family commitments, increased income, and sophisticated life standards encourage people to move out of India to make the best out of their life. However, while some prefer to stay abroad, many want to spend their retirement life in India. And, they invest in pension plans in India to sustain their financial condition to meet unprecedented and routine daily expenditures. Investing in pension plans is a fair decision as a Non-Resident Indian(NRI). However, it has to be done in the right manner for better returns. So, here is everything you need to know about pension plans in India.
What is a Pension Plan?
A pension policy is a financial instrument that allows you to accumulate a retirement corpus in the long term during your employment. It is referred to as the accumulation phase. Then, on maturity, you can withdraw a portion of the accumulated corpus and invest the remaining fund to purchase an annuity plan. The annuity plan will provide a regular income until desired. It is referred to as the vesting phase. The entire policy duration ranges from 10 to 30 years.
There are different types of pension annuity plans. It is applicable for the NRIs to invest in it as well. First, let us understand the types and further research what other processes impact the pension plan for NRI in India.
Types of Pension Plans
- Annuity Plans: The most preferred options are the immediate and the deferred annuity plans. The immediate annuity plan starts providing the regular income immediately once the annuity is purchased. And, the deferred annuity plan starts providing the regular income at a later date.
- National Pension Scheme (NPS): The National Pension Scheme(NPS) is a government pension scheme that helps you invest in a long-term retirement corpus invested in the equity or debt markets. You can withdraw 60% of the corpus and invest 40% in annuity plans for a regular income on maturity.
- Life Insurance Pension Plans: There are also annuity plans with life cover that will provide a sum assured to your family in your unexpected demise. Life insurance providers have customised these plans to help you maximise protection and the retirement benefit.
Important Pointers to Consider While Purchasing NRI Pension Plan
Now that we have briefly discussed pension plans and their types in India, we will know the important pointers to consider for the NRIs.
- Your account in India as an NRI should exist as a Non-Resident Ordinary(NRO) account. Therefore, if your account is an existing India-based account, you should inform your pension plan provider and the corresponding bank that you are an NRI. They will convert it to the NRO account.
- You should provide a life certificate from the Indian Embassy or the bank in the country where you are residing once every year in November.
- The bank handling the pension plan for NRI will credit it to your NRO account.
How Should You Plan for Retirement as an NRI?
We have discussed the official requirements necessary for an NRI pension plan. However, here are a few important considerations while you plan to invest in pension plans.
- Retirement corpus - Estimate a value for your retirement corpus. You can calculate whether you prefer staying in the host country or returning to India. If you plan to live in the host country, ascertain the expenses based on the country's economic conditions and your retirement financial goals. Make sure you don't compromise on your living standards and account for an extra sum to handle medical expenses.
- Inflation - While accounting for your retirement corpus, make sure you consider the inflation rate to accommodate the real cost of goods in the future in your host country or India.
- Exchange Rate - The exchange rate and the money value fluctuations will impact your retirement fund. You can always exchange your pension funds or savings for INR. Research the prevailing exchange rate and its changes over the years to understand its implications.
- Taxation* - According to the Income Tax Act, 1961, you will qualify for a tax* deduction benefit up to ₹1,50,000 for investments made in annuity pension plans from insurance providers under Section 80CCC, a subsection of Section 80C.
Moreover, investments made in the NPS will qualify for a deduction benefit up to ₹50,000. And, one-third of the withdrawal amount on maturity will be tax*-free, while the regular income will be taxable*. In addition to these, you have to inquire about the tax* implications associated with such pension plan investments from your host country to avoid any future discrepancies as an NRI.
- Secure documents - The most important aspect while being an NRI is safeguarding your documents related to your stay in the host country.
Pension plans are the apt investment to plan for a peaceful future. For some reason, you might have travelled abroad while wanting to return to India on retirement. In such cases, and even otherwise, as an NRI, you can invest in pension plans in India. While investing in the different types of annuity pension plans, consider the required retirement corpus, inflation, exchange rate and the tax* implications for better returns. And, most importantly, start investing early in life to opt for a longer policy term and benefit from a huge corpus!