Planning for retirement is crucial, especially for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) who seek financial stability for their future. The Indian pension system offers various schemes, including the National Pension System (NPS), the Unified Pension Scheme (UPS), and the Old Pension Scheme (OPS). Each of these pension plans has distinct features and benefits tailored to different financial goals. In this blog, we will compare NPS, UPS, and OPS to help NRIs choose the best pension plan that suits their needs.
What is National Pension System (NPS)
The National Pension System is a government-backed pension scheme designed to provide retirement savings to individuals, including NRIs. It offers market-linked returns through investments in equities, corporate bonds, and government securities. NRIs can invest in NPS and enjoy tax benefits while building a retirement corpus.
National Pension Scheme or NPS can be one more reliable source of investment for NRIs/OCIs in India. NPS scheme is fully backed by the government and allows NRIs to invest in equity funds, debts, or a combination of both. Individuals between the ages of 18 years and 60 years can invest in NPS with minimal documents like a PAN card and an Aadhaar card. You need a Non-Resident External (NRE) account or a Non-Resident Ordinary (NRO) account when investing in NPS.
Also read: NPS for NRI: Indian National Pension Scheme
Key Benefits of the National Pension Scheme (NPS)
- Flexibility in Investment: Investors can choose their asset allocation across equities, bonds, and government securities.
- Market-Linked Returns: The returns vary based on the performance of the investment portfolio.
- Tax Benefits: NRIs can claim tax deductions under Section 80C and 80CCD(1B) for contributions to NPS.
- Partial Withdrawals: NPS allows partial withdrawals for specific reasons like education or medical expenses.
- Annuity Purchase: Upon retirement, a portion of the corpus is used to purchase an annuity, providing a steady income stream.
Also read: NPS vs Mutual Fund: What is best for You?
What is the Unified Pension Scheme (UPS)?
The Unified Pension Scheme (UPS) is a government-initiated program announced by Union Minister Ashwini Vaishnaw aimed at simplifying the pension process for government employees and assuring pensions post-retirement. Currently, government employees are considered under the National Pension Scheme(NPS). With the UPS scheme to be implemented in the next financial year, government employees will have the option to select between the UPS scheme and the NPS scheme. The scheme is structured to offer a steady income post-retirement, ensuring financial independence during the non-working years.
The state government also has been given the flexibility to adopt and implement the UPS scheme for their state government employees. Currently, Maharashtra has already passed the bill in the cabinet and approved the implementation of the UPS scheme. If all the state governments implement the scheme, then it will benefit further 90 lakh state government employees too.
Also read: What is Unified Pension Scheme (UPS): Key Features, Eligibility & More
Key Benefits of the Unified Pension Scheme (UPS)
- Guaranteed Family Pension: In the unfortunate event of an employee’s death, their spouse will receive a family pension equal to 60% of the pension the employee was receiving.
- Minimum Assured Pension: Employees who have completed at least 10 years of service will be entitled to a minimum pension of ₹10,000 per month upon retirement.
- Inflation Adjustment: Both the guaranteed pension and family pension will be adjusted for inflation, ensuring they remain in line with rising living costs.
- Dearness Relief: Retirees under the UPS will receive Dearness Relief based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to what current employees receive.
- Lump Sum Payment on Retirement: In addition to gratuity, employees will receive a lump sum payment upon retirement, equivalent to 1/10th of their monthly emoluments (including pay and Dearness Allowance) for every six months of completed service. This payment will not reduce the assured pension amount.
Also read: Senior Citizen Savings Scheme (SCSS): Key Benefits, Eligibility, Rules, Interest Rates
What is Old Pension Scheme (OPS)?
The Old Pension Scheme (OPS) is a traditional pension plan that was discontinued in 2004 for government employees but remains relevant for those who joined the workforce before its closure. OPS provides a fixed pension based on the employee’s last drawn salary and years of service.
Key Benefits of the Old Pension Scheme (OPS):
- Defined Benefit Pension: OPS offers a guaranteed pension, usually 50% of the last drawn salary.
- Government-Backed: The pension is funded by the government, making it a safe and secure option for retirees.
- Inflation Protection: Some OPS pensions are indexed to inflation, ensuring that retirees maintain their purchasing power over time.
NPS vs UPS vs OPS: Key Comparisons for NRIs
| Parameter | NPS | UPS | OPS |
|---|---|---|---|
| Eligibility | Open to NRIs | Open to Government Employees | Only available to pre-2004 government employees |
| Returns | Market-linked, variable | Likely fixed or market-linked | Fixed, government-backed |
| Tax Benefits | Yes (under Sec 80C, 80CCD(1B)) | Details to be clarified | Not applicable for most NRIs |
| Flexibility | High (choice of asset allocation) | Moderate (streamlined process) | Low (fixed pension) |
| Withdrawal Rules | Partial withdrawals allowed | Withdrawal details emerging | Fixed pension after retirement |
| Annuity Purchase | Required at retirement | Expected, but not yet clarified | Not applicable |
Which Pension Plan is Best for NRIs among NPS, UPS and OPS?
The best pension plan depends on your financial goals, risk appetite, and investment horizon. Here’s a brief on these NPS, UPS and OPS and its suitability for NRIs/OCIs:
- National Pension System (NPS): This is the most suitable option for NRIs looking for a flexible, market-linked retirement plan. With the ability to diversify investments across asset classes and enjoy tax benefits, NPS offers the potential for higher returns over the long term. It also allows partial withdrawals, making it a practical option for those who may need liquidity before retirement.
- Unified Pension Scheme (UPS): Currently, the scheme is available to central government employees, but states may choose to adopt it as well. The UPS applies to all individuals who retired under the NPS from 2004 onwards. These retirees who had opted for NPS earlier and chose to opt UPS scheme will have their arrears adjusted with the amounts they have already received under the NPS.
- Old Pension Scheme (OPS): Unfortunately, OPS is not available to most NRIs unless they were government employees before 2004. If you fall under this category, OPS provides the security of a fixed pension but lacks the flexibility and growth potential offered by NPS.
Also read: Jeevan Pramaan Patra for NRIs: How can NRIs submit life certificate for Pension continuation?
Wrapping Up
For NRIs, the National Pension System (NPS) currently stands out as the most robust and flexible pension plan, offering market-linked returns and significant tax benefits. The Unified Pension Scheme (UPS) may become a strong contender if it pertains NRIs/OCIs to invest into it. On the other hand, the Old Pension Scheme (OPS) is a less relevant option for most NRIs, as it is restricted to a select group of government employees.
When choosing a pension plan between NPS, UPS and OPS, it’s essential to consider your long-term financial goals, risk tolerance, and the level of flexibility you desire. NPS offers the best mix of growth potential and adaptability for NRIs seeking a secure and comfortable retirement.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
What is the Unified Pension Scheme (UPS)?
The UPS is a pension reform initiative introduced by the Indian government, designed to offer a guaranteed pension of 50% of the average basic pay drawn over the last 12 months before retirement. It aims to combine the benefits of the Old Pension System (OPS) and the National Pension System (NPS) while addressing their shortcomings.
Who is eligible for the Unified Pension Scheme?
The scheme is primarily available to central government employees who joined service after 2004 under the NPS. It requires a minimum of 10 years of service for eligibility, with full benefits provided to those who have completed at least 25 years of service.
How does the UPS differ from the NPS?
The key difference lies in the pension structure. The UPS offers a defined benefit pension, ensuring a fixed monthly payout, while the NPS is a defined contribution scheme where the pension amount depends on market-linked returns from the invested corpus.
What are the contributions under the UPS?
Employees contribute 10% of their basic pay and Dearness Allowance (DA) towards the UPS, while the government contributes 18.5%. This is an increase from the previous 14% contribution under the NPS.
Is the Unified Pension Scheme applicable to state government employees?
Currently, the UPS applies to central government employees, but state governments have the option to adopt the scheme as well.
What happens to retirees who were already under the NPS?
Retirees under the NPS from 2004 onwards will have their arrears adjusted with what they have already drawn under the NPS, and they will receive the UPS benefits retroactively.
What are the benefits of choosing the Unified Pension Scheme over the NPS?
The UPS provides a guaranteed pension amount, inflation-adjusted pensions, and family pension benefits, making it a more secure option compared to the market-linked returns of the NPS.
Can employees switch back to the NPS after opting for the UPS?
No, once an employee opts for the UPS, the decision is irrevocable.
Is NPS good for NRI?
Yes, National Pension Scheme is one of the top investment opportunities in India for NRIs to plan a wonderful retirement
How can NRI open an NPS account online?
An NPS Account can be opened online through these simple steps:
- Visit NPS website and fill the “Online Subscriber Registration” Form.
- Select “Non-Resident Indian” option under “Choose Appropriate Options”
- Choose between a Repatriable (NRE) or Non-Repatriable Account (NRO)
- Enter Passport number, country of residence and generate OTP using Aadhar
- In case of Repatriable Account, your KYC will be done by the bank (one time charge of Rs.125/- plus taxes will be debited from your account)
- Select preferred address of communication, i.e. Overseas Address or Permanent Address (extra charges applicable for communication at overseas address)
- A Permanent Retirement Account Number (PRAN) will be allotted to you
- Get a print out of the form with e-sign or attach your photograph and signature
- Send the form within 90 days of the allocation of PRAN to the CRA (Central Recordkeeping Agency)
How can I get NRI pension?
The National Pension Scheme (NPS) is one of the top investment opportunities for NRIs in India that provides pension in form of an annuity post retirement.
Is NPS better than PPF?
When it comes to returns, NPS seems a better choice than PPF. In any retirement portfolio whether it is National Pension System or Public Provident Fund both have their own place and associated benefits. PPF is all about the safety cushion regarding your investments with solid returns while NPS offers a double benefit of capital safety and appreciation of investments.
Can NRI invest Tier 2 NPS?
Yes NRIs can invest in Tier 2 NPS. They can do so as long as they are Indian Citizens. Change in citizenship will make them ineligible to invest in NPS.
What is the tax benefit for NRIs under NPS?
NRIs can claim tax deductions of up to ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B) by investing in NPS.
