When an NRI NPS subscriber dies before retirement, the entire accumulated pension wealth is paid to the nominee or nominees or, where applicable, the legal heirs. According to Tax2win CEO Abhishek Soni, the amount received by the nominee on the subscriber's death is fully exempt from income tax in India, regardless of whether the nominee or legal heir is also an NRI. The nominee or family members also have the option to purchase an annuity if they wish to do so. As explained by Soni, if an NRI subscriber has an NPS corpus of ₹50 lakh and it is paid to an NRI nominee, the ₹50 lakh is not taxable as income in India, though pension or annuity income received later from the corpus would be taxable.
Being a nominee does not automatically mean ownership of the money outright. According to Garg & Garg Tax Associates Advocate Shourya Garg, the nominee generally holds it in a fiduciary capacity, almost like a trustee, on behalf of the legal heirs unless the nominee also happens to be the rightful heir under succession law. Garg emphasized that PFRDA will pay out to the nominee, but that doesn't necessarily settle who the money legally belongs to. Legal heirs can and sometimes do step in if they're different from the nominee, typically needing to either get the nominee's consent or establish their claim through proper legal channels, with courts generally siding with legal heirs regarding actual ownership.
Where there is no valid nomination, PFRDA directly pays out to the legal heirs based on a legal heir certificate from the state authority or a succession certificate from a court. The required documents for claiming the NPS corpus include the subscriber's death certificate, KYC and bank details of the claimant, a death withdrawal form, and a legal heir certificate or succession certificate if there is no valid nominee. For NRIs, there is usually an added layer of proof of overseas address and FEMA-related repatriation declarations since the funds may need to move across borders. As reported by Garg & Garg Tax Associates, nominees can be appointed at the time of opening an NPS account, with up to three nominees in NPS Tier I and Tier II accounts, requiring specification of percentage share allocation with collective shares adding up to 100%.
Recent regulatory developments have made NPS more flexible for subscribers. PFRDA's December 2025 amendments and the updated All Citizen Model material reflect wider exit choices, including combinations of lump sum, annuity, and phased withdrawal options in certain cases. Under the NPS All Citizen Model, PFRDA now reflects entry and continuation or exit flexibility up to 85 years, making late-entry and extended continuation planning more relevant for older investors. The employer NPS contribution remains an important retirement-planning factor, with deduction under Section 80CCD(2) continuing, though the applicable cap depends on employer category and tax regime - official Income Tax guidance currently supports a 14% cap in the new regime and a 10% cap in the old regime for employers other than Central or State Government.
