NPS investment: Check key differences between Tier 1 and Tier 2 accounts

The National Pension System (NPS) could be a suitable choice for investors looking to build a retirement corpus with higher returns compared to other savings instruments. The investments in the NPS allow investors to park their money across different asset classes like equities, debt and government securities, without direct exposure to market risks.

The scheme was launched as a retirement benefit plan only for government employees in 2004 and it was opened for all citizens as a voluntary contribution scheme in 2009. Citizens aged between 18 to 70 years are eligible for investments in NPS.

The scheme offers the annuity option, which can be availed as a pension after retirement.

The NPS provides two types of accounts, Tier I and Tier II. While the Tier I account is mandatory, the Tier II account is voluntary in nature. However, only the Tier I account holders can open the Tier II accounts under the NPS.

Tier I vs Tier II: NPS account features and other key details

The NPS Tier I account is the main account to build your retirement fund. On the other hand, a Tier I account acts similarly to a savings account that offers better flexibility and premature withdrawals.

Key Differences between Tier 1 NPS account and Tier 2 NPS account

Eligibility

Tier I account is open for all citizens of India who are aged between 18 to 60 years. On the other hand, a Tier II account is only available to those who have an active Tier I account and contributions to this account are voluntary.

Minimum Investment

The minimum investment required to open a Tier I NPS account is ₹500 and in multiples of ₹100 thereof. The minimum contribution to a Tier I account in a year is ₹1,000 and at least one contribution should be made to keep the account active. The minimum amount required to open a Tier II account is ₹1,000 and there is no minimum balance requirement.

Lock-in Period

Tier 1 NPS account has a lock-in period and the investors can’t withdraw their money until they turn 60. However, there is no lock-in period for Tier II NPS accounts, which gives the investor more flexibility.

Withdrawal

In the case of a Tier I account, an investor cannot withdraw the fund until reaching the age of 60 years. After that, he or she can only withdraw 60% of the amount as a lump sum and use the remaining to buy an annuity plan. However, partial withdrawals are allowed under certain conditions after remaining invested for at least 3 years.

Meanwhile, there is no withdrawal restriction in the case of Tier 2 NPS accounts and one can withdraw the entire amount at any time, subject to appropriate rules and regulations.

Tax Benefits

There are multiple tax benefits for the amount invested in the Tier I NPS account. The investors can claim the benefits under the overall ₹1,50,000 limit under Section 80C of the Income Tax Act, 1961, for contributions made into a Tier I account. An additional benefit of ₹50,000 under Section 80CCD (1B) of the I-T Act is also available for such investments.

On the other hand, contributions made towards Tier 2 NPS accounts are not eligible for tax exemptions.

Tier I vs Tier II: Which NPS account you should choose

Both Tier I and Tier II NPS accounts come with their own benefits. While a Tier 1 NPS account has multiple tax benefits, a Tier 2 NPS account offers more flexibility. The investors should evaluate their financial goals, needs for accessibility of funds and retirement planning roadmap before choosing between the two accounts.