NPS Tier 1 vs. Tier 2: A guide for central govt employees switching from UPS

For Central Govt Employees (like those switching from UPS to NPS):

Tier 1 will be your primary retirement account with employer contributions and tax savings.

Tier 2 can be used for extra savings, with full liquidity, and optional tax benefit (if lock-in is chosen).

Government’s additional 4% contribution, as per the new UPS-NPS switch announcement, will go into your Tier 1 account.

Benefits of NPS

The Tier 1 account is the core retirement savings account under NPS and is mandatory for participation. This account has a lock-in period until the age of 60 and is primarily used to build a retirement corpus, which later helps in purchasing an annuity to ensure post-retirement income.

Partial withdrawals from Tier 1 are allowed after three years, but only for specific reasons such as medical emergencies, children’s education, or buying a home. For central government employees, the employer contributes 14% of basic pay and DA into the Tier 1 account, and as per the latest UPS-to-NPS switch update, the government’s additional 4% contribution will also be credited here.

The Tier 2 account is an optional. With no lock-in and the same investing options and rewards as Tier 1, it operates more like a mutual fund. Because withdrawals are unrestricted, it's perfect for short- or medium-term financial objectives. Similar to ELSS (Equity Linked Savings Scheme) mutual funds, central government personnel are exempt from paying taxes under Section 80C if they choose to lock in their Tier 2 contributions for three years.

What are the tax benefits under NPS?

Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling of Rs 1.5 lakh under Sec 80 CCE.

An additional deduction for investment up to Rs 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs 1.5 lakh available under section 80C of Income Tax Act. 1961. For the majority of investors, Tier 2 does not provide tax advantages.

⦁ No additional annual maintenance Charge ⦁ Saving for your day to day need (withdrawal at any point of time) ⦁ Transfer fund to pension account ( Tier I) any time ⦁ No minimum balance required ⦁ No levy of exit load ⦁ Separate Nomination facility available ⦁ Option to select different Investment pattern from Tier I.

• Subscriber who has an active Tier I account can activate a Tier II account

• It is open for any resident Indian, NRI can’t activate Tier II account.

• It can also be opened along with Tier I account.

• All Government Subscribers who are mandatorily covered under NPS and have active Tier I account, can activate Tier II account.

NPS Tier 1 vs Tier 2 comparison table

The contribution remitted in Subscriber's account is passed on to the Pension Fund Managers (PFMs) as selected by the Subscriber at the time of registration (or changed subsequently). The PFMs invest the money and declare Net Asset Value (NAV) at the end of each business day. Accordingly, based on the NAV, units are credited in the Subscriber's account. The present value of the investment is arrived at by multiplying the units held with the NAV.

The return under NPS is market driven. Hence, there is no guaranteed/defined amount of return. The returns generated through investments are accumulated for the pension corpus and is not distributed by way of dividend or bonus.