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National Pension System (NPS) is a popular investment scheme launched by the Government of India for retirement planning. It offers two tiers of investment options, Tier 1 and Tier 2. While both tiers share similarities, they have unique features that distinguish them from each other. Understanding the difference between Tier 1 and Tier 2 NPS is crucial for making informed investment decisions.
In this blog post, we will provide a comprehensive comparison of Tier 1 and Tier 2 NPS, including their eligibility criteria, withdrawal rules, tax benefits, investment options, and account maintenance charges. By the end of this post, you will have a better understanding of the differences between the two tiers of NPS and be able to choose the one that best suits your financial goals and retirement planning needs.
What are Tier 1 and Tier 2 in NPS?
National Pension System (NPS) is a retirement-oriented investment scheme launched by the Government of India. It has two tiers of accounts, Tier 1 and Tier 2, that offer different features and benefits.
Tier 1 NPS is the primary retirement account and comes with a mandatory lock-in period until the age of 60. It is open to all citizens of India, including employees from the public and private sectors, self-employed individuals, and NRIs. The contributions made to this account are eligible for tax benefits under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per annum, and an additional deduction of up to Rs. 50,000 under Section 80CCD (1B).
Tier 2 NPS is an optional investment account that is open to all NPS subscribers, including those who already have a Tier 1 account. Unlike Tier 1 NPS, it does not have any lock-in period and allows subscribers to withdraw their savings at any time without any restrictions. However, the contributions made to this account do not qualify for tax benefits under Section 80C of the Income Tax Act.
Difference between Tier 1 and Tier 2 in NPS
There are several differences between Tier 1 and Tier 2 NPS. Here are the key differences:
1) Eligibility Criteria
Tier 1 NPS has a mandatory requirement for subscribers, which means that anyone who joins NPS must have a Tier 1 account. On the other hand, Tier 2 NPS is a voluntary account, and subscribers can open it only if they already have a Tier 1 account.
2) Withdrawal Rules
Tier 1 NPS has a lock-in period until the subscriber reaches the age of 60. Premature withdrawals are allowed only under certain circumstances, such as critical illness or death. In contrast, there is no lock-in period for Tier 2 NPS, and subscribers can withdraw their savings at any time without any restrictions.
3) Tax Benefits
Contributions made to Tier 1 NPS are eligible for tax benefits under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per annum, and an additional deduction of up to Rs. 50,000 under Section 80CCD (1B). However, contributions made to Tier 2 NPS do not qualify for tax benefits.
4) Investment Options
oth Tier 1 and Tier 2 NPS offer a range of investment options, including equities, corporate bonds, government securities, and alternative investment funds (AIFs). However, Tier 1 NPS has a cap of 50% on equity investments, while Tier 2 NPS has no such restrictions.
What are the Differences between NPS 1 & NPS 2?
EEE (Tax-free on withdrawal)
Equity, Corporate Bonds, Government Securities
How To Claim Tax Benefits For Tier 1 And Tier 2?
National Pension System (NPS) offers tax benefits for contributions made to Tier 1 accounts under Section 80C of the Income Tax Act, 1961, and an additional deduction of up to Rs. 50,000 under Section 80CCD (1B).
1. Make contributions to NPS Tier 1: To claim tax benefits for NPS Tier 1 contributions, you need to make contributions to your Tier 1 account. The minimum annual contribution for Tier 1 is Rs. 1,000.
2. Obtain NPS Transaction Statement: After making contributions to your Tier 1 account, you need to obtain the NPS Transaction Statement from your Point of Presence (PoP) or NPS Trust.
3. Claim Tax Deduction: You can claim a tax deduction for NPS Tier 1 contributions by filling out the relevant sections of your Income Tax Return (ITR) form.
4. Submit NPS Transaction Statement: To claim tax benefits for NPS Tier 1 contributions, you also need to submit the NPS Transaction Statement along with your ITR.
NPS Tier 1 vs NPS Tier 2 – Which One Should You Choose
1. Retirement Planning: If your primary goal is to save for retirement, then NPS Tier 1 is the better choice. It has a mandatory lock-in period until the age of 60 years, which ensures that your retirement corpus is not depleted before you retire.
2. Short-Term Goals: If you have short-term financial goals, then NPS Tier 2 is a better choice as it has no lock-in period, and you can withdraw your funds at any time. However, contributions to NPS Tier 2 do not offer any tax benefits.
3. Tax Benefits: If you want to avail of tax benefits on your contributions, then NPS Tier 1 is the only option, as contributions to NPS Tier 2 do not qualify for any tax benefits.
4. Investment Flexibility: NPS Tier 2 offers more investment flexibility as there are no restrictions on equity investments, while NPS Tier 1 has a cap of 50% on equity investments.
5. Account Maintenance Charges: NPS Tier 2 has lower account maintenance charges (0.10%) compared to NPS Tier 1 (0.25%).
In summary, if you are looking for long-term retirement planning, then NPS Tier 1 is the better choice as it offers tax benefits, annuity options, and a lock-in period to ensure that your retirement corpus is not depleted before you retire. On the other hand, if you have short-term financial goals or want more investment flexibility, then NPS Tier 2 is a better choice. It is important to evaluate your financial goals and requirements and choose the NPS Tier that best suits your needs.
Who qualifies for NPS Investments?
Anyone between the age of 18 and 65 years can invest in the National Pension System (NPS). Both Indian citizens and Non-Resident Indians (NRIs) are eligible to invest in NPS, subject to the guidelines issued by the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA) regulations. However, the maximum age limit for investing in NPS is 60 years for government employees and 65 years for others. Additionally, investors need to have a Permanent Retirement Account Number (PRAN) to invest in NPS. The PRAN is a unique identification number that is allocated to investors when they open an NPS account.
Can You Invest in Tier 1 and Tier 2 Accounts Simultaneously?
More About Savings Schemes
Frequently Asked Questions
Yes, you can open an NPS Tier 2 account through offline mode by visiting the nearest Point of Presence-Service Provider (POP-SP) for NPS and submitting a Tier 2 activation form along with supporting documents and an initial contribution amount of Rs 1,000 or more. Once your application is processed, you will receive a PRAN and PRAN card to access your Tier 2 account online.
In the event of the demise of an investor in NPS Tier 1 before the age of 60 years, the accumulated balance is paid to the nominee or legal heir. They can choose to receive the entire balance as a lump sum or use a portion of it to purchase an annuity for regular income. If the investor has also invested in NPS Tier 2, the balance in the Tier 2 account will be paid as a lump sum.
The fund manager's role in Tier 1 and Tier 2 NPS accounts is to manage the investor's investments by investing the funds in various asset classes in accordance with the investment guidelines laid down by PFRDA.