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NPS Tier 1 and Tier 2 accounts are the two account types offered under the National Pension System (NPS). The fundamental distinction between the two accounts lies in their withdrawal restrictions and tax advantages. But the purpose of both accounts is the same: to offer users a long-term investing and saving alternative for post-retirement financial needs.
Today, we will be covering the key features and differences between the Tier 1 and Tier 2 accounts of NPS.
What are Tier 1 and Tier 2 NPS Accounts
Before we cover NPS Tier 1 vs Tier 2 accounts differences, lets understand the key features of these 2 types of NPS accounts. There are two sorts of NPS accounts: Tier I and Tier II. The withdrawal restriction represents the most significant distinction between the two.
NPS Tier-1: It is mandatory NPS retirement savings account with a lock-in term that extends until the account holder reaches retirement age i.e. 60 years but can be extended up to the age of 75 years under current rules. This account prohibits withdrawals before superannuation at retirement except under exceptional circumstances. Additionally, NPS tax benefits are limited to investments made in NPS Tier 1 account.
The primary purpose of this account is to build a significant sum through regular contributions and investments in various asset classes according to user preference. At retirement, the account holder must use at least 40% of the NPS Tier 1 account to buy an annuity plan that provides monthly pension post-retirement. Users can take out the rest i.e. up to 60% of the account balance as a lump sum. Tier-1 accounts need at least one contribution of Rs. 500 per fiscal year to remain active.
NPS Tier-2: It is a voluntary account that only NPS Tier-1 account holders can form. Tier-2 accounts, unlike Tier-1 accounts, do not have a lock-in period, allowing account holders to withdraw funds from the report at any time, based on their needs. In addition, there are no limitations on the maximum amount or frequency of withdrawals. You also have the option of transferring money freely from your NPS Tier 2 to Tier 1 account for availing Section 80 CCD tax benefits.
Features and Benefits of NPS Tier 1 Account
Before we talk about the NPS Tier 1 vs Tier 2 differences, let’s understand the features of Tier 1 account. The features of the NPS Tier-I account are as follows:
- Investment: Minimum annual investment is Rs. 1000. Under Section 80CCD(1B), investors can receive an additional tax deduction of Rs. 50,000 through NPS investments.
- Premature Closure: The Tier-I account allows premature closure under specified circumstances and situations.
- Retirement Account: The NPS Tier 1 Retirement Account program is a basic pension account. When users open an account, they are assigned a Permanent Retirement Account Number (PRAN).
- Maturity: The NPS account matures at age 60 for the investor. The investor may take up to 60% of the fund's value at maturity and use the remaining 40% to purchase an annuity plan.
Features and Benefits of NPS Tier 2 Account
To understand NPS Tier 1 vs Tier 2 account differences, let’s understand the benefits and features of Tier 2 accounts. This type of account provides you with a variety of perks, including:
- Easy Liquidity: This investment can be withdrawn anytime, according to one's preferences. Therefore, this feature allows customers to tailor their investment strategies to their requirements.
- Flexible Investment Plan: Unlike many other investment programs, the NPS Tier 2 provides flexibility when it comes to withdrawals. In addition to easy withdrawals, NPS Tier 2 allows for an alternative investment option to mutual funds.
NPS Tier 1 vs Tier 2 Accounts Differences
There are numerous differences between NPS Tier-1 and Tier-2 accounts. Here are the most significant distinctions between the two types of NPS accounts:
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NPS Tier 1 vs Tier 2 accounts: Restriction Period: The tier-1 account has a lock-in duration that is valid until the account holder's retirement, but the tier-2 version has no lock-in duration. Tier 2 offers flexibility by permitting NPS account withdrawals at any moment.
NPS Tier 1 vs Tier 2 accounts: Contribution: Tier-1 accounts require a minimum opening deposit of INR 500, and Tier-2 accounts require a minimum opening deposit of INR 1,000. The minimum balance to be maintained in the NPS Tier-1 account after each fiscal year is INR 1,000. In addition, Tier-2 accounts are not required to maintain a minimum balance.
In the Tier-1 account, it is required to make at least one contribution per fiscal year, although no payment is needed for the Tier-2 account.
NPS Tier 1 vs Tier 2 accounts: Tax Benefits under 80 CCD: Tier-1 accounts are eligible for tax deductions. Under Section 80CCD of the Income Tax Act of 1961, Tier-1 qualifies for tax deductions up to Rs. 2 lakh every financial year.
Unlike Tier-1 accounts, Tier-2 accounts do not offer tax deduction benefits to Corporate Model or All Citizens Model NPS subscribers. Government employees can deduct their contributions to the NPS Tier-2 account under section 80C. This account will be locked for three years.
Tier 1 and Tier 2 NPS account benefits are virtually identical but differ in terms of investment flexibility and tax advantages. In addition, a Tier 1 account may help build a retirement fund if you are a new investor. Tier 1 account is a low-investment plan that provides tax advantages.
Frequently Asked Questions (FAQs)
1. What is an NPS account?
It is India's leading retirement savings program governed by the Pension Fund Regulatory & Development Authority (PFRDA). It enables the user to make regular payments to the account and build a substantial amount to fulfill their retirement planning demands.
2. How many types of accounts are available through the NPS?
Two types of accounts are available under the scheme: Tier-1 of the NPS is the retirement account, while Tier-2 is a voluntary account. The latter can only be created if the user already has an active NPS I account. This is different from the pension payment order (PPO)-based pension account offered by Employees Provident Fund Organisation (EPFO).
3. What tax advantages can an NPS account offer?
Contributions to the NPS Tier-1 account are deductible for income tax purposes. Section 80 CCD of the Income Tax Act of 1961 permits deductions of up to Rs. 2 lakh every financial year including the Section 80C annual limit for contribution made by the subscriber.
4. Is the NPS Tier 1 account or Tier 2 account mandatory?
The NPS Tier 1 account is mandatory for all those who want to subscribe to the National Pension System. Tier 2 account, on the other hand is an optional account that NPS subscribers may decide to invest in.
5. Can I have 2 different pension fund managers for NPS tier 1 and tier 2 accounts?
Yes. You can opt to have 2 different pension fund managers (PFM) for your Tier 1 and Tier 2 NPS accounts. Alternatively, you can choose to keep the same PFM for both accounts.
ARN No: Jan23/Bg/21