NPS Tier 1 vs Tier 2 Account | Eligibility | Tax Benefits | Withdrawal

NPS Tier 1 vs Tier 2 Account | Eligibility | Tax Benefits | Withdrawal | Contribution

The National Pension Scheme (NPS) has two main types of accounts – Tier 1 account and Tier 2 account. These accounts vary in many ways based on their features. The difference between Tier 1 and Tier 2 accounts in NPS is discussed under the following points:

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Eligibility

Tier 1 Account:

Any Indian citizen (resident or NRI), between the age of 18 to 60, can open a Tier 1 account in NPS.
It is mandatory for all central government employees.

Tier 2 Account:

Only those who have Tier 1 accounts can open Tier 2 accounts.
Hence it is essential to have a Tier 1 account if one wants to open a Tier 2 account.

NPS Minimum Contribution Tier 1 vs Tier 2 account.

Tier 1 Account:

The minimum contribution per year is Rs.1000.
It is mandatory to make at least 1 contribution per year.
The minimum amount per contribution is RS.500.
For government employees, it is mandatory to contribute 10% of their basic salary plus dearness allowance every month. This amount is matched by the government’s contribution to the employee’s account.

Tier 2 Account:

You have to contribute a minimum of Rs.1000 at the time of account opening.
There is no minimum contribution requirement per year.
It is mandatory to make at least 1 contribution per year.
The minimum amount per contribution is RS.250.

Note – It may be advisable for private sector employees/self-employed to contribute the basic required to the Tier 1 account and the rest to the Tier 2 account. This is because Tier 2 enjoys greater flexibility.

Minimum Balance Tier 1 vs Tier 2 NPS Account

Tier 1 Account: There is no specific minimum balance requirement.
Tier 2 Account: The minimum balance required in the account at the end of each year is Rs.2000.

Withdrawal Rules for NPS Tier 1 vs Tier 2

Tier 1 Account:

If you withdraw before the age of 60, 80% of the corpus has to be used to purchase the annuity. You can keep only 20% with you.
If you withdraw after the age of 60, you have to invest 40% in the annuity. You can keep the rest with you by withdrawing in a lump-sum or in a phased manner.

Tier 2 Account: You can withdraw the accumulated corpus at any time without any restrictions or penalties.

Tax Benefits of Tier 1 NPS vs Tier 2 NPS

Tier 1 Account:

During Investment:

10% of salary plus DA is eligible for tax deduction for employees (for self-employed this translates to 10% of gross income) under Section 80CCD (1). However the limit is Rs.1,50,000 (Section 80C).
The employer’s contribution (upto 10% of salary plus DA) is also tax deductible.
You can avail additional Rs. 50,000 of tax deduction under Section 80CCD (1B). This is over and above the Section 80C limit.

Tier 2 Account:

During Investment: There are no tax benefits on investment in Tier 2 accounts.

Notes –

Yearly earnings are not taxable for both accounts.
Lump-sum withdrawal at retirement is taxed in that particular year. And the amount invested in an annuity is taxed yearly as per one’s IT slab.

NPS Account Charges

Tier 1 Account:

Annual maintenance charges are applicable.
However, if NPS is through the employer, the employer has to pay these.

Tier 2 Account:

The subscriber has to pay the activation charge and transaction charges.

Note – Fund management charges are the same for Tier 1 and Tier 2 accounts.

Fund Transfer Option for NPS Tier 1 vs Tier 2

Tier 1 Account: You cannot transfer funds from your Tier 1 account to your Tier 2 account.
Tier 2 Account: You can transfer funds from your Tier 2 account to your Tier 1 account.

So before investing in NPS, it is important to understand the differences between Tier 1 and Tier 2 accounts. However, the investment style is same for both accounts.

To understand more about NPS, you can also read about how to open an NPS account, how to login, withdrawal and exit rules, and interest rates and how NPS works.