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While booking a train ticket for AC class, you have three options to choose from: Tier 1, Tier 2, and Tier 3, respectively. All are AC coaches, but they come with certain options, such as luxury, and they all have different price tags. But one thing is common among them: You will reach your destination in the end.
Similarly, NPS offers two account types: Tier 1 and Tier 2. But you invest in them with a common goal, which is to reach a secure financial destination. In this blog, we’ll explore the tax benefits associated with NPS Tier 1 and Tier 2 accounts.
Benefits of investing in NPS Tier 1 and Tier 2
NPS is a pension plan created to provide people with retirement benefits. There are numerous benefits to investing in NPS, which are:
Tax Benefit: Under Section 80CCD of the Income Tax Act, subscribers can avail of tax benefits for their contributions.
Flexibility: Investors have the freedom to move between different fund options and choose their asset allocation.
Affordability: A broad spectrum of investors can invest and contribute to NPS due to its minimum contribution requirements.
Expert Management: Skilled fund managers oversee NPS to maximize returns while lowering the risk.
High Returns: NPS has the potential to provide higher market-linked returns. It invests across asset classes like corporate bonds, government securities, alternative investments, and equities.
How can you plan your future with NPS with the help of digitalization? Are you curious to know? Read this.
Let’s look at the advantages of the Tier 1 and NPS Tier 2 tax saving schemes.
NPS Tier 1 and Tier 2 Tax Benefits
When it comes to tax deductions, they are available for contributions made to NPS Tier 1 accounts. And there are no tax benefits associated with contributions made to an NPS Tier 2 account unless you are a Central Government employee.
Tax Benefits under Tier 1:
Section 80CCE: Contributions directed towards the Tier 1 NPS account are eligible for tax deductions, with a maximum limit of ₹1.5 lakh per year.
Section 80CCD (1B): Offers an extra tax benefit for NPS investors, allowing deductions of up to ₹50,000 from their investments.
Thus, by investing in NPS, you can deduct up to ₹2 lakh in taxes, ₹1.5 lakh under Section 80C, and an additional ₹50,000 under Section 80CCD (1B). This implies that you can save ₹62,400 in taxes if you are in the 30% tax bracket.
Section 80CCD (2): An employer’s contributions towards an employee’s NPS are eligible for tax deductions of up to 10% of salary (basic plus DA), or 14% of salary if the contribution is made by the Central Government under Section 80CCD (2), exceeding the ₹1.5 lakh limit provided under Section 80CCE.
Tax Benefits under Tier 2:
Although Tier II accounts typically do not offer tax benefits, there is an exception for Central government employees. The government introduced the NPS Tier II Tax Saver Scheme (NPS-TTS) where contributions (up to Rs. 1,50,000 as specified in Section 80CCE) are eligible for deduction under section 80CCD(1). However, this scheme requires a mandatory lock-in investment period of 3 years.
Withdrawal Conditions
The withdrawal conditions are the primary distinction between the two accounts. You are only able to withdraw your investment from a Tier 1 account once you reach the age of 60. On the other hand, a Tier 2 account doesn’t have this kind of withdrawal restriction, so you are free to make a withdrawal anytime you want.
Conclusion
There are a few differences between the NPS Tier 1 and NPS Tier 2 tax-saving schemes. However, it is advisable to stay invested for the long term to reap the benefits of the National Pension System. Invest with a purpose and plan your investments to live a stress-free life in your golden years.
