Back to Blog
There are so many options available in the market to plan for your retirement but when you choose NPS, you need to have clarity between NPS Tier 1 and NPS Tier 2 accounts, respectively. So, in this blog, we’ll know the differences between the two account types.
Understanding of NPS Tier 1 vs Tier 2
The National Pension System (NPS) is slowly but surely getting popular among investors and those individuals who are looking to plan for their retirement. Although, there are two types of accounts in NPS, Tier 1 and Tier 2.
When you want to invest in the National Pension System, you first need to open an NPS account under Tier 1 before you can consider opening a Tier 2 account. There are certain differences in NPS Tier 1 and Tier 2 accounts, respectively.
Tier 1 is the primary NPS account for retirement savings, while Tier 2 offers flexible savings and withdrawal options, functioning more like a voluntary savings account.
NPS Tier 1 vs Tier 2 Comparison
| NPS Tier 1 Features | NPS Tier 2 Features | |
|---|---|---|
| 1. | If you are an Indian citizen and aged between 18 and 70 can open a Tier 1 account. | If you are an Indian citizen and have an active Tier 1 account, you can open a Tier 2 account. |
| 2. | You can start investing in a Tier 1 account with ₹500. | You can start investing in a Tier 2 account with ₹1000. |
| 3. | There is a lock-in period until you turn 60. | Tier 2 account doesn’t have a lock-in period. |
| 4. | Section 80C of the Income Tax Act permits deductions for contributions up to ₹1,50,000 annually. Section 80CCD(1B) allows for additional deductions of ₹50,000. | In this, contributions are not tax-exempt. |
| 5. | Withdrawals are not permitted for the first three years. You can withdraw 25% of the fund’s value but with certain conditions. When you turn 60, you can withdraw 60% of your corpus and the remaining 40% can be used to buy annuities. | There is flexibility in withdrawal rules. You can withdraw your funds anytime you want. |
| 6. | 60% of your corpus comes under tax exempt-exempt-exempt category. | Tax on withdrawals is applicable according to income rate slabs. |
| 7. | You can transfer your funds from Tier 2 to Tier accounts. | You are not allowed to transfer your fund in a Tier 2 account. |
How can you save tax while investing and planning for your retirement? Read here.
NPS Tier 1 and Tier 2 Benefits
The National Pension System aims to provide people with retirement benefits. There are some benefits and features of NPS, which are:
- Tax-efficient – Section 80CCD of the Income Tax Act allows for tax deductions on contributions made to NPS.
- Flexible – Investors have the freedom to select the funds they want to invest and to adjust the asset allocation.
- Low-cost Investment – Anyone can invest in NPS since it is made affordable to every citizen.
- Potential Returns – The performance of underlying securities, including stocks, corporate bonds, government securities, and alternative investments, determines the NPS returns. It may yield larger returns down the road because it also puts your money into stocks.
Conclusion
Whether you invest in an NPS Tier 1 account or in Tier 2 or in both, these above differences can help you to plan. Thus, investing in a Tier 1 account is recommended if you want to save taxes while building a sizable retirement corpus. It has a lock-in period that will assist you in maintaining investment discipline. Additionally, you can allocate a portion of your funds to a Tier 2 account if you require the flexibility to withdraw your money at any time. The decision between the two accounts ultimately comes down to your investment preferences, financial objectives, and degree of flexibility.
