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Investing in NPS Tier I and Tier II Account

Dec 28, 2020 Alankit Team NPS

National Pension System (NPS) is a Government introduced security initiative to provide retirement benefits to all citizens of India, even from the unorganized sectors. The voluntary contribution scheme ensures financial security by encouraging individuals to invest regularly in a pension account during their employment period. While NPS is gradually gaining investors’ attention due to its exclusive tax benefits, it may confuse investors at the time of investing.

NPS offers two types of investment accounts - Tier I and Tier II. To start investing in NPS, an investor first needs to open an account under Tier I before opening Tier II account.

Similarities: Tier I and Tier II

Both the investment accounts under NPS are similar. Both Tier I and Tier II have similar charges and choice of fund managers and pension schemes. The asset classes in which the Pension Fund Managers (PFMs) can make investment are also the same. 0.01% is charged on asset management and 0.0032% as an asset servicing charge for custodian charging. Whether you invest your money in Tier I or Tier II account, the POP charges remain same on every NPS transaction. POP Charges are 0.25% subject to a minimum charge of INR 20 and a maximum charge of INR 25,000. The one-time account opening charges are INR 200 and investors have the flexibility to port across PFMs and fund options with both the NPS accounts .

Difference between Tier I NPS Account and Tier II NPS Account

Tier I NPS Account

Tier I account under NPS is a mandatory account specifically designed to save up for retirement. When an investor opens an NPS Tier I account, he gets a PRAN (Permanent Retirement Account Number). The minimum contribution amount to open a Tier I account is INR 500; however, there is no bar on the maximum contribution. The invested fund in Tier I account is locked-in until the subscriber reaches 60 years of age. Before turning 60, a subscriber can make partial withdrawals for specific purposes* and claim tax deductions available under sections of the Income Tax. Under Section 80CCD (1), NPS subscribers are eligible for tax deduction of INR 1.50 Lacs and tax benefit of INR 50,000 under Section CCD 1(B).

Tier II NPS Account

NPS Tier II account can only be opened when a subscriber already has a Tier I account. This account allows voluntary savings and a NPS subscriber is required to maintain a minimum balance INR 2000 at the end of the year. The contribution to Tier II account has no tax benefits - a subscriber cannot claim deductions and the corpus are taxed on exit. There is no lock-in with savings in this account along with the flexibility to withdraw amount limitlessly.

The investment scheme offers the opportunity to earn market-based returns over long term. The returns offered by NPS are much higher** (approximately 10-12% ) in comparison to other tax saving investment schemes. While returns on NPS Tier I account are inclined towards accumulating funds for retirement, Tier II is geared towards taking care of your investment needs. Both the accounts under NPS vary in terms of taxation and withdrawal rules.

Should you opt for Tier II NPS?

If you are newbie to the world of investing and have a Tier I NPS account, you should consider Tier I under NPS to invest towards any surplus savings and meet your financial objectives. Even though the choice of investment asset class, options to choose fund manager, and charges remain same in both the accounts, however, Tier II account enables flexibility to withdraw your amount anytime you need and acts as a replacement to savings bank account.

* As per NPS guidelines

** NPS investments are subject to NAV based returns

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