NPS Tier 1 vs Tier 2

National Pension Scheme Tier 1 is the primary retirement account, whereas Tier 2 offers voluntary savings with flexible withdrawals.
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3 mins read
23-Dec-2024

The National Pension System (NPS) offers Tier 1 and Tier 2 accounts to cater to different savings goals. Tier 1 is designed specifically for retirement planning with restricted access to funds, while Tier 2 resembles a flexible savings account allowing for easy deposits and withdrawals.

NPS Tier 1 and Tier 2: the similarities

Both NPS Tier 1 and Tier 2 share a few similarities.

  • They both share similar charges and choices of fund managers and schemes.
  • Both incur the same Pension Fund Manager (PFM) charges (0.01%), custodian charges (0.0032%), and POP charges on every transaction.
  • You have the flexibility of porting across PFMs and funding options.

Difference between Tier 1 and Tier 2 NPS

Features Tier 1 Tier 2
Purpose Retirement Saving Plan Regular Saving Plan
Eligibility Must be an Indian citizen between the ages of 18 and 70 years. Must be enrolled in NPS Tier 1
Lock-in Period Till 60 years of age No lock-in period
Withdrawal Only after 60 years of age At any time
Minimum Contribution Rs. 1,000 per financial year Rs. 250 per financial year
Tax Benefits You are eligible for a deduction of up to Rs 1.5 lakh under Section 80CCD(1) and an additional Rs 50,000 under Section 80CCD(1B) No tax benefits
Maturity of the Scheme When subscribers turn 60 years of age (60% of the corpus is paid as lumpsum payment, and 40% must be utilised to buy an annuity plan) Not applicable
Investment Choice Active or auto-choice Active choice
Annuity 40% of the corpse No limit
Account Maintenance Charges Applicable Not Applicable
Partial Withdrawal Only 25% is allowed, for which you need to complete 3 years of investing in NPS There is no such condition

What are the benefits of investing in NPS Tier 1 & Tier 2?

The NPS is a government-backed investment scheme with guaranteed returns and long-term security. Here are some of its crucial benefits for NPS‌ Tier 1 &‌ NPS‌ Tier 2:

  • The investor can enjoy tax benefits and reductions under Section 80CCD of the Income Tax Act.
  • Investors can choose their own asset allocation and switch between the two fund options.
  • Due to its lower minimum contribution requirements, it is accessible to a wide range of investors.
  • They are managed by the Provident Fund Manager (PFM), which helps maximize your returns with lower risks.

What are NPS Tier 1 and Tier 2 tax benefits?

NPS‌ Tier 1 is eligible for tax benefits, unlike NPS Tier 2. Here are some crucial tax benefits that investors should consider before planning to invest in the national pension scheme.

  • You can invest up to Rs 1.5 lakh to claim a tax deduction under Section 80C of the Income Tax Act.
  • Besides the Rs. 1.5 lakhs, you can also claim the additional tax benefit for your investment up to Rs. 50,000 under Section 80CCD (1B).
  • There is also a provision for tax reduction by the employer of the investor under Section 80CCD (1B) of the Income Tax Act, which means that only salaried individuals can avail this facility.

National Pension Scheme Tier 1 vs Tier 2: Which is the better option?

Now comes the question: Which one should you choose between NPS Tier 1 vs Tier 2?

If you are looking for long-term stability and a secure retirement, NPS‌ Tier 1 could be your choice.

Moreover, if you are looking for flexibility in investment to withdraw your money and do not want to get constrained by the lock-in periods (in the case of 60 years in Tier 1), you can invest some portion of your amount in Tier 2, which can be a great way to cope with financial emergencies like accidents or marriage.

Ultimately, the choice between two accounts depends on your financial goals, investment preferences, and level of flexibility.

Apart from this, another attractive option is the Fixed Deposit Scheme by reputed financial institutions like Bajaj Finance, which offers interest rates of up to 7.30% p.a. while enjoying significant returns.

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Conclusion

The National Pension Scheme (NPS) offers two distinct account types: Tier 1 and Tier 2. Tier 1 caters to long-term retirement savings with tax benefits and a lock-in period until 60. Tier 2 offers flexibility with no lock-in but lacks tax benefits. Choosing the right option depends on your goals. Opt for Tier 1 for retirement security and tax savings. Choose Tier 2 for short-term goals and easy access to funds. Consider your financial needs and risk tolerance before making a decision.

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Frequently asked questions

Which is better, NPS Tier 1 or Tier 2?

Both Tier 1 and Tier 2 accounts have their strengths. Tier 1 offers significant tax benefits and builds a retirement corpus with limited withdrawal options. Tier 2 provides flexibility for deposits and withdrawals, similar to a savings account. Consider your goals: If long-term tax-saving retirement planning is your priority, Tier 1 is ideal. If you need more accessible savings, Tier 2 might be better. You can even have both. Choose the option that aligns with your financial needs and liquidity requirements.

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