Different Types of NPS Account: Tier 1 and Tier 2

Explore various Types of NPS to find the best retirement savings plan for you.
NPS Tier 1 vs Tier 2
3 min
2 May 2024

The National Pension Scheme (NPS) is one of the most preferred investment choices for individuals. You can think of it as the piggy bank where you put in small amounts regularly and withdraw them until you reach 60 years with the accrued interest.

In this blog, we shall understand the two types of NPS accounts (NPS tier 1 vs NPS tier 2), unveiling the key differences and similarities, the benefits, and which one you should go for based on your needs and requirements.

What are the different types of NPS accounts?

NPS Tiers 1 and 2 are the two main types of NPS accounts that allow you to invest long-term (up to 60 years) or short-term (with no lock-in period).

  • NPS Tier 1 account
    The NPS Tier 1 account is a long-term investment plan backed by the Government of India. An individual puts in small amounts on a regular basis and withdraws the money until he or she reaches the age of 60.
    Furthermore, if you wish to withdraw the amount before maturity, like for an emergency, you can withdraw 60% of the amount, and the rest 40% will be used to buy the annuity.
  • NPS Tier 2 account
    On the other hand, NPS Tier 2 accounts are a short-term plan with no lock-in period. You can withdraw or invest your amount at any time and open the account if you wish to.
    However, you should be an NPS Tier 1 account holder in order to be eligible to open this account.

NPS offers the potential for higher returns due to its investment in market-linked assets. In contrast, fixed deposits offer a guaranteed interest rate that is locked in for the duration of your investment. This provides stability and predictability, especially important for risk-averse investors.

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.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.

What are NPS Tier 1 and Tier 2 tax benefits?

NPS‌ Tier 1 is eligible for tax benefits, unlike 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 8.55% while enjoying significant returns.

Calculate your expected investment returns with the help of our investment calculators

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As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.