NPS

Difference Between Tier 1 and Tier 2 NPS

By admin
14 November 2024
3 mins read

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Difference Between Tier 1 and Tier 2 NPS

The Indian Government launched the National Pension System (NPS) in 2004 to help citizens plan their retirement and secure their financial future efficiently.

Individuals can open two types of accounts under the National Pension Scheme: Tier 1 vs Tier 2. Both these accounts are meant to help foster a habit of saving in Indian citizens.

If you’re wondering what is Tier 1 and Tier 2 in NPS, the difference between the two and NPS Tier 1 and Tier 2 tax benefits, you’re in the right place.

Here, we discuss both these NPS accounts, exploring what sets them apart.

NPS Tier 1 vs Tier 2: Key Differences

Basis	Tier 1	Tier 2
Account Type	Primary account for employees working in government or private sectors	Voluntary account that can be opened by individuals with a Tier 1 account
Purpose	Part of a retirement savings plan	Part of a regular investment plan
Eligibility	Resident, non-resident or Overseas Indian citizens between the ages of 18 and 70 are eligible	Individuals must have a Tier 1 account
Lock-in Period	Until the account holder attains 60 years of age	Funds can be withdrawn at any time
Minimum Contribution	Rs 500	Rs 1,000
Maturity of the Scheme	Individual attains the age of 60 years (60% of the corpus is paid in lumpsum, 40% can be utilised to acquire an annuity plan)	Not applicable
Investment Choice	Auto and active choice	Active choice
Annuity	Once the individual attains the age of 60, 40% of the sum must be used to acquire an annuity plan	Not applicable
Account Maintenance Charges	Charges are applicable	Charges are not applicable
Partial Withdrawal	Individuals can withdraw up to 25% of the amount invested if they have held the account for at least 3 years. Partial withdrawals can be made only three times during the tenure.	Partial withdrawals can be made anytime.

Tax Benefits on NPS Tiers

Between NPS Tier 1 vs Tier 2, only Tier 1 attracts tax benefits. Here are the details of the tax benefits under the Income Tax Act 1961:

1. Tax Benefits under Section 80 C:

The maximum tax deduction under this section is Rs 1.5 Lakh.

2. Tax Benefits under Section 80CCD (1B):

Under this section, you can claim an additional tax deduction of up to Rs 50,000. And so you can essentially claim a tax deduction of Rs 2 Lakh (Rs 1.5 Lakh + Rs 50,0000) in total.

3. Tax Benefits under Section 80CCD (2):

This section applies only if contributions have been made by an employer. Hence, it doesn’t apply to self-employed individuals and is limited to salaried professionals.

Final Thoughts

At the end of the day, you cannot have a Tier 2 account without having a Tier 1 account, making the debate- Tier 1 vs Tier 2 virtually redundant. Further, both these accounts serve different purposes. And so, its best to have both active for comprehensive retirement and financial future planning.

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