NPS Simplified: Understanding Tier 1 and Tier 2 Accounts

The National Pension Scheme or NPS offers two account types- Tier 1 and Tier 2, designed for retirement savings and flexible investments. In this video, we’ll explore the features of both accounts.

The Tier 1 account acts as your primary pension savings vehicle, requiring regular contributions with limited withdrawal options. It offers tax benefits under Sections 80C and 80CCD(1B). This could make it a tax-efficient way to build a retirement corpus. On the other hand, the Tier 2 account provides voluntary savings flexibility and might allow you to make withdrawals without restrictions. However, it offers no tax benefits unless you’re a Central Government employee.

We’ll also discuss the investment options available in NPS, including active and auto choices. Active choice might let you allocate funds across asset classes such as equity, corporate debt, government securities, and alternative investments. Auto choice could automatically manage your portfolio based on your age and risk profile.

Finally, we’ll walk you through how to open these accounts. Be it through the official NPS website, PoP service providers, or the e-NPS platform. Investing in NPS could help you plan effectively for a secure retirement.

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Key Takeaways

An NPS Tier 1 account serves as your primary pension account and requires mandatory contributions from both you and your employer

Withdrawals from a Tier 1 account are restricted, with partial withdrawals allowed under specific conditions

To open a Tier 1 account, a minimum initial contribution of Rs. 500 is required, with annual contributions of at least Rs. 1,000

Contributions to Tier 1 accounts qualify for tax deductions under Sections 80C and 80CCD(1B) of the Income Tax Act

An NPS Tier 2 account functions as a voluntary savings account and could offer unrestricted, flexible withdrawals

You could open a Tier 2 account only if you maintain an active NPS Tier 1 account

You could choose between active and auto investment options to manage asset allocation according to your preferences

Frequently Asked Questions
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An NPS Tier 1 account is a mandatory retirement savings account. Contributions from both you and your employer might help build a pension corpus. This account could help long-term retirement planning, with specific rules governing withdrawals to ensure disciplined savings.
Withdrawals from a Tier 1 account are usually restricted. Partial withdrawals may be allowed under specific conditions, such as funding higher education or purchasing a home. These rules might ensure these funds are primarily used for retirement purposes. This could help maintain financial security post-retirement.
Contributions to a Tier 1 account qualify for tax deductions under Sections 80C (up to Rs. 1.5 Lakhs) and 80CCD(1B) (an additional Rs. 50,000). This could provide total tax benefits of up to Rs. 2 Lakhs annually, which might make it an efficient option for retirement savings.
An NPS Tier 2 account is a flexible, voluntary savings account. It allows you to make withdrawals without restrictions, unlike Tier 1 accounts, which might have stricter rules. However, you need to have an active Tier 1 account to open a Tier 2 account.
Generally, Tier 2 contributions do not offer tax benefits. However, Central Government employees could claim tax deductions under Section 80C. For other contributors, this account could serve as a convenient savings option without the tax advantages of a Tier 1 account.
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