Update Date : 23-Jun-2024

Created Date : 23-Jun-2024

Reference : ET Wealth

The NPS is a pension scheme launched by the government to give people a stable income after retirement. It functions as an annuity product, allowing people to amass retirement savings through consistent contributions made during their working years, with the option to take the entire amount upon reaching 60 years of age.
 
NPS accounts are divided into two categories: Tier I and Tier II. Although Tier I NPS accounts are ideal for retirement planning, Tier II NPS accounts function as discretionary savings accounts. An investment in Tier I NPS is long-term, and the money cannot be taken out until retirement. Fortunately, Tier II NPS accounts are not like this.
 
Tier 1 is your principal NPS account, and its primary goal is to help you establish strong retirement savings.
 
Tier 2 is similar to a flexible savings account, with additional deposit and withdrawal options.
 
 
NPS TIER 1 VS NPS TIER 2: UNDERSTANDING THE DIFFERENCES

NPS offers two distinct account types: Tier 1 and Tier 2. While both accounts contribute to retirement savings, they differ in flexibility, withdrawal options and tax benefits. According to the ICICI Bank website, let us know their differences.

 

ELIGIBILITY AND MINIMUM INVESTMENT

• NPS Tier 1: Open to all Indian citizens aged between 18 and 60 years
• NPS Tier 2: Only available to individuals with an active Tier 1 account
• Minimum investment: Rs 500 for Tier 1 and Rs 1,000 for Tier 2.
 

LOCK-IN PERIOD

• NPS Tier 1: Funds in Tier 1 accounts have a lock-in period until the investor turns 60
• NPS Tier 2: There is no lock-in period for Tier 2 accounts allowing more flexibility for deposits and withdrawals.
 

TAX BENEFITS

• NPS Tier 1: Contributions made under Section 80C of the Income Tax Act are eligible for annual deductions of up to Rs 1,50,000 lakh. An additional deduction of Rs 50,000 is available under Section 80CCD(1B)
• NPS Tier 2: Contributions to Tier 2 accounts do not qualify for tax exemptions.
 

WITHDRAWAL OPTIONS

• NPS Tier 1: Withdrawals are restricted until the account holder turns 60. At that point, up to 60% of the fund's value can be withdrawn, with the remaining funds utilised to purchase an annuity
• NPS Tier 2: Withdrawals from Tier 2 accounts are more flexible and can be made at any time, subject to applicable rules and regulations.
 

DIFFERENCES BETWEEN NPS TIER 1 AND NPS TIER 2

According to the Protean website, the following table presents the differences between NPS Tier 1 and NPS Tier 2 accounts:
 
• Indian citizens aged between 18 years and 70 years are eligible to open it. Indian citizens who hold an NPS Tier 1 account are eligible to open an NPS Tier 2 account.

• Contributions to NPS Tier 1 account remain locked till the account holder attains 60 years. Partial withdrawals upon valid reasons can be made only after 3 years from the initial date of investment. These don’t have any lock-in periods. NPS Tier 2 is a voluntary add-on account which allows flexible withdrawals and exits.

• You can avail various tax deductions for contributions made to an NPS Tier 1 account. You can avail various tax deductions for contributions made to an NPS Tier 1 account.
• You can transfer funds from an NPS Tier 2 account or EPF (Employees Provident Fund) to NPS Tier 1 account. You cannot transfer funds from an NPS Tier 1 account to a Tier 2 account.
 
The two accounts serve distinct financial objectives and purposes. Although Tier 1 concentrates on creating a retirement corpus with tax advantages and restricted withdrawals, Tier 2 offers funds that are accessible and flexible without any lock-in duration. Carefully evaluate your financial goals, risk tolerance, and liquidity needs to make an educated choice on the best NPS account type for your situation.

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