NPS is a government-backed pension scheme to which you can contribute throughout your earning years, and then withdraw money from it regularly on retirement. NPS is a low-cost retirement product which is market-linked, and also offers a host of tax benefits. There are two different types of NPS account – the Tier 1 account and the Tier 2 account. Let us know about the similarities and the differences between NPS Tier 1 vs Tier 2 accounts.
NPS Tier 1 Account
Tier -1 is the basic retirement account and this is created by default when you open an NPS account. On opening an NPS Tier 1 account, you are allotted a PRAN (Permanent Retirement Account Number) which is the unique identification for your NPS account.
NPS Tier 2 Account
Tier 2 account is a voluntary account which can be opened only if you have an existing Tier 1 account. This account is flexible in terms of deposits and withdrawals.
Now, let us understand the similarities between these two.
Similarities between NPS Tier 1 and Tier 2 Accounts
| Tier 1 | Tier 2 | |
| Available Asset Classes | E, C & G | E, C & G |
| Choice of Funds | 8 Pension Fund Managers | 8 Pension Fund Managers |
| Expenses | Pension Fund Manager (PFM) charges 0.01% on the assets managed, and the custodian charges 0.0032% as an asset servicing charge. | Pension Fund Manager (PFM) charges 0.01% on the assets managed, and the custodian charges 0.0032% as an asset servicing charge. |
| Portability | You can port across PFMs and fund options | You can port across PFMs and fund options |
| POP Charges | Prevailing rates applicable for all types of transactions | Prevailing rates applicable for all types of transactions |
Differences between NPS Tier 1 vs Tier 2
| Tier 1 | Tier 2 | |
| Eligibility | Any Indian citizen between 18 and 25 years of age | Members of Tier 1 only |
| Lock-in period | Up to the age of 60 years | No lock-in. Can be withdrawn as and when you require |
| Minimum contribution for account opening | Rs.500/- | Rs.1000/- |
| Minimum annual contribution | Rs.1000/- | Rs.250/- |
| Minimum number of contributions in a year | 1 | Contributions every year is not mandatory. |
| Withdrawal Rules | No withdrawals can be made for the first three years. Once the account holder reaches the age of 60, 60% of the fund value can be withdrawn and the balance amount is used to purchase an annuity. | There is no limit neither on the number of withdrawals nor on the amount to be withdrawn. |
| Partial withdrawal | Up to 25% of the fund value can be withdrawn if the NPS account is at least 10 years old, but only for specific purposes such as education, marriage, medical expenses, house purchase, etc. | No restriction on withdrawals |
| Tax Benefits on Contribution | Contributions eligible for tax deduction under Section 80C up to Rs 1.5 lakh. Additional deduction of Rs.50,000 can be availed under Section 80CCD (1B). | Only government employees can avail of tax deduction under Section 80C for investment in NPS Tier 2. |
| Tax Benefits on withdrawal at maturity | 60% of the corpus, which is what can be withdrawn at maturity, is exempt from taxes. | The withdrawn amount is added to your income and taxed according to applicable income tax slab rates. |
| Tax on partial withdrawals | No tax is levied on partial withdrawals | The withdrawn amount is added to your income and taxed according to applicable income tax slab rates. |
| Annuity Purchase | 40% of the total accumulated corpus has to be utilized to purchase an annuity. | No need to buy an annuity. |
The NPS Tier 1 and Tier 2 accounts are the same except for stricter withdrawal rules in the Tier 1 account. At a given time, you can invest in the same scheme of a particular Pension Fund Manager in both Tier 1 and Tier 2 accounts. The returns and expenses will be the same for both, except that you cannot withdraw from the Tier 1 account without meeting the required conditions.
NPS Tier 2 vs Mutual Funds
NPS Tier 2 account is often compared to a Mutual Fund scheme as it is market-linked, and has flexible investment and withdrawal rules. However, unlike mutual funds where only gains are subject to tax, in NPS Tier 2 the entire amount withdrawn is added to your income and taxed according to your applicable IT slab rate.
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