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 Can be withdrawn as and when you require|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 Once the account holder reaches the age of 60, 60% of the fund value can be withdrawn and the balance amount is used to purchase an annuity.||There is no limit neither on the number of withdrawals nor on the amount to be withdrawn.|
|Partial withdrawal||Up to 25% of the fund value can be withdrawn if the NPS account is at least 10 years old, but only for specific purposes such as education, marriage, medical expenses, house purchase, etc.||No restriction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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