Regular post-retirement income | Additional tax benefit on investments up to ₹50,000 u/s 80CCD (1B) - EEE Category | Regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India) Invest Now

NPS is a government-initiated programme that offers tax savings and retirement planning. The Pension Fund Regulatory and Development Authority(PFRDA) oversees its management. The National Pension Scheme's primary goal is to help investors in amassing a decent retirement fund. Any citizen of India between the ages of 18 and 60 may invest in the National Pension Scheme. 

 

There are two different account variants of the National Pension Scheme: Tier I and Tier II. The NPS Tier II account serves as a voluntary savings account, whereas Tier I accounts are ideal for retirement planning. You cannot prematurely withdraw the funds from a NPS Tier I account before your retirement as it is a long-term investment. With Tier II accounts, that is different.

Tier 1 and Tier 2 NPS Accounts

  • Tier I Account

The NPS Tier I account is eligible for tax deductions of up to Rs. 1.5 Lakhs per year under Section 80C and an additional Rs. 50,000 per year under Section 80CCD (1B) of the Income Tax Act. This is a permanent retirement account that cannot be withdrawn from. 60% of the corpus, which is tax-free, can be withdrawn at maturity i.e., when the subscriber attains the age of 60. The purchase of an annuity with the remaining 40% is required. Either the remaining 20% can be utilised to purchase an annuity or it can be withheld after tax.

 

However, in accordance with the statements made in the Union Budget 2019, 60% of the total cumulative corpus, that can be taken at the time of retirement, would be tax-exempt from FY 2020–21.

 

As a result, NPS now receives the same tax treatment as other saving plans like PPF and EPF.

 

  • Tier II Account

If you already have a Tier I account, you cannot open this optional retirement-cumulative savings account. Subscribers are allowed to invest or withdraw their money whenever it suits them. No tax deductions are available for either self-employed or private sector workers. The tax benefits can be claimed on the NPS Tier II account contributions starting in FY 2020–21, but there will be a lock-in period, making it comparable to Equity Linked Savings Schemes(ELSS).

 

The national pension scheme can potentially add to tax savings for salaried individuals who have already claimed a tax exemption of Rs. 1.5 Lakhs under Section 80C. Under 80CCD (1B) Section, both self-employed and salaried NPS account holders who invest up to Rs.50,000 are eligible for an additional tax exemption. 

 

However, only owners of Tier I NPS accounts are eligible for these additional deductions under Section 80CCD (1B). Tier II accounts are not eligible for a tax break under Section 80C of the Income Tax Act, unlike Tier I accounts.

 

You must note that when it comes to NPS tax benefits, both salaried and non-salaried people are eligible for the deduction under Section 80CCD (1). However, the maximum deduction that is allowed under Section 80CCD (1) for salaried individuals is 10% of their pay for that year. For those who are not paid a salary, however, it is 20% of their annual gross income.

Differences between Tier 1 and Tier 2 NPS Accounts

Both Tier 1 and Tier 2 in NPS accounts are similar in terms of functionality, and so are the options for investments and cost of fund management. However, there are some key differences.

Tier 1 Account

Tier 2 Account

You have the option to make withdrawals partially for certain purposes or exit prematurely before the age of 60.

There is no lock-in with investments in the Tier 2 account, unlike the Tier 1 account. You can withdraw at any time from a Tier 2 account. 

Your investments are locked until the age of 60. 

Tier 2 accounts are voluntary, with flexible exit rules and withdrawal. 

The subscription for the National Pension Scheme starts when you open a Tier 1 account that comes with a Permanent Retirement Account Number (PRAN).

You can only open a  Tier 2 account after you have a Tier 1 account.

Contributions towards Tier 1 accounts are eligible for tax benefits.

Any contributions made towards Tier 2 accounts are not eligible for tax benefits.

Similarities between Tier 1 and Tier 2 NPS Accounts

There are various similarities when it comes to  Tier I and Tier 2 NPS accounts.

 

  • Fund schemes, fund managers and charges.

  • Asset classes that fund managers.

  • Option to switch between Pension Fund Managers and fund options.

 

Note: The Custodian charges 0.0032% as servicing charge and the Pension Fund Manager (PFM) charges approximately 0.01% on the assets being managed. The Point of Presence (POP) has the same charge for every transaction when you put money in Tier 1 or Tier 2 NPS Accounts.

Benefits of Investing in NPS

The National Pension Scheme is a pension programme that was made to provide individuals with benefits post retirement. Some of the benefits of investing are mentioned below:

  • Flexibility

Subscribers can decide on the asset allocation to their liking and choose to switch between the various fund options.

  • Tax benefit

Any contributions towards the National Pension Scheme are eligible for tax benefits u/s Section 80CCD of the IT Act.

  • Affordability

You can make low payments in terms of minimum contribution, making it available to a wide range of investors.

  • Professional Management

The scheme is managed by PFMs who aim to maximise returns while minimising risks.

 

The contributions to a NPS Tier 1  account are eligible for tax deductions. However, contributions towards a Tier 2 account will not offer any tax benefits. 

  • Section 80CCD(1B) Tax Benefits

Subscribers are also eligible for additional tax benefits up to Rs.50,000 Under Section 80CCD (1B) of the Income Tax Act.

  • Section 80C Tax Benefits 

The deduction limit is Rs.1.50 Lakhs u/s Section 80C of the IT Act. An individual can either invest the full corpus in NPS and claim any deduction if you want.

  •  Section 80CCD (2)Tax Benefits 

Under this section, tax benefits can only be enjoyed on the contributions made by the organisation. Therefore, it is only meant for salaried individuals. 

 

You can claim a tax deduction of up to Rs.2 Lakhs by investing in the National Pension Scheme - Rs.50,000 under Section 80CCD(1B) and Rs.1.5 Lakhs under Section 80 C. 

Tier 1 Vs Tier 2 – Which One Should You Choose

Both Tier 1 and Tier 2 NPS accounts have their pros and cons. Therefore, choosing the right type of account after careful consideration is important.

 

Tier 1 accounts are more rigid than NPS Tier 2 accounts offering lesser opportunities for premature withdrawals. Hence, subscribers cannot rely on Tier 1 for emergency funds. However in Tier 2, you do not have this limitation. You are free to withdraw funds prematurely to fund your needs. 

 

On the other hand, NPS Tier 1 account investments lead to significant income tax deductions. Under Section 80CCD (1) of the IT Act, you can claim deductions up to Rs.1,50,000, with additional benefits on an additional investment of up to Rs.50,000. 

 

Tier 2 accounts do not offer tax benefits reducing your ability to save on your annual taxes. These are some of the factors that you have to consider before choosing between a Tier 1 and a NPS Tier 2 account.

Who Qualifies for NPS Investments?

The Tier 1 NPS account is available to all Indian citizens who are between the age of 18 and 65. However, if you wish to invest in a Tier 2 account, you will have become a Tier 1 NPS subscriber.

 

In addition, holders of NPS Tier 1 scheme accounts will have to invest in it at least once a year. However, you do not have to invest annually for Tier 2 to maintain your investment.

Should You Choose a Tier 2 NPS Account?

Structurally, all the aspects of Tier 1 and Tier 2 are quite similar. The choices of asset classes available to invest, charges and option among fund managers are all the same. Although, there is a reason to invest in a Tier 2 NPS account despite the tax benefits.

 

The limited exposure of equity of up to 75% in the case of National Pension Scheme lowers the risk of volatility. This is something that beginner investors look for.

 

The PFMs only charge 0.01% for the assets that are being managed. Also, the expense overall of the National Pension Scheme is low compared to mutual funds (MF). This makes it a great investment option.

 

The National Pension Scheme is a good choice for individuals looking to save up some money for retirement and simultaneously take advantage of the tax benefits. It is imperative that you assess your risk tolerance and investment objectives before making a decision.

Frequently Asked Questions

Do I need a Tier 1 account to open a Tier 2 account?

Yes. Individuals with an existing Tier 1 account can open a Tier 2 account. Also, existing subscribers need not submit the KYC documents when opening an account.

Can I have different PFMs and investment options for Tier 1 and Tier 2 NPS accounts?

Yes, you can choose different PFMs and options of investment for your Tier 1 and Tier 2 NPS accounts.

Is the National Pension Scheme a safe investment option?

As the National Pension Scheme is a government initiated pension scheme, it is one of the safest investment options in the market and it is designed specifically to ensure Indian national’s post-retirement security. There are two types of NPS accounts - TIer 1 and Tier 2.

What are Tier 1 and Tier 2 NPS accounts meant for?

The Tier 1 account is meant for private and government sector employees and other Indian citizens. Tier 2 account, however, is meant for any additional contribution that is to be done to an existing NPS account.

Will a private sector employee receive tax exemption under a Tier 2 NPS account?

No, self-employed individuals or private sector employees cannot enjoy any tax deductions under Tier 2 NPS.

Is Tier 1 NPS account compulsory to open?

Yes, a Tier 1 account is compulsory when it comes to subscribing to the National Pension Scheme. A Tier 2 account, on the other hand, is a voluntary savings account.

Can I change from one Pension Fund Manager and investment plan to another, and if it is possible, how?

As a participant, you can change your PFM. Right now, you can do this only once a year.

To submit the request, there are two ways of going about it:

  • Visit the NPS website and submit your request.

  • Submit form number UOS-S3/CS-S3 by going to a POP outlet physically.

After the request is verified, you will receive an e-mail at your registered e-mail.

Can You Invest in both Tier 1 and Tier 2 Accounts simultaneously?

Yes, you can invest in both Tier 1 and Tier 2 NPS accounts simultaneously.

Home
active_tab
Loan Offer
active_tab
Download App
active_tab
CIBIL Score
active_tab