The Buyt Desk
National Pension System (NPS) is an investment plan which helps in accumulating a corpus for your retirement years. You contribute in market-linked pension funds based on equity, corporate debt or government securities and receive a return as per the fund’s performance. There are two types of NPS account- Tier I and Tier II. Both the accounts can be opened with the registered bank which is known as a point of presence service provider or directly through the NPS trust’s website (https://enps.nsdl.com/eNPS/
Difference Between NPS Tier I & Tier II Account
The tier I account is the pension account which has a mandatory maturity time. The subscriber can withdraw money from the tier I account only after he/she turns 60 years of age. At the time of maturity, subscribers can withdraw 60% of the amount as a lump sum. He/she will have to buy an annuity plan from the rest of the 40% of the amount which will be disbursed as a monthly or quarterly pension to the subscriber. The NPS tier II account on the other hand is a voluntary account with the flexibility of withdrawal and exit at any time. There is no hard and fast rule related to the maturity period for tier II accounts. But you must have a tier I account then only can you open a tier II account. The Tier II account can be opened with a minimum contribution of Rs 1000.
Taxability on NPS
NPS Tier I – The tier I subscriber gets a deduction of Rs 1.5 under section 80C of the Income Tax Act. In addition to this Rs 50,000 deduction under section 80CCD(1B). If you are salaried and the employer is also contributing towards your NPS then the employer’s contribution will be allowed tax exemption under section 80 CCD 2 of the IT Act. But the employer’s contribution can’t be more than 10% of the basic salary.
NPS Tier II- There were no tax benefits on NPS Tier II until 2019-20. But from FY 20-21 NPS tier II will give tax deduction on a conditional basis. The subscriber will have to fulfil the following criteria-
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Only Central government employees will get tax exemption on tier II investment. It is called the NPS Tier II Tax Saving scheme and is open only for government employees. Private sector employees can have tier II accounts but without any tax exemption. For a regular investor, it would be like an investment in open-ended mutual fund investment. The Central Government employee will get a tax deduction of Rs 1.5 lakhs under section 80 C but only if they agree to follow a 3-year lock-in.
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No withdrawals can be made during the 3-year lock-in period. But in case of the death of the subscriber, the nominee/legal heir will get permission to withdraw the money prematurely.
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In case of closure or premature exit from NPS tier I, the Tier II account will have to be closed as well.
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The Tier II account does not offer any investment choice to the subscriber. The asset mix will have equity ( between 10 to 20%) , debt ( up to 90%) and liquid funds ( up to 5%).
Hope we have helped you in giving a better understanding of NPS tier II accounts. It is simply a secondary account with no lock-in period. It allows you to invest in market-linked pension funds and the pension fund manager’s cost is very low at 0.01% as compared to other funds’ cost which could be anywhere between 0.5% to 2 %.
