The National Pension Scheme (NPS) is a government-backed pension scheme which was launched in 2004. Though, initially it was launched only for government employees, it was opened to all in 2009. An investor can contribute into his/her NPS account during his/her employment years and start withdrawing the money once he/she attains the age of 60.

There are two types of NPS accounts – Tier 1 and Tier 2. While Tier 1 account is the primary NPS account aimed at creating a retirement corpus, Tier 2 account is more like a voluntarily savings account which offers more flexibility in terms of deposits and withdrawals.

What is Tier 1 NPS account?

A Tier 1 NPS account is the basic retirement account which is mandatory if you want to avail NPS benefits. Once you open an NPS Tier 1 account, you are allotted a Permanent Retirement Account Number (PRAN) which acts like a unique identification number for your NPS account.

A Tier 1 NPS account can be opened with a minimum investment of Rs. 500. Thereafter, you can invest Rs. 1000 or more every year to create a retirement corpus. Upon attaining the age of 60, you’re allowed to withdraw up to 60% of your total accumulated corpus. The remaining 40% of the investment will be used to buy annuities to provide regular pension to you.

The contributions of up to Rs. 2 lakhs made towards the NPS account are eligible for tax exemptions under section 80C of The Income Tax Act, 1961.

What is Tier 2 NPS account?

A Tier 2 NPS account is a voluntary account which you can open only if you have an existing Tier 1 account. As compared to a Tier 1 account, these accounts offer more flexibility in terms of deposits and withdrawals.

You can open a Tier 2 account with a minimum investment of Rs. 1,000. However, unlike a Tier 1 account, it’s not compulsory to invest at least once every year in a Tier 2 account. Also, you can withdraw from this account anytime just like a normal savings account.

The Final Word

Though the functionality of both Tier 1 and Tier 2 NPS accounts are similar, they differ from each other in terms of flexibility and tax benefits they offer to the investors. However, to open a Tier 2 account, you need to mandatorily have a Tier 1 account.

Learn more about your Pension Plans here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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