National Pension System (NPS) is a pension scheme launched by the Government of India in 2004. Initially, it was open only to government employees. However, in 2009, it was made available to all the citizens of India. Today NPS is gaining popularity due to its low handling cost, flexibility and tax benefits. There are 2 kinds of NPS accounts – NPS Tier 1 and NPS Tier 2. Here in this article, we have carried out a comparison between NPS Tier 1 and NPS Tier 2.
NPS Tier 1
- NPS Tier 1 can be opened by any citizen of India with a minimum deposit of ₹ 500.
- Once an individual subscribes to the NPS, they are assigned the Permanent Retirement Account Number (PRAN).
- NPS Tier 1 works like a fixed deposit with a lock-in period until the age of 60 years.
- The subscriber is allowed to withdraw up to 60% of the corpus. And the remaining 40% of the corpus amount is kept invested to buy annuities for securing the funds for pension benefits for senior citizens.
- NPS Tier 1 qualifies for tax exemption up to ₹ 1.5 lakh under Section 80CCD (1) of Income Tax Act, 1961. And, an additional tax deduction of ₹ 50,000 can also be claimed under Section 80CCD (1B).
NPS Tier 2
- Any Indian citizen with the age of 18 to 60 years can open NPS Tier 2 account if the subscriber already has an active NPS Tier 1 account.
- It requires a minimum deposit amount of ₹ 1,000 and unlike NPS Tier 1, it does not require mandatory contributions every year.
- Since NPS offers flexible withdrawals, it works more like a bank savings account. The subscriber can withdraw the investment amount anytime.
- Unlike NPS Tier 1, NPS Tier 2 does not qualify for tax exemption.
Key Differences
| TIER 1 | TIER 2 | |
| ELIGIBILITY | Indian citizenship and age between 18 and 65 years | Membership of Tier 1 |
| LOCK-IN PERIOD | Till the age of 60 years | Nil |
| MINIMUM CONTRIBUTION FOR OPENING | ₹ 500 | ₹ 1,000 |
| MINIMUM COMPULSORY CONTRIBUTIONS (PER YEAR) | 1 | Not Mandatory |
| MINIMUM COMPULSORY CONTRIBUTION (EVERY YEAR) | ₹ 1,000 | Not mandatory |
| TAX BENEFITS ON CONTRIBUTION | Tax exemption is available up to ₹ 1.5 lakh | No tax benefit |
| WITHDRAWAL | Tedious | Flexible |
| TAX BENEFITS ON WITHDRAWAL | Whole corpus is tax exempted | Whole corpus is added to the taxable income |
Which is better – NPS Tier 1 or NPS Tier 2?
Both are similar in the terms of functionality. The cost of managing funds is also the same. But both serve different purposes.
NPS Tier 1 is inclined towards the accumulation of retirement funds, while NPS Tier 2 is more focussed on saving for varied needs.
For the new investors with a low-risk appetite, NPS Tier 2 seems to be better because it acts like a mutual fund and gives limited exposure to the equity between 10% to 25%. However, NPS Tier 2 funds are allowed a maximum of 75% allocation towards equity.
