National Pension System Tier 1 vs Tier 2: Differences explained
What's the story
The National Pension System (NPS) is a popular retirement savings scheme in India, which has two tiers: Tier 1 and Tier 2. While Tier 1 is mandatory and has restrictions on withdrawals, Tier 2 is voluntary and more flexible. Knowing the difference between the two can help you make informed decisions regarding your retirement planning. Here are five key differences between NPS Tier 1 and Tier 2.
#1
Withdrawal restrictions
One of the biggest differences between NPS Tier 1 and Tier 2 is the withdrawal rules. Tier 1 has strict withdrawal rules until the age of 60, except in certain circumstances. However, Tier 2 allows you to withdraw funds anytime without any restrictions. This makes Tier 2 ideal for those looking for liquidity in their investment.
#2
Tax benefits
NPS Tier one offers tax benefits under Section 80CCD of the Income Tax Act, allowing you to claim deductions up to ₹1.5 lakh per annum (₹2 lakh for salaried individuals) from taxable income. However, NPS Tier two does not offer any tax deduction on contributions. This difference makes Tier one more attractive for tax planning purposes.
#3
Minimum contribution requirements
Another difference between the two tiers is the minimum contribution requirement. For NPS Tier 1, you need to contribute a minimum of ₹500 per month or ₹1,000 per annum to keep your account active. For Tier 2, there is no minimum monthly contribution requirement; you can invest any amount at any time as per your financial situation.
#4
Investment choices
Both tiers offer different investment options, but with different levels of control over asset allocation. In NPS Tier one, the government determines asset allocation based on predefined options like equity or corporate bonds. In NPS Tier two, investors have more flexibility to choose their asset mix according to risk appetite and market conditions.
#5
Exit strategies
Exit strategies also differ between the two tiers when you retire or decide to exit early. In NPS Tier 1, you must use at least 40% of the accumulated corpus for purchasing an annuity plan at retirement age, while the rest can be withdrawn as a lump sum. Tier 2 allows complete withdrawal at any time without such conditions.