NPS Tier 1 vs Tier 2: Meaning and Key Differences

Retirement planning is important when it comes to the future as regular income stops but expenses don’t come to an end. Meeting these expenses requires regular income where retirement planning comes to rescue especially for employed individuals. There are several options for retirement investment. The National Pension Scheme (NPS) is one of them which comes with different benefits. This scheme has two different accounts NPS tier 1 and tier 2 which might look confusing. In this blog we will discuss NPS tier 1 and tier 2 in detail.

NPS Account

NPS is a retirement saving account where an individual can contribute for his retirement and his employer can contribute to it. National Pension Scheme (NPS) is based on a fixed contribution in which subscriber and employer contribute for subscriber retirement. There is no defined benefit that could be availed at the time of exit. The accumulated wealth depends on the contribution made in the account and income from investment generated from this wealth.

ALSO READ: https://stablemoney.in/blog/how-to-check-nps-balance

Types of Account

The National Pension Scheme (NPS) is divided into two tiers. Here are the two types of NPS accounts available-

• NPS Tier-1 Account
• NPS Tier-2 Account

NPS Tier 1

An NPS tier-1 account is one of a basic NPS account which needs to be opened if subscribing to NPS. This is a long-term investment which is especially designed for retirement planning and offers market-linked returns. Opening a tier 1 account you need 500 and 1000 for maintaining that account. 

NPS tier-1 Account Features-

NPS tier 1 account comes with different features. Some of the features of NPS Tier-1 account are mentioned below-

• In NPS tier-1 you can continue to contribute till the age of 60 years.
• NPS tier 1 accounts after maturity at 60 years can be extended for 10 years. i.e. till the age of 70 years.
• NPS tier 1 account also earns a tax deduction under section 80 CCD.
• NPS tier 1 allows partial withdrawal from the account.
• NPS tier 1 account offers premature closure.

NPS Tier 1 Account Eligibility

Now, as you know the features of NPS tier 1 let’s check who can apply and who cannot. Eligibility criteria for opening an NPS tier-1 account is mentioned below-

Who is Eligible?

• Anyone who is resident or non-resident of India is eligible
• Anyone whose age is between 18 to 70 years
• Central government employees who have joined on or after January 1 2004 are eligible.

Who is Not Eligible?

• Pension of Indian Origin are not eligible
• Hindu Undivided Families are not eligible.
• NPS account cannot be opened on behalf of third person

Documents Required NPS Tier 1 Account Opening

Opening a NPS account requires you to submit some documents. Here are all the required documents-

• NPS account registration form
• Aadhaar card
• Appointment/Offer Letter, Employee ID Card, etc if a government subscriber
• Signature
• Proof of identity
• Proof of address
• Age or D.O.B proof

NPS Tier 1 Withdrawal and Premature Closure

NPS tier 1 has some rules for withdrawal and premature closure of accounts. Details related to NPS tier 1 withdrawal and premature closure are mentioned below-

• NPS tier 1 allows a lump sum withdrawal up to 60% of the full corpus amount. The remaining corpus can be used for buying an annuity plan. 
• 25% of the total NPS contribution is allowed to be withdrawn.
• You can make three withdrawals within the investment period
• Partial withdrawal is possible after 3 years of investment period..
• You can make partial withdrawal for some specified reasons like Higher education or marriage of children, Purchase or construction of a residential house, Specified illnesses, etc.

NPS Tier 2

NPS Tier-2 account is an add-on account only when you are an NPS Tier-1 subscriber. This account is more flexible than the Tier-1 account and allows withdrawal whenever required.

NPS Tier 2 Features-

Here are some of the salient features of NPS Tier-2:

• No need to maintain minimum annual contribution
• No maximum contribution limit for this account
• NPS tier-2 account contributions
• Flexible withdrawal facility available with zero exit charges
• Funds transfer facility from Tier-2 to Tier-1 account
• No additional annual maintenance charges required
• Voluntary savings facility available

NPS Tier 2 Account Eligibility

Here is the eligibility criteria for opening NPS Tier-2 account-

• Must be a resident of India
• You must be between the age of 18 years to 70 years
• Must have a NPS Tier-1 account to open NPS tier-2 account
• Government subscribers covered under NPS having active NPS Tier-1 account.
• Contribution must be in multiples of ₹250 after opening this account with minimum ₹1000

Documents Required for NPS Tier 2 Account

Here are some fo the documents required to open an NPS Tier 2 account:

• Duly filed NPS registration form
• Identity Proof
• Address Proof
• Proof of Age or Date of Birth
• Appointment/Offer Letter, Employee ID Card, etc if a government subscriber
• Signature

ALSO READ: https://stablemoney.in/blog/old-pension-scheme-vs-nps-which-one-is-better-and-why

NPS Tier 1 vs Tier 2

Here are the key difference between NPS tier-1 and NPS tier-2 account-

Conclusion

NPS Tier-1 and Tier-2 accounts both serve different purposes and offer unique benefits depending on your financial goals. While the Tier-1 account is a basic account with tax benefits and structured withdrawal rules, the Tier-2 is a voluntary add-on account that offers greater flexibility and liquidity. Choosing between these two accounts depends on the subscribers requirements.