What is the difference between Tier 1 and Tier 2 Account in NPS? Many Government employees or others subscribed to NPS. However, the majority of them do not know what is the meaning and difference of Tier 1 and Tier 2 Accounts of NPS.
Let us first brief about NPS.
NPS or New Pension Scheme is a retirement product launched by Government of India. It is managed by PFRDA (Pension Fund Regulatory and Development Authority). This product helps you to create retirement corpus.
Any citizen of India (whether resident or NRI) can invest in this scheme. The age of the subscriber must be within 18-60 years of age. However, an individual of unsound mind or existing members of NPS are not allowed to open new account.
Therefore, an individual can open only ONE NPS account.
How to open NPS Account?
You have to fill the application form and provide the relevant KYC documents at your nearest POP-PS (You will find the list in PFRDA portal).
However, if you want to open new Tier 2 account, then the process is different. You have to approach POP-PS with copy of PRAN (Permanent Retirement Account Number) and Tier 2 activation form.
The subscriber has to make the first contribution while opening the account. Minimum contribution for Tier 1 is Rs.500 and Rs.1, 000 for Tier 2.
Note-Now you can open NPS account online and also contribution can be made it online through eNPS portal. Refer my latest post on the same “eNPS – How open and invest in NPS account online?“.
What are the investment choices?
Asset Class E-Invests predominantly in the equity market. You may say high return and high risk.
Asset Class C-Invests in fixed income instruments other than Government Securities. Risk is medium in this category.
Asset Class G-Invests in Government Securities. So lower risk and lower return.
Along with that, you have two different options to choose regarding allocation.
You can change both scheme preference and investment choices at any point of time. But it is allowed only once in a year.
Please remember that there is no ASSURED RETURN from NPS.
Your retirement fund will be managed by fund managers appointed by PFRDA. Currently there are six fund managers. They are as below.
ICICI Prudential Pension Funds Management Company Limited, Kotak Mahindra Pension Fund Limited, Reliance Capital Pension Fund Limited, SBI Pension Funds Limited, UTI Retirement Solutions Limited, and Annuity Service Provider (ASP).
You can change your fund manager at any point of time. This change is allowed only one time in a year.
Along with that, PFRDA tied with IRDA approved Life Insurance companies to pay the pension once the subscriber reaches 60 years of age. They are as below.
Life Insurance Corporation of India, SBI Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., Bajaj Allianz Life Insurance Co. Ltd., Star Union Dai-ichi Life Insurance Co. Ltd., Reliance Life Insurance Co. Ltd. and HDFC Standard Life Insurance Co. Ltd.
How to exit from NPS?
Once you attain the age of 60 years, you can withdraw up to 60% of accumulation as lump sum and rest 40% will be converted into pension.
If you want to exit from NPS before 60 years of age, then you are allowed to withdraw only 20% accumulated amount. You have to buy a pension product with that 80% fund.
However, in case the death of the subscriber, a nominee is allowed to withdraw 100% of NPS.
I wrote a post on recent changes about new withdrawal of exit rules of NPS. Refer below post.
This is the brief about NPS.
Let us come back to the main purpose of this post. I tried to put it the difference in below image.
Note-
-As per recent PFRDA circular dated 8th August, 2016, the minimum contribution in Tier 1 Account is now reduced to Rs.1,000 a year. There will be no minimum investment limit for Tier 2 account (Earlier, it was Rs.250). Also you no need to maintain the minimum balance in Tier 2 account (Earlier, it was Rs.2,ooo).
-From Budget 2016, the 40% withdrawal at the time of your retirement from NPS will be tax-free. Rest 60% of the corpus will be treated taxable income as per old rules. Hope this above table cleared your doubts.
-Effective from 1st April 2019, if Central Government Employee contributes to Tier 2 account, then his such contribution will be eligible for deduction under the Sec.80C limit of Rs.1.5 lakh.
Also, the Central Government will contribute 14% of Basic+DA to NPS rather than the earlier 10% of Basic+DA. However, there is no change in employee contribution rules.
Conclusion-You notice that when it comes to taxation, NPS is one of the worst products. Everybody concentrating on the tax benefits of NPS while investing. However, they forget the tax issues at retirement or at withdrawal. Along with that, liquidity is an issue with NPS. For Government employees and corporate employees, no option but to invest.
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View Comments
Thanks for wonderful article. I have a query. I am 53 yrs old government employee. Investing rs 5 lakh in my GPF account. Rs 1.5 lakh in my PPF. My equity mutual fund investment is around 50% I don't want to increase it.I have rs 1.5 lakh pm in hand for
investment.where should I invest (1) in GPF where excess of 5 lakh will be taxed (2) NPS Tier 2 auto conservative (3) long term gilt fund .. time period 4-7 yrs
Dear Sundeep,
Hard to say BLINDLY without knowing your risk appetite and financial life to the fullest.
What will be the income tax on capital tax gain after switching from tier 2 to tier 1
Dear Sundeep,
There is no clarity in this aspect.
Sir, the new tier II tax benefit with three years lock in period is notified for central govt employees, so it is not applicable for the state govt/psu/psb employees?? Does the state govt/psu/psb employees is under the tax exemption benefit for the employer's contribution under 80ccd(2) or not??
Dear Sumit,
As of now, the tax benefit under Tier 2 is for Central Govt Employees. Regarding your next question of Sec.80CCD(2), the answer is YES.
Dear Sir,
Can I withdraw the lump sum amount after one or two years retirement age. If I withdraw as said how the taxes are applicable i.e by default lump sump amount 20% of 60% is taxable at the retirement age or whenever withdrawal year. Because at the retirement age generally will get more money and adding other money would increase the tax detection.
Regards,
karthigeyan.D
Dear Karthigeysan,
You are not allowed to withdraw as per your wish from NPS Tier 1 Account.
I am trying to do an online contribution in NPS. I have registered to Tier 1.
Now in payment page I see below options. Which option should I select to do the payment. Please let me know.
NPS Subscriber Type* NPS CRA NPS Swavalamban
Dear Ravindra,
NPS CRA.
Thank you very much sir for the response.
PRANAM SIR,
i m a govt employee since 4 years. and i have an nps tier 1 account. if i leave or resign from the job then will i get the money that i have contributed. how will i claim i. pls guide.
Dear Aparna,
Refer my earlier post "Latest NPS Withdrawal Rules 2018".
Is investing in NPS Tier 1 is really a good option as of now.
Dear Vivek,
Sadly NO.
Hi sir,
I have one query is it good to invest in nps tier 1 for future reference.
Dear Sanjay,
As per me NO.
Dear sir,
I contribute in ppf and vpf. Please let me know if I should opt to go for increased contribution in vpf or nps. My age is 41yrs and want to invest additional 6k. Please guide. Thanks.
Dear Kirti,
Better opt VPF.
Dear sir, it was a very informative blog, thanks for that, I am a govt bank employee, covered under old pension scheme, should I go for nps to get extra 50000 tax benefit? Is there any other scheme from which I may get that benefit? Should I go for atal pension scheme rather than nps? Plz reply.
Dear Abhishek,
Never invest in a product just for the sake of TAX SAVING.