• NPS Tier 1 and Tier 2 accounts represent the two types of accounts available under the National Pension System (NPS). The main difference between the two accounts is found in their limitations on withdrawals and the tax benefits provided. However, both accounts serve the same purpose: to provide individuals with a long-term investment and savings option to meet financial requirements after retirement.

• Today, we will discuss the important features and distinctions between the NPS Tier 1 and Tier 2 accounts.

What are Tier 1 and Tier 2 NPS Accounts

• Prior to examining the differences between NPS Tier 1 and Tier 2 accounts, let’s recognize the key features associated with these two types of NPS accounts. There exist two categories of NPS accounts: Tier I and Tier II. The most significant difference between the two is the withdrawal restriction.

NPS Tier-1: This account is a mandatory NPS retirement savings account featuring a lock-in period that lasts until the account holder reaches retirement age, which is 60 years, but may be extended to a maximum of 75 years per current regulations. This account does not allow for withdrawals before retirement except in exceptional circumstances. Moreover, NPS tax benefits are restricted to investments made in the NPS Tier 1 account.

• The primary objective of this account is to accumulate a substantial amount through consistent contributions and investments across various asset classes as per user preference. Upon retirement, the account holder is required to utilize at least 40% of the NPS Tier 1 account for purchasing an annuity plan that guarantees a monthly pension after retirement. The account holder may withdraw the remaining amount, which is up to 60% of the account balance, as a lump sum. To remain active, Tier-1 accounts need at least one contribution of Rs. 500 each fiscal year.

NPS Tier-2: This account is a voluntary option available solely to holders of NPS Tier-1 accounts. In contrast to Tier-1 accounts, Tier-2 accounts do not impose a lock-in period, enabling account holders to withdraw funds from the account at any time according to their requirements. Furthermore, there are no restrictions on the maximum amount or frequency of withdrawals. You also have the freedom to transfer money from your NPS Tier 2 account to your Tier 1 account in order to qualify for Section 80 CCD tax benefits.

Features and Benefits of NPS Tier 1 Account

Before discussing the differences between NPS Tier 1 and Tier 2, let us explore the features of the Tier 1 account. The characteristics of the NPS Tier-I account include the following:
Investment: The minimum annual investment required is Rs. 1000. Under Section 80CCD(1B), investors may qualify for an additional tax deduction of Rs. 50,000 through NPS investments.

• Premature Closure: The Tier-I account allows for premature closure under certain defined circumstances and situations.

• Retirement Account: The NPS Tier 1 Retirement Account program serves as a fundamental pension account. When users initiate an account, they receive a Permanent Retirement Account Number (PRAN).

• Maturity: The NPS account reaches maturity at age 60 for the investor. The investor may withdraw up to 60% of the fund’s value upon maturity and utilize the remaining 40% to secure an annuity plan.

Features and Benefits of NPS Tier 2 Account
To grasp the distinctions between NPS Tier 1 and Tier 2 accounts, let’s explore the benefits and features associated with Tier 2 accounts. This category of account offers a range of advantages, which include:
Easy Liquidity: This investment is withdrawable anytime, based on one’s preferences. Consequently, this feature enables customers to customize their investment strategies to meet their needs.
Flexible Investment Plan: Unlike numerous other investment programs, the NPS Tier 2 offers flexibility concerning withdrawals. Besides easy withdrawals, NPS Tier 2 presents an alternative investment option to mutual funds.

NPS Tier 1 vs Tier 2 Accounts Differences

• There are several differences between NPS Tier-1 and Tier-2 accounts. Below are the most notable distinctions between these two types of NPS accounts:

• NPS Tier 1 vs Tier 2 Accounts: Eligibility: The Tier-1 account can be established by any Indian citizen or NRI aged between 18 and 65, while Tier 2 accounts can only be created by subscribers who hold Tier 1 accounts.

• NPS Tier 1 vs Tier 2 accounts: Restriction Period: The tier-1 account has a lock-in period that lasts until the account holder’s retirement, whereas the tier-2 version does not have any lock-in period. Tier 2 grants flexibility by allowing NPS account withdrawals at any time.

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• NPS Tier 1 vs Tier 2 accounts: Contribution: Tier-1 accounts mandate a minimum opening deposit of INR 500, whereas Tier-2 accounts necessitate a minimum opening deposit of INR 1,000. The minimum balance that must be maintained in the NPS Tier-1 account after each fiscal year is INR 1,000. Furthermore, Tier-2 accounts are not obligated to maintain a minimum balance.
• In the Tier-1 account, it is compulsory to make at least one contribution each fiscal year, while no payment is required for the Tier-2 account.
• NPS Tier 1 vs Tier 2 accounts: Tax Benefits under 80 CCD: Tier-1 accounts qualify for tax deductions. Under Section 80CCD of the Income Tax Act of 1961, Tier-1 is eligible for tax deductions up to Rs. 2 lakh every financial year.

• In contrast to Tier-1 accounts, Tier-2 accounts do not provide tax deduction benefits to Corporate Model or All Citizens Model NPS subscribers. Government employees can deduct their contributions to the NPS Tier-2 account as per section 80C. This account will be locked for three.

Conclusion

• The advantages of Tier 1 and Tier 2 NPS accounts are nearly identical; however, they vary in terms of investment flexibility and tax benefits. Moreover, a Tier 1 account may assist in establishing a retirement fund for new investors. The Tier 1 account is a low-investment plan that offers tax benefits.