​National Pension System: Types of Account

 

The NPS offers two different account types you can consider. These are NPS Tier 1 and Tier 2 account:

 

Tier I NPS Account: This retirement account provides numerous tax benefits, but your contributions remain locked until you turn 60. However, under specific conditions—such as completing three years of service or facing critical illness, educational expenses for children, wedding costs, or house-related expenditures—you can make partial withdrawals. Additionally, after 25 years of service, you can withdraw up to 50% of the corpus. Tax benefits can be claimed under Section 80CCD (1), Section 80CCD (1B), and Section 80CCD (2) when you open an NPS account. The Tier I account is mandatory and automatically activated upon opening to ensure a substantial fund at retirement.

 

Tier II NPS Account: This voluntary account functions like a regular investment account and requires a Tier I account for eligibility. You can open a Tier II account with an additional application form. Unlike the Tier I account, you can withdraw funds at any time without restrictions. The minimum contribution per installment is ₹250, and there is no minimum balance requirement. Investments in the NPS Tier II account do not qualify for tax benefits, and the returns are taxable. There is no lock-in period, and you can have a separate scheme preference and nomination for the Tier II account. The primary advantage of the Tier II account is its liquidity, allowing unlimited withdrawals, making it a valuable resource during emergencies.

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Features of NPS Account

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With its host of features and benefits, NPS has become a popular investment avenue among investors who want to save for retirement. Here are some of the features of the NPS that make it an attractive option for investors.

 

Regulated: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), a government body. It ensures that pension fund companies comply with the guidelines to safeguard the investors against any risks.

 

Flexibility: NPS gives you flexibility in choosing your pension fund manager, contribution amount, frequency of investment, etc. There are no strict criteria for investing in NPS, as you can start with Rs 1,000, and to keep your account active, you must deposit only Rs 1,000 per year. 

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Higher Returns: When you invest your money in an NPS account, your money is also allocated to equities along with the other asset classes. Equities can potentially deliver a higher return in the future, which will help your investment earn a good return.

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Tax saving: One feature of NPS that attracts many investors is tax saving. It allows you to claim the tax deduction upto Rs 2 lakh (Rs 1.5 lakh under Section 80CCD(1) and an additional Rs 50,000 under Section 80CCD(1B)). Also, if your employer invests in your NPS account, you can take a deduction of up to 10% of your salary under Section 80CCD(2).

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Annuity Income: At maturity, when you turn 60 years of age, you only receive 60% of the corpus, and for the remaining 40%, you will have to purchase an annuity plan. This annuity plan helps you to earn regular income as a pension. So, it provides you with a regular source of income after retirement.

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For investment in NPS