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RETIREMENT PLANS BUYING GUIDE
:1800-266-9777
What are Tier 1 and Tier 2 NPS Accounts
Table of Content
Let us understand the meaning of NPS tier 1 and tier 2 before proceeding to NPS tier 1 vs tier 2. The two NPS account types are the investment options under the National Pension System.
NPS Tier 1
NPS tier 1 is meant for retirement planning. It entails a mandatory regular contribution till the subscriber turns 60. With a lock-in period until superannuation, the subscriber cannot withdraw the contribution before retirement unless in circumstances such as a critical illness, children’s education, marriage, etc.
A minimum contribution of Rs. 500/- is a must to keep the NPS account active. However, there is no limit on maximum contribution. The tax benefits under Section 80C of the IT Act 19611 are available only to the contributions made to NPS tier 1 accounts.
NPS Tier-2
The NPS Tier 2 is a voluntary account. Investors should compulsorily hold an NPS Tier 1 account to open an NPS Tier 2 account. This is a more flexible account. Another significant NPS Tier 1 vs Tier 2 is the lock-in period. NPS Tier 2 does not have a lock-in period like NPS Tier 1. They can withdraw funds from the account whenever they need.
Private sector personnel and the self-employed cannot claim tax deductions for their investment in NPS Tier 2 accounts. However, tax deduction under Section 80C for the contributions to NPS Tier 2 accounts is available for government employees after the lock-in period of 3 years.
You can start an NPS Tier 2 account with a contribution of Rs. 250. There is no restriction on the extent of subscription, which makes it more flexible.
Key Features and Benefits of an NPS Tier 1 Account
Before understanding NPS Tier 1 vs Tier 2, you should know the key features and benefits of NPS Tier 1 Account. They are:
Investment
The National Pension System (NPS) is an attractive investment option due to its low annual contribution requirement. A minimum investment of just Rs. 1,000 annually keeps your Tier 1 account active, with each individual contribution needing to be at least Rs. 500. This structure provides flexibility, allowing you to tailor the frequency and amount of your contributions to fit your personal financial situation.
Premature Closure
The NPS Tier 1 account permits premature closure under special circumstances such as healthcare expenses, children’s education or marriage, purchase of a house, etc., after the lock-in period of 3 years.
Retirement Savings Account
NPS Tier 1 Account is a retirement savings account. Every account holder is given a Permanent Retirement Account Number (PRAN) upon opening an account.
Maturity
The contribution to the NPS Tier 1 account can continue till the investor attains 60 years of age. Investors can withdraw 60% of the fund value on maturity and purchase an annuity plan with the remaining amount.
Key Features and Benefits of an NPS Tier 2 Account
Being aware of the difference between Tier 1 and Tier 2 NPS is crucial before investing in the National Pension System. However, learning about the key benefits of NPS Tier 2 is also important for an informed decision.
Quick Access to Cash
High liquidity is the key advantage of NPS Tier 2 accounts. You can withdraw the investment at any time. This feature allows you to customise your investments to align with your financial goals, whether short-term or long-term.
Flexible Investment Option
NPS Tier 2 permits withdrawals as and when you need funds. Apart from this flexibility, it also allows investment in different asset classes such as equities, bonds, government securities, etc. Pension fund managers manage the investments to balance the risks and rewards.
NPS Tier 1 vs Tier 2 Accounts Differences
The table below gives clarity about NPS Tier 1 vs Tier 2:
NPS Tier 1 |
NPS Tier 2 |
A resident Indian in the age group 18 to 65 is eligible to open an account. |
Only NPS Tier 1 account holders can open a NPS Tier 2 account. |
Should start the investment with a minimum of Rs. 500/- |
The minimum investment to open the account is Rs. 1000/- |
The accounts have a lock-in period. Investors cannot withdraw the funds before 60 years of age. |
No lock-in period. Subscribers can withdraw the investment whenever funds are required. |
Contributions to the account up to Rs. 1.50 lacs are eligible for deduction under Section 80C of the ITA 19611. An additional deduction up to Rs. 50000/- is available under Section CCD(1B) of the ITA Act 19611. |
No tax benefits for self-employed and private sector personnel. However, government employees can avail of the tax benefit under Section 80C for their contributions to NPS Tier 1 account. |
NPS Tier 1 account holders can withdraw 25% of the fund's value after the lock-in period of 3 years. This part withdrawal is allowed only for certain requirements such as treatment of critical illnesses, children’s education, marriage, buying a property, etc. On attaining 60 years of age, the investor can withdraw 60% of the fund value. The remaining 40% should be used to buy an annuity plan. NPS Tier 1 is an ideal long-term investment account to build a corpus and generate a regular income stream for post-retirement life. |
There are no restrictions on withdrawals and premature closures. |
The 60% fund withdrawn is tax-free. |
The funds withdrawn are added to the investor’s income, and tax is deducted as per the applicable income tax slab. |
Transfer of funds from NPS Tier 1 accounts to Tier 2 accounts is permitted. Also, the EPF funds can be transferred to the Tier 1 account. |
Funds cannot be transferred from NPS Tier 2 accounts. |
Tax Benefits on NPS Tier 1 and Tier 2 Earnings
The tax benefits on NPS Tier 1 and Tier 2 returns mark the significant difference between Tier 1 and Tier 2 NPS. The benefits are:
- The investment under NPS Tier 1 qualifies for tax deduction up to Rs. 1.50 lakhs under Section 80CCE of the ITA Act. Tax benefit of up to Rs. 50000/- under Section 80CCD (1B) is available for investments in NPS Tier 1 accounts
- In the case of part withdrawals, 25% of the fund withdrawn is tax-free.
Which is Better: NPS Tier 1 or NPS Tier 2?
Understanding what is Tier 1 and Tier 2 in NPS and knowing which one is better is crucial before investing in NPS. To open a NPS Tier 2 account, having a NPS Tier 1 account is mandatory. Since NPS Tier 2 is a voluntary account, you should study the advantages and the disadvantages of both accounts for an informed decision.
- Investments in an NPS Tier 1 account are eligible for a tax deduction of up to Rs. 50000/- under Section 80CCD(1B) in addition to a tax deduction of up to Rs 1.50 lakhs under Section 80CCE of the ITA 19611.
- With no tax advantages, the investment in NPS Tier 2 accounts does not reduce the overall tax liability.
- Withdrawals in NPS Tier 1 accounts are restricted. NPS Tier 2 investors can withdraw from the fund as and when the need arises. They will be able to meet their financial goals with the funds accumulated in the Tier 2 accounts.
Summary
Tier 1 and Tier 2 NPS are accounts under NPS with their pros and cons. The investment choice in these accounts depends on the withdrawal flexibility, tax benefits, and alternative investment options the subscriber expects. Awareness of NPS Tier 1 vs Tier 2 helps in making the decision. Since keeping NPS Tier 1 and Tier 2 accounts active simultaneously is possible, investing in both accounts is a wise move.
However, while NPS helps build a retirement corpus, it doesn't guarantee lifelong financial security. To ensure a steady income post-retirement, consider complementing your NPS investment with an HDFC Life annuity plan. An annuity plan converts your savings into a regular income stream, protecting you from market fluctuations and ensuring financial stability for life. Pairing NPS with an HDFC Life annuity offers the best of both worlds—tax-efficient savings during working years and a predictable income in retirement.
FAQs on NPS Tier 1 vs Tier 2
Q. Which NPS is best, Tier 1 or Tier 2?
Having an NPS Tier 1 account is mandatory to open a Tier 2 NPS account. Those who wish to have easy access to funds and the flexibility to create a diverse portfolio should invest in both accounts.
Q. Is NPS Tier 2 a good investment?
The choice of Investment in NPS Tier 2 depends on your financial goals. The flexibility to withdraw funds when needed, prudent management of funds by professional fund managers, etc., makes it an ideal short-term to medium-term investment option.
Q. What are Tier 1 and Tier 2 in NPS?
Tier 1 NPS is a retirement planning account. It involves a regular subscription till the investor turns 60. On superannuation, the subscriber can withdraw 60% of the fund value and purchase an annuity plan with the remaining 40%. Tier 2 NPS is a voluntary account, and only Tier 1 NPS account holders are eligible.
Q. Who qualifies for NPS Investments?
Resident Indian citizens between 18 to 65 years are eligible to invest in NPS. Self-employed individuals and employees in public, private, and unorganised sectors can invest in the scheme.
Q. What are the differences between NPS 1 & NPS 2?
NPS Tier 1 is a long-term retirement savings account with tax benefits, whereas NPS Tier 2 account is a short-term investment option with part withdrawal facility.
Q. Is it possible to invest in both Tier 1 and Tier 2 Accounts at the same time?
Yes. It is possible to invest in both Tier 1 and Tier 2 accounts at the same time. Having a Tier 1 account is mandatory to invest in a Tier 2 account.
Related Article
- Swavalamban Scheme: NPS Swavalamban Details and Pension Benefits 2025
- NPS Tax Benefit: Check NPS Tax Exemption and Deduction | HDFC Life
- NPS for NRI: Benefits, Eligibility and How to Invest?
- Annuity Plans for National Pension System – NPS
References:
- https://www.hdfcpension.com/buy-nps/
- https://www.hdfcpension.com/blog/everything-you-need-to-know-about-your-nps-tier-1-account/
- https://www.hdfcpension.com/blog/nps-tier-1-vs-tier-2-understand-the-best-option-for-your-needs/#:~:text=The%20NPS%20Tier%202%20account%20is%20voluntary%20and,from%20the%20Tier%202%20account%20at%20any%20time.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
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Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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1. Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
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