NPS Tier 1 vs Tier 2: Difference And Tax Benefits | HFDC Pension

NPS Tier 1 vs Tier 2 – Understand the Best Option for Your Needs

Most of us spend a lot of time planning our future goals. We save for future expenses and try to build a corpus for retirement. The National Pension System (NPS) is a powerful financial tool that makes retirement planning easy. Once you register, you can make annual contributions and invest based on your risk appetite to build a corpus for your future needs. When you retire, you can withdraw a part of the accumulated corpus and use the rest to purchase an annuity and receive a regular income. When you subscribe to the NPS, you can open only a Tier 1 account or both a Tier 1 and Tier 2 account. Let’s evaluate the differences between an NPS Tier 1 vs Tier 2 account and better understand why you should open a Tier 2 account.

NPS Tier 1 vs Tier 2


NPS Tier 1 – The Core Retirement Account

The NPS Tier 1 account serves as the primary retirement account. It helps build a significant corpus to ensure a regular income stream after retirement. Let’s better understand the features of an NPS Tier 1 account:


Mandatory Contribution

The NPS Tier 1 account requires a minimum contribution of Rs. 1,000 per financial year to keep it active.


Tax Benefits

You can claim tax deductions against contributions to your NPS Tier 1 account. You can claim a maximum deduction of Rs. 1,50,000 under Section 80 C of the Income Tax Act. Section 80CCD(1B) offers an additional deduction of Rs. 50,000.


Long-Term Savings

The NPS Tier 1 account reaches maturity when you retire or turn 60. It ensures you have long-term savings for retirement.


Partial Withdrawals

NPS Tier 1 accounts enable partial withdrawals under specific circumstances. You can dip into the corpus for critical illness, higher education, and housing expenses.


Annuity Purchase

Since the Tier 1 account aims to safeguard your retirement, you must purchase an annuity with a portion of the accumulated funds on retirement. You can select an annuity plan from an insurance company registered with PFRDA as ASP to receive a regular pension.


NPS Tier 1 vs Tier 2


NPS Tier 2 – The Flexible Investment Account

The NPS Tier 2 account is voluntary and offers more flexibility and liquidity.


Mandatory Contribution

You do not have to make a compulsory annual contribution to your Tier 2 account.


Tax Benefits

The Tier 2 account does not offer any tax benefits.


Withdrawal Flexibility

You can withdraw funds from the Tier 2 account at any time.


Annuity Purchase

You do not have to purchase an annuity with funds from your Tier 2 account.


NPS Tier 1 vs Tier 2


NPS Tier 1 vs Tier 2 Accounts – What’s Better for Me?

Once you subscribe to the NPS, you must maintain your Tier 1 account. It enables you to save and invest for a financially secure retirement. The Tier 2 account functions like a savings account, facilitating easy liquidity and withdrawals.

You can choose whether to open a Tier 2 account based on your goals. The benefits of having a Tier 2 account include:


Low Management Costs

Your NPS Tier 2 account has minimal management costs, making it an affordable way to save a corpus for the future.


Financial Flexibility

You can withdraw funds from the Tier 2 account whenever required to meet your daily expenses. You can divert funds from the Tier 2 account to your Tier 1 account to boost your annuity payout and secure your financial future.


No Restrictions

Your Tier 2 account does not restrict withdrawals or levy exit load charges. You can withdraw funds whenever required without any penalty.


NPS Tier 1 and Tier 2 accounts cater to different financial goals and requirements. Tier 1 accounts focus on long-term retirement planning with tax benefits. Tier 2 accounts offer flexibility and liquidity. Now that you understand the differences between NPS Tier 1 vs Tier 2 accounts, you can make an informed decision about your finances.


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