What is tier 1 and tier 2 in NPS

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What is tier 1 and tier 2 in NPS

National Pension System(NPS) is a popular pension scheme in India. Although it is a pension scheme it offers some excellent tax benefits and also offers some excellent investment choices via the Tier 1 and Tier 2 NPS account.

Before we talk more about What is tier 1 and tier 2 in NPS. Lets first understand a few things about NPS itself.

What is tier 1 and tier 2 in NPS
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What is the National Pension System?

NPS is an easily accessible, low cost, tax-efficient, flexible, and portable retirement savings account. Under the NPS, the individual contributes to his retirement account via the Tier 1 NPS account. NPS is designed on a Defined contribution basis wherein the subscriber contributes to his/her own account.

The benefit subscribers ultimately receive depends on the amount of contributions, the returns made on the contributions, and the period of contributions. NPS is managed by PFRDA. You can get all latest details about NPS on the NPS Trust website.

When was NPS launched?

National Pension System (NPS) is a government-sponsored pension scheme. It was launched in January 2004 for government employees. However, in 2009, it was opened to all Indian citizens and NRIs who have valid KYC.

What are the different types of NPS account?

There are 2 types of NPS accounts

  1. NPS Tier 1 account
  2. NPS Tier 2 account

What is an NPS Tier 1 account?

NPS Tier 1 account gets created by default when a subscriber opens an NPS account. When you open NPS account either offline or online. You get a  Permanent Retirement Account Number(PRAN) generated for you and a default Tier 1 NPS account.

The mandatory contribution for all NPS investments are made via the NPS Tier 1 account. The NPS tier 1 account investment qualify for all the tax benefits and used for the retirement purpose.

What are the different types of schemes for NPS Tier 1 account?

When you open an NPS account, while creating the NPS Tier 1 account you will get a choice to select the different types of funds which are:-

  1. Asset class E : “High return, High risk” (equity market instruments).
  2. Asset class G : “Low return, Low risk” fixed income instruments. The best example of this is the central government bonds.
  3. Asset class C : “Medium return for credit risk” bearing fixed income instruments. Examples of these are bonds issued by firms.
  4. Asset class A : Alternate investments like – Investments in REITs, INVITs, etc.(Currently Asset class A is not being shown as an option in NPS website.

Please go through How to fill NPS form online to understand how much % in which fund you can allocate and how you can opt for Auto allocate your NPS contributions for these funds.

NPS Tier 1 mandates you to have some part of your investment in debt instruments like Class G, C funds based on your age.

Who are the different Fund managers for NPS Tier 1 account?

As of May 2020 there are 7 different fund managers in NPS and they are :-

  1. Birla Sun Life Pension Management Ltd.
  2. HDFC Pension Management Co. Ltd.
  3. ICICI Pru. Pension Fund Mgmt Co. Ltd.
  4. Kotak Mahindra Pension Fund Ltd.
  5. LIC Pension Fund Ltd.
  6. SBI Pension Funds Pvt. Ltd
  7. UTI Retirement Solutions Ltd.

Please go through Best NPS fund manager in 2020 for Tier-1 to understand NPS tier 1 returns and which fund may be best for you.

What are the benefits of the NPS Tier 1 account?

The biggest benefit of NPS Tier 1 account is tax exemption. Here are the main benefits of NOS Tier 1 account:-

Tax Benefit available to Individual:
Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) within the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Tax Benefits under the Corporate Sector:

  1. Corporate Subscriber:
    Additional Tax Benefit is available to Subscribers under the Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of the employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.
  2. Corporates
    Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

What is an NPS Tier 2 account?

NPS Tier 2 is an optional account that you can create either alongside while you are opening your NPS Tier 1 account or any time after the NPS Tier 1 account is created. You can not have an NPS Tier 2 account without having an NPS Tier 1 account.

What are the different types of schemes for NPS Tier 2 account?

There are 4 types of schemes under NPS:-

  1. Asset class E : “High return, High risk” (equity market instruments).
  2. Asset class G : “Low return, Low risk” fixed income instruments. The best example of this are central government bonds.
  3. Asset class C : “Medium return for credit risk” bearing fixed income instruments. Examples of these are bonds issued by firms.
  4. Asset class A : Alternate investments like – Investments in REITs, INVITs etc.(Currently Asset class A is not being shown as an option in NPS website.

Who are the different Fund managers for NPS Tier 2 account?

As of May 2020 there are 7 different fund managers in NPS Tier 2 and they are:-

  1. Birla Sun Life Pension Management Ltd.
  2. HDFC Pension Management Co. Ltd.
  3. ICICI Pru. Pension Fund Mgmt Co. Ltd.
  4. Kotak Mahindra Pension Fund Ltd.
  5. LIC Pension Fund Ltd.
  6. SBI Pension Funds Pvt. Ltd
  7. UTI Retirement Solutions Ltd.

Please go through Best NPS Schemes in 2020 to understand NPS tier 2 returns and which fund may be best for you.

What are the benefits of the NPS Tier 2 account?

The biggest benefit of NPS Tier 2 account is to be able to invest in funds that are investing like large-cap mutual funds/ debt mutual funds with the lowest expense ratio to pay. Main benefits are:-

  • Ability to select a pension fund house while account creation.
  • Only pay 0.01% as expense ratio for funds
  • can select any type of schemes with any % investment choice
  • Ability to invest at any time
  • Ability to withdraw at any time
  • NO exit load
  • See all NPS investments at one place

What is tier 1 and tier 2 in NPS and what are the differences between them?

Here are the key difference between NPS Tier 1 and NPS Tier 2 account

FeatureNPS Tier 1NPS Tier 2
Who can invest?All Indian citizens including NRIs with valid KYCAll Indian citizens including NRIs with valid KYC
Can it be opened online?YesYes(Need NPS Tier 1 account first)
Can it be opened Offline?YesYes(Need NPS Tier 1 account first)
Charges for opening accountSame for bothSame for both
Investment choiceSame for bothSame for both
Minumum contribution at account opening5001000
Minumum contribution per annum500250
minimum number of contribution per year1no minimum contribution required
Lock in periodtill age of 60No lock in
Fund Options available for investmentSame for both
Equity (E): Scheme invests predominantly in Equity market instruments.
Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments
Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments
Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc.
Same for both
Equity (E): Scheme invests predominantly in Equity market instruments.
Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments
Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments
Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc.
Restriction on withdrawalYesNo
Mandatory purchase of annuity on exitYesNo
Tax benefitsYes Section 80CCD(1): Up to Rs 1.5 lacs for own contribution (capped at 10% of basic salary). Included under Rs 1.5 lacs under Section 80C.

Section 80CCD(1B): Up to an additional Rs Tax Benefits on investment Tax benefit 50,000 for own contribution.

Section 80CCD(2): Up to 10% of basic salary for employer contribution. Benefit under Section 80CCD(1B) and Section 80CCD(2) are over and above Rs 1.5 lacs under Section 80C.
Tax Treatment on Maturity (exit)
60% of the accumulated corpus can be withdrawn as tax-free lumpsum. Annuity income taxable in the year of receipt
Tax benefit only for Govt employees.
No tax benefits for ordinary citizens.
Tax treatment on maturity60% of maturity amount is tax free. Rest 40% mandatory annuity.Gains added to income
NPS Tier 1 vs NPS Tier 2

NPS FAQs

What is the full form of NPS?

NPS stands for National pension system

What is the full form of PRAN?

PRAN stands for Permanent Retirement Account Number

Can I have two NPS accounts?

No. You can not have two NPS accounts. when you create an NPS account, you get allocated with a PRAN number which is portable and can be used anywhere even if you switch jobs.

Can NRI contribute to NPS?

Yes NRIs with valid KYC can contribute to NPS via their NRE/NRO account.

How many times we can contribute in NPS in a year?

There is no upper limit to NPS tier or tier 2 contribution. For NPS tier 1, you need to mandatory invest at least once a year otherwise your NPS account gets freezed.

Can we stop NPS in between?

If you wish to stop NPS contribution before the age of 60 then you can only withdraw 20% of your investments and purchase an annuity for test 80% value. If you don’t withdraw or invest money into your NPS account then your NPS account gets frozen.

Can I pay NPS monthly?

Yes you can invest in your NPS account monthly.

What is the NPS interest rate?

Typically 12-14%. Although there is no absolute formula to calculate the NPS interest rate as the rate of returns depends on your fund allocation. If your contribution is for a long time and if youhave selected the equity option then you may benefit from higher returns.

What is the benefit of NPS?

The benefit of having NPS account is the tax efficiency. Section 80CCD(1B): Up to an additional Rs Tax Benefits on investment Tax benefit 50,000 for own contribution is only available for NPS investments.

Is it a must to have NPS Tier 1 account?

Yes. NPS Tier 1 accounts are by default created when you signup for NPS. You can’t have NPS account with out NPS Tier 1 account.

Is it a must to have NPS Tier 2 account?

No. NPS Tier 2 is an optional account. You dont need to create NPS Tier 2 account if you dont need it.

Is NPS better than mutual funds?

NPS investments are better than mutual funds when you consider the 80CCD(1B) tax benefits. If you are in a higher tax slab then NPS is an excellent choice for you for investments.

Is Tier 2 NPS taxable?

The gains from Tier 2 NPS are taxable and is added to your total income for the FY.


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