Financial planning has always been discussed among Indians. The most crucial aspect of one’s financial planning is retirement planning, especially for employed individuals. After retirement, paychecks stop coming, but bills do not. It can get difficult to manage if you don't start planning your retirement. You can opt to invest in various savings schemes for retirement.
One such beneficial scheme is National Pension System. The government launched NPS in 2004. Here, you will learnwhat Tier 1 and Tier 2 are in NPS, their differences, tax benefits and more.
NPS: A brief overview
Launched in 2004, theNational Pension System (NPS) is a government-sponsored pension program. Although it was initially solely available to government workers, the government made it available to everyone in 2009. Individuals can contribute to their NPS accounts while still working and withdraw once they turn 60.
In essence, NPS is an annuity product designed to act as a retirement fund once a person leaves the workforce.
Tier 1 and Tier 2 NPS accounts are two different categories. As opposed to Tier 1, which serves as the principal NPS account for building a retirement fund, Tier 2 is similar to a voluntary savings account and provides greater flexibility for deposits and withdrawals.
NPS Tier 1 vs NPS Tier 2
The below table illustrates the differences between NPS tier 1 and tier 2.
NPS Tier 1
NPS Tier 2
Any Indian citizen between 18 and 65 can open it.
Any Indian citizen who has an active Tier 1 account.
Minimum amount to start investing is Rs.500.
Minimum amount to start investing is Rs.1,000.
Tier 1 accounts have a lock-in period until the investor turns 60.
Tier 2 accounts don’t have any lock-in period.
Section 80C of the Income Tax Act permits deductions for contributions up to Rs.1,50,000 annually. Section 80CCD(1B) allows for additional deductions of Rs.50,000.
Tier 2 contributions are not tax-exempted for non-government employees. However, government employees are eligible for a deduction under section 80C for the contributions made to Tier 2 account after the lock-in-period of 3 years.
For the first three years, withdrawals are not permitted. After that, you can take up to 25% of the fund's value, but only for certain things. When the account holder turns 60, 60% of the fund value may be withdrawn, with the remaining funds being utilised to buy an annuity.
The withdrawal and exit rules are flexible. You can withdraw funds anytime.
Taxes are not applicableon 60% of the corpus, withdrawn at maturity.
The withdrawn funds are added to the investor’s income and are then taxed at the applicable income tax rate brackets.
It is feasible to move funds from Tier 2 to Tier 1 accounts. Moreover, funds from the EPF can be transferred to Tier 1.
Transferring funds is not permitted from an NPS Tier 2 account.
Tax Benefits On NPS Tier 1 And Tier 2 returns
You should be aware of the following NPS tier 1 and tier 2 tax benefits while investing:
Under Section 80CCE, all NPS Tier 1 subscribers can claim a deduction of up to Rs.1.5 lakhs.
The entire amount invested is tax-free if you purchase an annuity. However, the annuity's income will be taxed at the appropriate rates.
When taking a lump sum payout after turning 60, up to 40% of the money is tax-free. With the balance, you have to buy an annuity with taxable returns.
25% of the withdrawn amount is tax-free in cases of partial withdrawals.
Under Section 80CCD(1B), Tier 1 investors are qualified for an extra deduction of up to Rs.50,000. Remember that this discount is above the Rs.1.5 lakh deduction provided u/s 80CCD (1) of the Income Tax Act of 1961.
While filing your ITR, consider these elements and claim substantial tax cuts. However, only owners of Tier 1 NPS accounts are eligible for these perks.
NPS Tier 1 Vs NPS Tier 2 – Which One Should You Choose?
Under Section 80CCD (1), Tier 1 investors may receive a tax exemption for an additional investment of up to Rs.50,000. Premature withdrawals and the purchase of annuities both qualify for deductions.
There are no tax advantages for Tier 2 accounts. Your ability to decrease your yearly taxes is significantly reduced as a result.
There are fewer options for withdrawals before maturity in Tier 1 accounts because they are significantly more restricted.
Tier 2 subscribers can make an early withdrawal to cover different expenses. Hence, Tier 2 subscribers can better manageall financial needs with the collected funds.
Both Tier 1 and 2 have advantages and disadvantages. So, one must choose one after giving it great thought.
Conclusion
While most investments are made in Tier 1 or Tier 2 accounts, keeping both investments active is feasible. Hence, a new investor can open a Tier 1 and Tier 2 account simultaneously.
For example with a Tier 1 NPS Account, individuals can plan long-term financial savings, especially for retirement, with withdrawal restrictions but tax benefits. However, with Tier 2 Account, there is no restriction on withdrawal and can be considered a savings account, with no tax benefits.
NPS Tier 2 presents a flexible and accessible investment avenue with tax advantages. However, the absence of guaranteed returns, tax implications, and limited fund choices underscore the need for careful consideration.
Is NPS tier 2 better than MF? The significantly lower expense ratios, unlimited withdrawal clause, and diversified investment options make NPS Tier 2 accounts better than MF for those planning for retirement.
Level 1, referred to as tier 1, is a mandatory basic national social security managed by SSNIT with a constituted Board of Trustees. Level 2, referred to as tier 2, is a mandatory occupational pension scheme managed by a Corporate Trustee who appoints a Fund manager and a Custodian.
NPS provides you two types of accounts: Tier I and Tier II. Tier I is mandatory retirement account, whereas Tier II is a voluntary saving Account associated with your PRAN. Tier II offers greater flexibility in terms of withdrawal, unlike Tier I account, you can withdraw from your Tier II account at any point of time.
An additional deduction of Rs <50,000> is available under Section 80CCD(1B) NPS Tier 2: Contributions to Tier 2 accounts do not qualify for tax exemptions.
NPS Tier II is voluntary in nature and gives its investors the option to choose their asset allocation and fund managers if they want to. Having said that this choice can be applied, keeping in mind certain limits. For example, an investor can opt for a maximum investment of 75% in equity.
This means you can invest up to Rs.2 lakhs in an NPS Tier 1 account and claim a deduction for the full amount, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000/- under Section 80CCD(1B).
You can avail various tax deductions for contributions made to an NPS Tier 1 account. You can transfer funds from an NPS Tier 2 account or EPF (Employees Provident Fund) to NPS Tier 1 account. You cannot transfer funds from an NPS Tier 1 account to a Tier 2 account.
Tier 1 is for retirement savings, while Tier 2 offers flexibility for investments. Tax benefits include deductions under various sections. Understanding the differences and benefits of each account type helps in making informed decisions for retirement planning.
How to close an NPS Tier 2 account. You can submit a request to close your NPS Tier 2 account by logging into your NPS account online through enps.nsdl.org. Alternatively you can close your NPS Tier 2 account by submitting an account closure form to your nearest NPS Point-of-Presence, typically your bank.
While NPS Tier I is well-suited for retirement planning, Tier II NPS accounts act as a voluntary savings account. Tier I NPS investment is a long-term one and the amount cannot be withdrawn until retirement. This is not the case with Tier II NPS accounts.
Tier 1 and Tier 2. Tier 1 has a longer lock in period (15 years for even partial withdrawal) as it is designed as pension scheme which aim to provide income after retirement.
Most companies rely on NPS scores too much to understand their customers' loyalty. The truth is NPS scores aren't a magic wand that can retain customers with just one question. It's not possible to understand your customers' feelings completely.
An OTP will be sent to the registered mobile number / email address. Once the OTP is entered and PRAN is verified, select the account to which contribution will be made (Tier I or Tier II) and mention the contribution amount.
NPS Tier 1 Withdrawal Rules for Withdrawal after Maturity
Under existing NPS withdrawal rules for withdrawal after maturity, you can withdraw up to 60% of your corpus tax free. You are mandatorily required to use the remaining 40% of your corpus to buy an annuity.
Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.
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