Should you choose NPS Tier 1 or Tier 2?

Patrick Foley says, “Retirement is a blank sheet of paper. It is a chance to redesign your life into something new and different.” While he is true in saying this, one must also keep in mind that to redesign your life and make the most of the golden years of retirement, the most important thing that you would require is money. Hence, savings play an important role in retirement. To create a sustainable amount of savings that can secure your future, you must properly plan retirement. Retirement planning is extremely essential, and salaried individuals are often advised to start retirement planning in their 20s. There are many retirement plans to assist individuals. To lead a financially stable and fulfilling life after retirement, individuals have the great option of NPS.

The NPS, or National Pension Scheme, is a retirement savings scheme given by the government of India. The NPS scheme was started for government employees only. Later on, it was made available to the public as well. NPS gives you two types of investment accounts: the NPS Tier I account and the NPS Tier II account.

• 1. NPS Tier I account: NPS Tier I accounts are mandatory and must be opened by every individual who wishes to be a part of the NPS scheme.
• 2. NPS Tier II account: The NPS Tier II account is optional. You can choose to open an NPS Tier II account after you have opened a Tier I account. NPS Tier II accounts come with various benefits.

To understand NPS Tier 1 and NPS Tier 2 better and to decide which one is better for you, we must dive into the details of the two and draw a comparative analysis so that you can make informed decisions about your future.

What is NPS?

The National Pension System (NPS) is a voluntary, defined contribution towards savings for retirement that enables patrons to make the right decision for the future by generating savings throughout their lives. NPS is a defined contribution towards retirement savings schemes through which subscribers can take a step forward towards increasing savings for life after retirement. NPS focuses on empowering citizens and inculcating in them the habit of saving for retirement. It is an attempt to find a long-term solution to the problem of providing adequate retirement income savings to every Indian citizen.

The NPS (National Pension Scheme) is a great way to save for retirement. Anyone in the age group of 18–70 years, public or private employee, resident or non-resident, can become a part of the National Pension Scheme program. Section 80CCD(2) of the Income Tax Act covers the contribution made by an employer to an employee's NPS, which the employee can claim as a deduction under both tax regimes. Section 80C of the Income Tax Act covers the tax deduction of ₹1.5 lakh for self-contribution to the National Pension Scheme. Section 80CCD(1B) of the Income Tax Act covers the additional deduction of ₹50,000, which is allowed if a contribution is made towards the NPS.

Hence, if you are planning your finances to save for the future and have a peaceful life after retirement, you must take this into account. To know more about NPS in detail, visit https://pensionbox.in/blog/What-is-NPS.

NPS Tier 1

NPS Tier 1 is a mandatory account if you want to avail of the benefits of the NPS retirement scheme. In a way, it is the primary account under NPS.

Documents you will need to open an NPS Tier 1 account:

• 1. NPS account opening form
• 2. Aadhar Card
• 3. Registration Form
• 4. Identity proof
• 5. Address proof
• 6. Age proof

Features and characteristics of NPS Tier 1

• 1. Tax-related benefits: If you invest in NPS Tier 1, under the old tax regime you can avail of the benefits of tax deductions under Section 80C up to ₹1.5 lakh per annum and an additional ₹50,000 under Section 80CCD(1B).

• 2. Lock-in Period: In the NPS Tier 1 system, withdrawals are restricted until the individual attains the age of 60.

• 3. Investment Options: There are a plethora of pension fund managers and investment options available to individuals who opt for NPS Tier 1. This includes equity, government bonds, and alternative investment funds.

• 4. Withdrawal Rules: When the individual reaches the age of 60, they can withdraw up to 80% of the corpus as a lump sum. Of this, only the part up to 60% of the corpus is confirmed tax-free. The remaining 20% must be used to buy an annuity, which would provide regular pension income.

• 5. Minimum balance: You can open an NPS Tier 1 account with ₹500, but you are required to make a minimum contribution of ₹1000 annually to keep your account active.

Who should opt for NPS Tier 1?

• 1. Individuals whose focus is long-term retirement planning and those who are looking to boost and enhance their savings can opt for NPS Tier 1.
• 2. Young professionals can opt for NPS Tier 1, as it would increase the compounding period, which would ultimately lead to higher savings.
• 3. Individuals who do not want to take a highly risky path can opt for NPS Tier 1, as it allows comparatively secure investment options.

NPS Tier 2

NPS Tier II accounts are optional in nature. You can choose to open an NPS Tier II account after you have opened a Tier I account.

Documents you will need to open an NPS Tier 2 account:

• 1. Identity proof
• 2. Residence proof
• 3. Registration form(filled)
• 4. Age proof

Features and characteristics of NPS Tier 2

• 1. No Tax Benefits: Contributions to Tier 2 do not qualify for any tax deductions under the Income Tax Act. However, you can still avail of tax benefits for contributions made to your NPS Tier 1 account.

• 2. No Lock-in Period: There is no lock-in period for Tier 2. Individuals who have opted for NPS Tier 2 can choose to withdraw funds at any time. Investment Options: Just like NPS Tier 1, there are a plethora of pension fund managers and investment options available to individuals who opt for NPS Tier 1 as well.

• 3. Transfer rules: You have the option to transfer funds from your NPS Tier II account to your Tier I account.

• 4. Minimum balance: You do not need to maintain a minimum balance in an NPS Tier II account.

Who should opt for NPS Tier 2?

• 1. Individuals who are looking for flexibility in their investments can opt for NPS Tier 2.
• 2. Individuals who are looking to fulfill short-term goals, for instance, buying a car, can opt for NPS Tier 2.
• 3. Individuals who have already invested in retirement plans but are looking for an additional retirement savings plan can opt for NPS Tier 2.

The NPS Tier 1 account is mandatory. If you wish to avail yourself of the benefits of the NPS scheme, opening an NPS Tier 1 account is an obligation. NPS Tier 2 accounts are voluntary. You may or may not choose to open an NPS Tier 2 account. This completely depends on what your needs and requirements are. Both NPS accounts—NPS Tier 1 and NPS Tier 2—serve different purposes and are suitable for different groups of people. Choosing between the two is a highly personal decision. In this article, PensionBox has attempted to simplify the process of deciding which one to choose: NPS Tier 1 or Tier 2. By analyzing your financial needs and using this article by PensionBox as a guide, you can make informed decisions about your future.