When you open an NPS account, you receive a PRAN (Permanent Retirement Account Number). There are two types of NPS accounts: Tier I and Tier II. The NPS is a retirement savings scheme that allows individuals to save for retirement. It offers exposure to four asset categories: equity, government securities, corporate bonds, and alternative investment funds. NPS provides various investment options, including equity, corporate bonds, and government securities. It also offers tax advantages for contributions made under section 80C of the Income Tax Act. Tier I and Tier II NPS accounts are the two categories available.
Tier I accounts are the primary accounts for government and private sector employees. You can start investing in Tier I accounts with just Rs 1,000 per year. It is mandatory for all NPS subscribers to open a Tier I account. The money in this account is invested in a mix of equity and debt funds and can only be withdrawn after reaching retirement age.
Tier II accounts are optional and can be used to save money for other goals. The money in this account can be withdrawn at any time without penalty. Tier II accounts are additional retirement savings accounts that can be opened by individuals who already have a Tier I account. They do not offer any tax benefits and withdrawals are taxed as per the income tax slab.
Key differences between Tier I and Tier II accounts are as follows:
– Withdrawal: A Tier I account allows the account holder to withdraw 60% of the balance at retirement, with the remaining 40% going towards the purchase of annuities. There is no withdrawal limit for Tier II accounts.
– Lock-In Period: Tier I accounts have a lock-in period until retirement, while Tier II accounts have no lock-in period.
– Tax Deductions: Contributions to Tier I accounts are eligible for tax exemptions under section 80CCE and 80CCD(1B) of the Income Tax Act, while Tier II contributions do not offer any tax benefits.
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