National Pension System: Tier - 1 vs Tier - 2 Account

The National Pension System (NPS) is a voluntary contribution pension plan for employees. Investments in this scheme are compulsory for state and central government employees, but are optional for private sector personnel.

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Any person aged between 18 and 60 years can open an NPS account and should contribute at least INR 6,000 per annum.

Individuals have several options, including online NPS account opening when it comes to signing up for the scheme. Moreover, users can opt for a Tier 1, Tier 1 & Tier II when they first decide to open an NPS account.

It is advisable for users to familiarise themselves with the different options before making their decision. Here are some of the key features of the different types of accounts that will give you a better understanding into which one suits your objectives.

NPS Tier I Account
The NPS Tier I account is compulsory for all central government employees. Each employee must contribute 10% of his or her basic salary + dearness allowance every month to this account. The same contribution is matched by the government for additional building of the retirement corpus.

The regulations impose several restrictions on withdrawals that are allowed from this account. If you withdraw the accumulated corpus before the age of 60 years, you will have to convert at least 80% of the amount to an annuity. The remaining 20% can be withdrawn.

Subscribers who withdraw the accumulated corpus on reaching the age of 60 years need to convert at least 40% of this amount to annuity. The balance 60% can be withdrawn either as a lump sum amount or in a phased manner in up to 10 installments up to the age of 70 years.

Private sector employees who wish to contribute to the NPS need to open this account with any of the designated Point of Presence (POP). This account is mandatory before you can opt for a Tier II account. The minimum contribution to this account is INR 6,000 per year.

NPS Tier II Account
The NPS Tier II account is similar to the Tier I account, but without the strict withdrawal limitations. Private sector investors who have no compulsion to invest 10% of their earnings in NPS are advised to invest the minimum contribution amount to Tier I and the remainder in the Tier II account.

Investors can withdraw the accumulated corpus in the NPS Tier II account without any restrictions or penalties any time during the validity of this account. The minimum contribution at the time of opening this account is INR 1,000 and minimum balance at the end of each year is INR 2,000. Investors will need to contribute at least once during a financial year towards their Tier II accounts.

The amounts in the NPS accounts are invested in different asset classes, such as corporate bonds, government securities, and equities. Subscribers can either choose the active mode or the automatic mode for investment based on their personal requirements. For ease of applying in NPS, you can learn guidelines on how to apply for NPS and various options available.

If you need any help or additional information to make a decision or open an account, you should seek help from a financial adviser.