On opening a National Pension System (NPS) account, the Tier I account gets opened mandatorily. The amount you put into NPS goes into this Tier 1 account as per the allocation decided by you among the various fund options. You can diversify across equity and debt fund options in NPS and the NPS returns will depend on the performance of these fund options.
In addition, there is an option for the NPS subscriber to open a Tier II account within the same account. The difference between NPS Tier 1 and Tier 2 account is about the lock-in period of your money in the NPS scheme. Your money in NPS Tier 1 remains locked-in till maturity which is till age 60 for most subscribers while the money in NPS Tier 2 remains liquid from day one.
It means, you can make withdrawal from NPS Tier 2 account of NPS anytime you like. The fund options available under NPS Tier 1 will be the same as NPS Tier 2 and hence the NPS Tier 2 account of NPS may be used similar to any open-ended mutual fund scheme. You may opt for different fund managers or fund options in Tier II account and thus customize your NPS scheme.
If you are looking for tax benefits on NPS investments, put it only in Tier 1 account as there is no tax benefit on investment put into the Tier II NPS Account. The investments in NPS Tier I qualify for tax benefits under Section 80 CCD (1) Section 80CCD (1B) and Section 80CCD (2) as per the conditions of the Income Tax Act.
However, to a government employee, deduction up to Rs. 1.50 lakh under Section 80 C is allowed for investing in NPS Tier 2 Account, provided that there is a lock-in period of 3 years.
To open an NPS Tier 2 account at the time of opening a Tier I NPS account, one has to additionally fill Annexure I. While if you wish to open it at a later date, the Annexure S10 has to be filled up and submitted to the POP.
And, when it comes to making partial withdrawal from a Tier I account, partial withdrawal for a maximum of 25 per cent of one’s own contribution may be made anytime after three years. Such partial withdrawal is allowed only for meeting specific needs such as education, marriage, medical, house ownership etc. As a subscriber, one is allowed to withdraw only a maximum of three times during the entire tenure of subscription under the National Pension System.
From Tier II account, there are four types of partial withdrawals that can be availed of. One may specify a particular amount, ask for complete withdrawal or ask for scheme-wise units withdrawal from any of the funds – Fund E, Fund C or Fund G.
So, when you open a NPS account and want to save more through it but do not want to lock-in funds for a long time, the NPS Tier 2 account can be of use to you. There is no requirement for compulsory annuitization on the funds in NPS Tier 2 account and they can be withdrawn anytime.