During the process of opening the NPS account, there are two different accounts in the scheme- Tier I NPS account and Tier II NPS account.
With the new rules regarding the taxation of the withdrawal amount at the time of maturity, the interest in the National Pension System (NPS), seems to be picking up. NPS is a popular tax saving option amongst the taxpayers. To open the NPS account, one may visit any authorised POP( point of presence) or can get an eNPS opened online.
During the process of opening the NPS account, there are two different accounts in the scheme- Tier I NPS account and Tier II NPS account. Let us see what are NPS Tier 1 and Tier 2 accounts and how different are they from each other and also see out of NPS Tier 1 and Tier 2 accounts which one is better.
1. Is Tier 2 account mandatory
The Tier 1 NPS account is the mandatory account and on opening the NPS it automatically gets created by filling the Subscriber Registration Form. The NPS Tier 2 account activation can be done optionally and if one is interested to open it right at the time of opening Tier I NPS account, he or she has to additionally fill Annexure I.
However, if one wishes to activate Tier II account at a later date, the Annexure S10 has to be filled up and submitted to the POP. Any Indian citizen (other than government employee mandatorily covered under NPS) need to submit the application only to the POP-SP through which they have registered with CRA for Tier I account.
2. NPS Tier 1 and Tier 2 tax benefits
Tax benefits are applicable for investments in Tier I account only. The investments in NPS Tier I qualifies for tax benefits under Section 80 CCD (1) Section 80CCD (1B) and Section 80CCD (2) as per the conditions of the Income Tax Act.
There is no tax benefit on investment towards Tier II NPS Account. However, On 6th December, 2018, Union Cabinet had approved the certain new proposals one of which was to allow contribution by the Government employees under Tier-II of NPS, the benefit of Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax, provided that there is a lock-in period of 3 years. For non-government employees, there is no such tax benefit.
The Union Cabinet has also approved the proposal for enhancing the tax exemption limit for lump sum withdrawal on exit to 60 per cent of the corpus. With this, the entire withdrawal will now be exempt from income tax. At present, 40 per cent of the total accumulated corpus utilized for the purchase of an annuity is already tax exempted. Out of 60 per cent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 per cent is tax exempt and balance 20 per cent is taxable.
3. NPS Tier 1 and Tier 2 accounts lock-in period
There will be a lock-in period for funds in the Tier I account, while there is no such lock-in period for funds in Tier II account, other than government employee if tax benefit is sought by them. One can withdraw funds anytime from the Tier II account similar to a open-ended mutual fund investment. After ten years, one may exit NPS account completely anytime before the age of 60 in which case the entire accumulated pension wealth in Tier II account would be paid along with lump sum withdrawal of Tier I account.
4. How different are fund options and investment choices
The fund options and investment choices are largely the same in both Tier I account and Tier II account. However, one may opt for different fund manager or fund options in Tier II account if needed. Presently, in NPS, there are eight pension fund managers (PFMs,) two investment options (Auto or Active) and four Asset Classes. The Subscriber first selects the PFM, and post selection of PFM, the subscriber has an option to select any one of the Investment Options.
There are four Asset Classes (Equity, Corporate debt, Government Bonds and Alternative Investment Funds) from which the allocation is to be specified under single PFM.
Asset class E -Equity and related instruments
Asset class C -Corporate debt and related instruments
Asset class G -Government Bonds and related instruments
Asset Class A -Alternative Investment Funds
5. Are partial withdrawals different
From Tier I account, partial withdrawal for a maximum of 25 per cent of own contribution may be made anytime after three years. Such partial withdrawal is allowed only for meeting specific needs such as education, marriage, medial, 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. However, the investor should note that the withdrawal amount received after the execution of the withdrawal request can be different from the requested amount to the extent of difference in NAV of two different days.