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Business News/ Money / Personal Finance/  NPS: What are the key differences between Tier I and Tier II accounts?
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NPS: What are the key differences between Tier I and Tier II accounts?

Contribution to Tier 1 account is mandatory, while the Tier-2 account is an add-on account and helps subscribers meet their short-term financial goals.

The Tier-1 accounts have a lock-in period till retirement while Tier-2 accounts do not have such lock-in. Premium
The Tier-1 accounts have a lock-in period till retirement while Tier-2 accounts do not have such lock-in.

If you are planning to save for retirement, you could consider opening a National Pension System (NPS) account that enables exposure to four types of asset categories: equity, government securities, corporate bonds and alternative investment funds (AIFs).

After opening an NPS account, subscribers are given a PRAN (Permanent Retirement Account Number).

For the unversed, there are two categories of NPS accounts. The main NPS account is known as Tier-1, while the second one, i.e., add-on account is referred to as Tier-II account.

Both the accounts are quite different from each other. Let us explain the key differences between the two:

Minimum contribution: Every investor is supposed to invest a minimum of Rs 500 in the Tier-1 account at the time of opening of this account, while every year, subscriber must contribute a minimum of Rs 1,000.

On the other hand, having an operational Tier-1 account is mandatory to open a Tier-2 account. The Tier-II account can be opened by investing Rs 250. After that, no regular contributions to Tier-II are mandatory, reveals NPS Trust portal.

The Tier-II account is often compared to mutual funds that are meant to meet short term financial goal and not for the purpose of accumulating retirement corpus.

Mandatory/ optional: As indicated in the above point, opening of Tier 1 account is mandatory if you are an NPS subscriber, whereas opening of Tier -II account is completely at the discretion of subscriber.

Withdrawal: At the time of retirement, account holder can withdraw 60 percent of corpus from Tier 1 account whereas the remaining 40 percent must be used to buy annuities. On the other hand, the entire corpus of Tier-II can be withdrawn and there is no cap on withdrawal.

Lock-in period: The Tier-1 accounts have a lock-in period till retirement while Tier-II accounts do not have any lock-in period. So, one can withdraw the corpus from Tier-II accounts as and when they please.

Tax deduction: The contribution to Tier-I account is eligible for exemption up to Rs 1,50,000 under Section 80CCE of Income Tax Act. An additional exemption is given for contribution of Rs 50,000 under section 80CCD(1B).

On the other hand, there is no such tax benefit given on Tier-II contributions.

 

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Financial goals of women include retirement and buying house
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Financial goals of women include retirement and buying house

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Published: 03 Aug 2023, 09:17 AM IST
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