Different Types of NPS Accounts Explained

The National Pension Scheme is open to all Indian citizens. It invests the subscriber’s funds into various equity and debt markets where the final pension amount depends on the performance of these investments.

The Government introduced this system to ensure the citizens receive long-term returns on their savings and investment.

Further, there are essentially two types of NPS accounts one can open. In the following article, we will be answering your question of what are the most common types of NPS and draw a comparison between them.

Without any further delay, let’s begin!

Types of NPS Accounts

One needs to know about the NPS account types to accrue benefits. This low-cost structure, tax-efficient, and flexible investment plan acts as an effective financial instrument for people who are looking to save after retirement. The two types of NPS schemes are as follows:

Tier-I NPS account.
Tier-II NPS account.

Now let’s delve deeper into the types of National Pension Scheme accounts.

Tier-I NPS Account

This is the basic and mandatory NPS account that is opened to save up for retirement. From this account, one cannot withdraw before 60 years of age.

Nonetheless, upon attaining 60 years of age, the pensioner can withdraw 60% of his investments and utilise the rest to buy an annuity. The annuity plan will enable an individual to get fixed premiums at regular intervals.

Investments under this account are tax deductible up to ₹2 lakhs per annum under Section 80C of Income Tax. An additional ₹50,000 may be deducted per annum under Section 80CCD (1B). However, as per the Union Budget 2019 announcements, 60% of the accumulated corpus withdrawn at the time of retirement would enjoy tax exemption from the Fiscal Year 2020-21.

Therefore, the NPS becomes a reliable saving option like PPF and EPF.

Furthermore, while opening a Tier-I account, an individual will receive a Permanent Retirement Account Number after making a minimum contribution of ₹500. To sustain an NPS Tier-I account, one needs to contribute a minimum of ₹1000 per annum.

However, there is no cap on the maximum amount for this type of NPS account. To open this account, one needs to present identity, address and age proof documents and fill up the respective registration form.

Tier-II NPS Account

This is a voluntary retirement and savings account that may be opened if an individual already has a Tier-I account. Withdrawals or contributions to and from this account can be made at any time at the pensioner’s convenience. The investments on this account have no tax deductions for private-sector or self-employed personnel.

Further, according to the Finance Ministry’s announcement in the Union Budget 2019, one can claim tax benefits on this account within the lock-in period. This makes this scheme at par with the Equity Linked Saving Schemes (ELSS).

To open a Tier-II NPS account, one needs to make a contribution in multiples of ₹ 250. Although there are no tax exemptions related to this kind of account, both the Tier-I and II NPS accounts have similar fund management costs and investment choices.

Also, as opening a Tier-II account requires an individual to have an existing Tier-I account, he does not need to present KYC documents.

To understand the benefits of the different types of NPS accounts, take a look at the table in the following section.

Comparison Between the Two Types of NPS Accounts

From the following table, one can clearly understand the purpose of both NPS accounts and which one is appropriate for a pensioner’s needs.

NPS Tier-I	NPS Tier-II
Tier-I NPS accounts help you to reduce tax outgo as well as accumulate funds for retirement purposes.	Similar to a bank account, a Tier-II account meets your requirements in totality.
This account helps in the accumulation of funds for retirement saving purposes.	Tier-II accounts help in saving funds for various needs.
If a pensioner is focused on a retirement savings plan only, he should open this account.	Individuals looking for an additional source of funds that offer high liquidity should consider opening this account.
There are some restrictions related to the withdrawal of funds from this account.	One can withdraw any amount at any point in time from this type of account.
Pensioners can enjoy tax deductions at the rate of ₹2 lakhs per annum.	Only government employees are exempted from paying tax at the rate of ₹1.5 lakhs.
One needs to make a minimum contribution of ₹500 or ₹1000 to keep a Tier-I account.	The minimum amount to keep this account is ₹250.
No maximum requirement.	No maximum requirement.

Therefore, knowing about the types of NPS accounts from the above section will help an individual to understand the scheme better and enjoy benefits to the fullest.

Frequently Asked Questions

All

Do I need to have a Tier-I NPS account to open a Tier-II account?

Yes. Existing individuals with a Tier-I account can open a Tier-II account and accrue benefits. The existing pensioners do not need to present KYC documents during account opening.

Will a private company employee receive tax exemption under a Tier-II NPS account?

No. Private company employees or self-employed individuals cannot enjoy tax deductions under Tier-II NPS.

Is an NPS Tier-I account mandatory to open?

Yes. The Tier-I NPS account is mandatory and aids during retirement, whereas the Tier-II account is a voluntary savings account.