Know the difference between Tier 1 and Tier 2 in NPS

Saving for retirement is crucial, and the National Pension System (NPS) offers a robust solution. Understanding the NPS Tier 1 and Tier 2 benefits can help you optimise your savings and minimise your tax liability. This guide explores the differences between NPS Tier 1 vs Tier 2, highlighting their respective features and how you can make the most of your investments.

NPS: Overview

NPS is a government-backed retirement savings initiative designed to provide a steady income post-retirement. It is open to all Indian citizens aged 18 to 65 years. The scheme is divided into two tiers: Tier 1 and Tier 2. While both have their unique advantages, they serve different purposes in retirement planning.

What is NPS Tier 1?

NPS Tier 1 is the mandatory account for subscribers. It is aimed at long-term retirement savings and comes with various tax benefits. Contributions to this account are locked in until you reach the age of retirement.

What is NPS Tier 2?

NPS Tier 2 is a voluntary account that provides more flexibility and liquidity compared to Tier 1. It is suitable for those looking to complement their retirement savings or for short-term financial goals. Funds in Tier 2 can be withdrawn at any time.

Tax benefits on NPS Tier 1 and Tier 2 returns

Employee’s contribution

NPS Tier 1 tax benefit: Contributions up to ₹1.5 lakh per annum are eligible for tax deduction under Section 80C. An additional deduction of ₹50,000 per annum is available under Section 80CCD(1B), exclusively for NPS investments, making the total possible deduction up to ₹2 lakh per annum under old tax regime.
NPS Tier 2 tax benefit: Contributions to NPS Tier 2 do not qualify for tax deductions.

Employer contribution

NPS Tier 1: made by your employer (up to 10% of your salary) are tax-deductible under Section 80CCD(2), with limit of up to Rs 7.5 lakh.
NPS Tier 2: There are no tax benefits for employer contributions in Tier 2.

Voluntary contribution

NPS Tier 1: Voluntary contributions enjoy the same tax benefits as regular contributions under Section 80C and 80CCD(1B).
NPS Tier 2: Voluntary contributions do not qualify for any tax deductions.

NPS Tier 1 vs NPS Tier 2

Feature	NPS Tier 1	NPS Tier 2
Eligibility	Mandatory for all NPS subscribers	Optional and can be opened only if you have a Tier 1 account
Lock-in Period	Funds are locked in until the age of 60 years, with partial withdrawals allowed under specific conditions	No lock-in period; funds can be withdrawn anytime
Tax Benefits	Contributions up to ₹2 lakh are tax deductible; employer contributions (10% of salary) are also tax deductible up to Rs 7.5 lakh.	No tax benefits
Withdrawal Options	Upon retirement, up to 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity, which is taxable as per the annuity income	Withdrawals are subject to capital gains tax, depending on the holding period and type of assets

Also Read: Can NRIs open NPS Accounts?

Choosing between NPS Tier 1 and Tier 2

Choosing between NPS Tier 1 and Tier 2 depends on your financial goals. If you are looking for long-term retirement savings with significant tax benefits, Tier 1 is the ideal choice. For more flexible savings that can be accessed anytime, you can open a Tier 2 as well. It is beneficial to have both accounts to enjoy the advantages of both tiers.

By understanding the differences between NPS Tier 1 and Tier 2, you can make informed decisions that align with your financial goals. You can invest in NPS via Axis Bank’s internet and mobile banking app and plan for a financially secure future today.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.