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Understand NPS tier 2 Vs tier 1 accounts

December 27, 2018 2269
In India, the outreach and the general awareness about financial planning and future security is a subject that is picking up its momentum. However, a lot of ground yet remains to be covered and gradually things are shaping up. Among the core areas of financial inclusion, retirement planning and building up funds for the later years in life is a matter that is very important for everyone.

After all, in the absence of a regular paycheck every month and the bills coming in, everyone needs a solid financial framework for financial strength. With this view, government of India launched the National Pension Scheme in 2004. Originally, it was meant exclusively for government employees but its framework was later expanded to include employees of all the sectors - organized as well as unorganized.

What is NPS?

NPS is basically an annuity product that is meant to serve as a retirement fund, after an employee retires from active service. Unlike EPF (Employees Provident Fund), contributions towards NPS are not mandatory and are voluntary in nature.

Any citizen of India, in the age group of 18 to 65 years can avail of this scheme and the whole scheme is governed and regulated by the PFRDA (Pension Fund Regulatory and Development Authority), under the aegis of the government of India.

The NPS offers government bonds, corporate and equity related options as the main fund driving instruments and is structured in two mechanisms or tiers, which are referred to as tier 1 and tier 2.

 

Tier I Account

Tier II Account

Who Is Eligible?

All Indian citizens between the ages of 18 and 65

Any Indian citizen with an active Tier I account

Minimum Contribution Required to Open Account

INR 500

INR 1,000

Minimum Annual Contribution Required

At least one contribution of INR 1,000 is required each year.

It is not mandatory to make a contribution every year.

Are Contributions Exempt from Tax?

Contributions up to INR 1,50,000per year qualify for deductions under Section 80C of the Income Tax Act.

Further deductions of INR 50,000 can be availed under Section 80CCD(1B).

No, contributions made to Tier II accounts are not exempt from tax.

Rules on Withdrawals

No withdrawals can be made for the first three years.

After that, up to 25% of the fund value can be withdrawn, but only for specific purposes.

Once the account holder reaches the age of 60, 60% of the fund value can be withdrawn and the balance amount is used to purchase an annuity.

There are flexible

withdrawal and exit rules.

Withdrawals can be made at any time.

Taxes on Withdrawals

60% of the corpus, which is what can be withdrawn at maturity, is exempt from taxes.

The withdrawn amounts are added to the account holder's income, which is taxed as per the current income tax slab rates.

Fund Management Charges

The fund management charge, known as the Investment Management Fee, is 0.01% for both Tier I and Tier II accounts.

Availability of Asset Classes

The following asset classes are available to both Tier I and Tier II account holders:

  • Equity (E)

  • Corporate Debt (C)

  • Government Securities (G)

  • Alternative Investment Funds (A)

 

A subscriber whose tier 1 account is set up can then set up her/his tier 2 account. An NPS tier 2 account basically serves like a regular bank savings account from which regular transactions in the form of deposits and withdrawals can be made. Therefore, a tier 2 account functions like an investment option and is not subject to the mandatory withdrawal rules like a tier 1 account.

ARN:ED/08/20/20354

 

Plan Your Retirement Now

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