What is the
difference between Tier 1 and Tier 2 Account in NPS? Many Government employees
or others subscribed to
NPS. However, the majority of them do not know what is
the meaning and difference of Tier 1 and Tier 2 Accounts of NPS.
Let us first
brief about NPS.
NPS or New
Pension Scheme is a retirement product launched by Government of India. It is
managed by PFRDA (Pension Fund Regulatory and Development Authority). This
product helps you to create retirement corpus.
Any citizen
of India (whether resident or NRI) can invest in this scheme. The age of the
subscriber must be within 18-60 years of age. However, an individual of unsound
mind or existing members of NPS are not allowed to open new account.
Therefore,
an individual can open only ONE NPS account.
How to open
NPS Account?
You have to
fill the application form and provide the relevant KYC documents at your
nearest POP-PS (You will find the list in PFRDA portal).
However, if
you want to open new Tier 2 account, then the process is different. You have to
approach POP-PS with copy of PRAN (Permanent Retirement Account Number) and
Tier 2 activation form.
The
subscriber has to make the first contribution while opening the account.
Minimum contribution for Tier 1 is Rs.500 and Rs.1, 000 for Tier 2.
Note-Now you
can open NPS account online and also contribution can be made it online through
eNPS portal. Refer my latest post on the same “eNPS – How open and invest in
NPS account online?“.
What are the
investment choices?
Asset Class
E-Invests predominantly in the equity market. You may say high return and high
risk.
Asset Class
C-Invests in fixed income instruments other than Government Securities. Risk is
medium in this category.
Asset Class
G-Invests in Government Securities. So lower risk and lower return.
Along with
that, you have two different options to choose regarding allocation.
Active
Choice-You have the option to choose your investment among E, C or G asset
classes. However, if you opted for E asset class, then the maximum equity
exposure is 50% only.
Auto
Choice-If you don’t want to take active part in switching asset class, then
PFRDA will do it according to your age. It is predefined.
You can
change both scheme preference and investment choices at any point of time. But
it is allowed only once in a year.
Please
remember that there is no ASSURED RETURN from NPS.
Your
retirement fund will be managed by fund managers appointed by PFRDA. Currently
there are six fund managers. They are as below.
ICICI
Prudential Pension Funds Management Company Limited, Kotak Mahindra Pension
Fund Limited, Reliance Capital Pension Fund Limited, SBI Pension Funds Limited,
UTI Retirement Solutions Limited, and Annuity Service Provider (ASP).
You can
change your fund manager at any point of time. This change is allowed only one
time in a year.
Along with
that, PFRDA tied with IRDA approved Life Insurance companies to pay the pension
once the subscriber reaches 60 years of age. They are as below.
Life
Insurance Corporation of India, SBI Life Insurance Co. Ltd., ICICI Prudential
Life Insurance Co. Ltd., Bajaj Allianz Life Insurance Co. Ltd., Star Union
Dai-ichi Life Insurance Co. Ltd., Reliance Life Insurance Co. Ltd. and HDFC
Standard Life Insurance Co. Ltd.
Following
conditions apply:
Subscriber
is not covered under employer assisted retirement benefit scheme and also not
covered by social security schemes under any of the following laws:
Employee
Provident Fund and Miscellaneous Provision Act, 1952
The Coal
Mines Provident Fund and Miscellaneous Provision Act, 1948
The Seamen’s
Provident Fund Act, 1966
The Assam
Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955
The Jammu
& Kashmir Employee Provident Fund Act, 1961
Subscriber
contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for
both Tier1Â and Tier II taken together, provided subscriber makes minimum
contribution of Rs.1000 per annum to his Tier 1 account
Based on the
limitations mentioned above, I think most people reading this blog will be
ineligible.
How to exit
from NPS?
Once you
attain the age of 60 years, you can withdraw up to 60% of accumulation as lump
sum and rest 40% will be converted into pension.
If you want
to exit from NPS before 60 years of age, then you are allowed to withdraw only
20% accumulated amount. You have to buy a pension product with that 80% fund.
However, in
case the death of the subscriber, a nominee is allowed to withdraw 100% of NPS.
I wrote a
post on recent changes about new withdrawal of exit rules of NPS. Refer below
post.
National
Pension System (NPS)-New Partial Withdrawal and Exit Rules
This is the
brief about NPS.
Let us come
back to the main purpose of this post. I tried to put it the difference in
below image.
Note-
-As per
recent PFRDA circular dated 8th August, 2016, the minimum contribution in Tier
1 Account is now reduced to Rs.1,000 a year. There will be no minimum
investment limit for Tier 2 account (Earlier, it was Rs.250). Also you no need
to maintain the minimum balance in Tier 2 account (Earlier, it was Rs.2,ooo).
-From Budget
2016, the 40% withdrawal at the time of your retirement from NPS will be
tax-free. Rest 60% of the corpus will be treated taxable income as per old
rules. Hope this above table cleared your doubts.
Conclusion-You
notice that when it comes to taxation, NPS is one of the worst products.
Everybody concentrating on the tax benefits of NPS while investing. However,
they forget the tax issues at retirement or at withdrawal. Along with that,
liquidity is an issue with NPS. For Government employees and corporate
employees, no option but to invest.
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