NPS Account Tier 1 Vs. Tier 2

The government of India introduced National Pension System for its employees in 2004, replacing the existing pension scheme. Subsequently, the enlarged ambit covers the salaried and the self-employed as well from May 2009. The scheme is designed to fulfill the government’s social obligation by extending old age security coverage to its citizens. The system ensures retirement income through long-term market-based returns on the accumulated corpus in a defined architecture comprising Tier 1 and Tier 2 accounts.  These accounts are the lifeline of the system that you must know, regardless of your professional status.

Read more
  • Peaceful Post-Retirement Life

  • Tax Free Regular Income

  • Wealth Generation to beat Inflation

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Invest ₹6,000/month & Get Tax Free Monthly Pension of ₹60,000

Get the best returns & make the most of your Golden years

View Plans
Please wait. We Are Processing..
Plans available only for people of Indian origin By clicking on "View Plans" you agree to our Privacy Policy and Terms of use #For a 55 year on investment of 20Lacs #Discount offered by insurance company Tax benefit is subject to changes in tax laws
Get Updates on WhatsApp
We are rated
58.9 million
Registered Consumers
26.4 million

What is the Meaning of Tier 1 and Tier 2 Accounts in NPS?

The entire scheme revolves around the two account types with varying connotations for the subscriber.  You contribute to the accounts during your earning years to reap the benefits of the corpus as you retire at sixty years of age. The Tier 1 account is mandatory where you contribute till you retire. The Tier 2 account, on the other hand, is optional with no compulsion to contribute but supplements your retirement corpus. 

The primary difference is that the Tier 1 account is rigid about withdrawals while the Tier 2 account is flexible and liquid. 

NPS Account Tier 1 Vs. Tier 2 – Subscription

The Pension Fund Regulatory and Development Authority (PFRDA) is the NPS’s governing body, while the NSDL is the Central Recordkeeping Agency (CRA). The CRA generates the unique Permanent Retirement Account Number (PRAN) for each subscriber acting as the ID maintained in its database. The NPS operates through well-defined models structured on the subscriber class. Check where you belong:

  • Government Model: Covers all Central and State Government employees barring the Armed Forces.

  • Corporate Model: Covers public and private sector employees.

  • All Citizens Model: Any citizen of India can volunteer to join the system. 

The subscription to NPS is determined by the model you belong to, and the available options are:

  • Nodal Officers: Employers and Government employees

  • POP-SP (Points of Presence – Service Provider):   Corporate Employees

  • POS-SP or eNPS: Other individual subscribers by using the PAN Card and bank account credentials.

Difference Between NPS Account Tier 1 Vs. Tier 2

You are eligible to subscribe to the NPS if you are an Indian citizen between 18 and 65 years of age. Since 1 May 2009, there has been no bar on joining the scheme even if you are self-employed. The differences between these two accounts are:

Parameter Tier – 1 Account Tier – 2 Account
Eligibility Opening the account is mandatory if you want to enjoy the benefits of NPS. The prerequisite is that you must have subscribed for NPS membership and possess a valid PRAN. The account is optional, but you can open it only after opening the Tier 1 account.
Contribution You open the account with Rs.500 and deposit a minimum of Rs.1000 every year to continue your membership.  The salaried contribute a compulsory 10% of their basic pay, and the employer an equal amount every month. However, the Central Government contributes 14% of the employee’s monthly basic pay. You are under no compulsion to contribute regularly to the account. It is an open-access account where you contribute a minimum of Rs.1000 initially to get going. But consider a subscription to the account in place of the Mutual Fund Systematic Investment Plan (SIP) as a first-time investor to save and earn market-linked returns.
Lock-in Period The fund is locked in the account until you reach sixty years, considered the retirement age. Your fund is not locked in, and you can withdraw the accumulated balance in full or partially, according to your convenience.
Return on Investment The NPS corpus grows based on the long-term returns earned in Tier 1 and Tier 2 accounts. Beginning from the Pension Fund Manager (PFM) selection, your role is crucial. The return under NPS is market-driven, depending on the PFM’s fund allocation. Therefore, you must not expect a fixed return, but a record of 9% to 15% makes it a safe investment vehicle. The PFM declares the Net Asset Value (NAV) at the day-end, and units are credited to your NPS accounts. It implies that you do not access the returns by way of dividend or bonus, for which the withdrawal rules apply.
Tax Benefits On Investment: You are eligible for tax deduction under Section 80CCD of the Income Tax Act, 1961. 
  • 80CCD (1):  Permitted deduction is 10% of your monthly income if you are salaried and 20% for the self-employed, limited to a maximum of Rs.1.5 Lac. **
  • 80CCD (1B): A maximum of Rs.50000, regardless of your profession. ##
  • 80CCD (2):  Your employer’s contribution is up to 10% of your salary over and above 80DCCD (1). The deduction is 14% for central government employees. @@

**Within the overall limit of Rs.1.5 Lac deduction under Section 80C. ## Over and above the deduction under Section 80C. @@ Over and above the deduction under Section 80C
On Investment: You do not enjoy any tax deduction for contributing to the account.
On Maturity: You can withdraw 60% of the corpus on retirement, and the remaining 40% is used to purchase an annuity plan.  The entire withdrawal amount is tax-exempt. On Maturity: Not specified for the corpus in this account.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

“Tax benefit is subject to changes in tax laws. Standard T&C apply.”

NPS account Tier 1 Vs. Tier 2 – Which to Choose?

Having gone through the comparison between the NPS Tier 1 and Tier 2 accounts, you must have a grasp of the pros and cons. In addition, your careful consideration must factor the following:

  • The Tier 1 account provides fewer opportunities to meet financial emergencies, unlike the Tier 2 account.

  • While the Tier 1 account is rigid, the Tier 2 account is similar to operating a savings bank account. 

  • You enjoy more significant tax benefits with the Tier 1 account than the Tier 2 account at the investment and maturity phases. 

  • However, the Tier 2 account augments your retirement corpus with extreme flexibility.

In Conclusion 

The Tier 1 account is the clincher in your retirement planning through the NPS route. For the salaried, especially in the government sector, you do not have a choice but open a Tier 1 account. However, the compulsory Tier 1 and the voluntary Tier 2 accounts complement each other functionally.   However, the accounts differ widely in terms of flexibility while fulfilling the long-term objective. So, consider all these factors and choose wisely.


Secure Your Retirement Today
Start Investing ₹6,000/month
Get Pension ₹60,000/month+
Including Life Cover
View Plan
Pension Plans
+Standard T&A Applied
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
Retirement Plans
Monthly Pension Plans
Higher Returns Than Fixed Deposit
Retirement Calculator
Retirement Calculator
How much do you need to save for retirement?
₹ 20,000
₹ 25,000
₹ 30,000
Monthly Expenses in 2023
Edit Done
Your expense go up every year by
Today 2023 Your expenses today in 2023, at the age of 34 Yrs
Your expenses in 2043, at the age of 55 Yrs
For a monthly pension of ₹77,300
you need to invest
Calculated as per past performance of 15%
View Plan Recalculate?

Pension plans articles

Recent Articles
Popular Articles
How to Get a 50K Pension Per Month?

15 Jun 2022

Retirement planning should form an essential part of your
Read more
NPS Premature Withdrawal

15 Jun 2022

The National Pension Scheme is the Central Government’s social
Read more
Get 30K Pension Per Month

15 Jun 2022

Planning retirement is extremely important and crucial these
Read more
Atal Pension Yojana Premium Chart

08 Jun 2022

Atal Pension Yojana (APY) is a government of India initiative to
Read more
Pension Scheme for Senior Citizens

02 Jun 2022

Retirement planning is paramount to creating a constant source
Read more
National Pension Scheme (NPS) – Govt Approved Pension Scheme
National Pension Scheme or NPS scheme is an investment cum pension plan launched by the Indian Government. This
Read more
NPS Calculator - National Pension Scheme Calculator Online
National Pension Scheme Calculator is an online tool, which allows the individual to calculate the estimated
Read more
How to Get a 50K Pension Per Month?
Retirement planning should form an essential part of your financial decision-making. As we grow older, job
Read more
Post Office NPS Calculator 2023
National Pension System is a scheme launched by the Government of India that offers stability to all Indian
Read more
NPS Tier 2 Account Advantages and Disadvantages
NPS, or the National Pension Scheme, is an initiative taken by the Central Government that protects the holder's
Read more

Download the Policybazaar app
to manage all your insurance needs.