Types of NPS Accounts

If you want to create a resilient retirement fund for the future then is imperative to start planning for your retirement right from the time when you start earning. As there are many different retirement plan options available in the market, the government initiated the National Pension Scheme is one of the best options of investment to create a retirement corpus.

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Tax efficiency, low-cost structure, and investment flexibility have made NPS a popular investment choice for retirement planning. As a government-initiated investment option, NPS is one of the safest investment products available in the market and is specially designed to ensure the financial security of Indian residents post-retirement. There are two different NPS account available i.e. Tier I and Tier II account. let’s read further to understand it in detail.

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What is NPS Tier I Account?

NPS Tier I  account is a mandatory account. While opening NPS Tier I account the subscriber gets a Permanent Retirement Account Number (PRAN). To open the account you will need to make a minimum contribution of Rs.500. The minimum contribution limit for the Tier I account is Rs.1000 per annum, whereas, there is no limit on maximum contribution towards the NPS account. The accumulated fund is locked in until you turn 60 years of age. To open a Tier I account, the individual should fill in the right information along with the required document while filling up the registration form.

What is NPS Tier II Account?

NOS Tier II account is a voluntary account that can be opened only if the individual has the Tier I account.  Tier II account has flexible exit and withdrawals rules. Even though both the accounts work almost similar there are certain differences. To open a Tier II account one should make a minimum contribution of Rs.1000. Moreover, the contribution made towards the Tier II account does not qualify for tax exemptions. The fund management charges and investment choice in the Tier-II account are the same as the Tier I account.

Key Highlights of NPS Scheme

  • All Indian citizens between the age group of 18-60 years can open the NPS account.
  • The maturity age of the scheme is 60 years, which can be further extended up to 70 years.
  • The current interest rate applicable to the investment done in the NPS account is 9%-12%.
  • The NPS benefit also includes tax exemption U/S 80C of the Income Tax Act up to the maximum contribution of Rs.1.5 lakh made towards the NPS.

Let’s take a look at the top 5 reasons why NPS should be a part of your retirement planning.

  • Dual Benefit of Power of Compounding and Low Cost

    NPS is one of the most affordable pension investment products available in the market. An individual can start investing in the NPS scheme with a minimum contribution of Rs.500 for the Tier-I account and Rs.250 for the Tier-II account and can invest up to a maximum of Rs.6000 in a financial year.  Moreover, the investment made towards the NPS scheme is multiplied in the long-term with the benefit of the power of compounding and helps to create a strong financial cushion for a secured life after retirement.

  • Interest/Returns

    A part of the investment made towards the NPS scheme is invested in equity securities, which offers profitable returns as compared to the other tax-saving option of investment like PPF. The scheme offers an interest rate of 9%-12% and is best suitable for individuals who want to gain a high return on investment and create wealth in the long-term.

  • Flexibility

    NPS offers flexibility, as you can choose your pension fund and investment option and see your capital grow. Also, you can switch the asset class and investment option twice a year and can change your pension fund once a year. As per the rule of the equity allocation, you can allocate a maximum of 50% of the investment in equity securities. Moreover, NPS also offers you two different choice to invest in your account i.e.

    • Active Choice- In this option, you can select the allocation percentage in the asset classes.
    • Auto Choice- In this option, the funds are automatically allocated among the different asset classes in a pre-defined time- period as per the age of the subscriber.
  • Tax Benefit

    NPS scheme also offers tax benefits the same as PPF and EPF. NPS offers tax benefits under the EEE rule i.e. exempt, exempt, exempt. Under this rule, the investment made in the scheme, the interest earned on the contributed amount, and maturity proceeds are all applicable for tax exemption Under Section 80C of the Income Tax Act. NPS also offers additional tax benefits on the contribution of Rs.50,000 over and above the investment in the NPS account. Thus, you can claim a total tax exemption of Rs.2 lakh.

  • Assured Annuity Amount

    After the maturity of the NPS scheme, you can withdraw only 60% of the accumulated fund from the account after retirement. However, it is mandatory to purchase the annuity from the rest 40% of the accumulated fund. You can select the annuity service provider at the time of submitting the withdrawal request and after the payment of the lump-sum withdrawal.

    The amount of annuity depends on the annuity purchase amount & tenure of the annuity policy. The annuity purchased by you ensures a regular flow of pension income after retirement. As per the information available on NSDL, the minimum age of receiving the annuity is predefined by the Annuity Service Provider (ASP).

Wrapping it UP!

With the above-mentioned reasons, it is justified now why you should invest in the NPS scheme to create more resilient retirement planning.

Written By: PolicyBazaar - Updated: 20 December 2021
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