NPS Tier 1

National Pension System (NPS) Tier 1 account is a retirement savings account offered by the Government of India. It is a long-term investment scheme that helps you save for your retirement. You can open an NPS Tier 1 account if you are between 18 and 60 years of age.

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Let us take a close look at the NPS in general to comprehend Tier 1 account’s significance. 

NPS Tier 1 Account Features

The NPS Tier 1 account provides the platform to amass a corpus for generating retirement income through annuity investments. Here are some features of the account:

  • The PRAN (Permanent Retirement Account Number), a 12-digit number assigned during NPS subscription, is necessary to open a Tier 1 account.

  • Regardless of changing employers, you can only have one NPS account.

  • The account remains locked until you turn 60, but you have the option to extend it for another 10 years.

  • Upon retirement, you can withdraw the accumulated funds in two portions: 60% and 40%.

  • After completing 25 years of service, you can withdraw 50% of the accumulated funds.

  • Early withdrawals from the Tier 1 NPS Account are permitted in the form of repayable advances, but only after 15 years of service. Such withdrawals are allowed in cases of unforeseen circumstances like critical illness or emergencies.

  • After completing 15 years of service, you are eligible to withdraw from the Tier 1 corpus.

  • Public sector employees have investment options in government and corporate bonds for their Tier 1 funds, while corporate employees typically have a mixed-asset allocation in stocks, bonds, and fixed deposits.

  • When opening your NPS Tier 1 account, you can choose between the "active" or "auto" investment models.

  • Investments made in the Tier 1 account are eligible for tax exemptions.

NPS Tier 1 Eligibility Criteria

NPS is a pension scheme for Indian citizens. Eligibility criteria for NPS include:

  • Open to Indian citizens, residents, and non-residents.

  • Non Resident Indians are also eligible for the NPS scheme

  • Minimum age is 18 years, and the maximum age is 70 years (as of August 2021).

  • Account can be deferred until the subscriber turns 75.

How to Open Your NPS Tier 1 Account?

The process for opening your NPS Tier1 account is flexible and uncomplicated. You can choose between online and offline modes and follow the simplified procedure. 

Online Process

  • Visit the official e-NPS portal and register.

  • Enter the required information and receive an OTP on your registered mobile number.

  • Verify the OTP to log in.

  • Select the Tier 1 account and choose from eight fund managers.

  • Decide between "active" or "auto" mode for asset allocation.

  • Complete the nomination process and specify the share for each nominee.

  • Upload KYC documents with the registration form.

  • Make a minimum initial contribution of Rs.500 to finish the registration.

  • Once these steps are completed, your PRAN is generated, and you become an NPS subscriber.

Offline Process

  • Visit the nearest bank or the Point of Presence Service Provider (POP-SP) to collect the application form.

  • Submit the filled-in form along with the required documents for KYC compliance and other formalities.

  • Make the minimum initial payment to complete the registration process and initiate the generation of your PRAN. 

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Documents Required for Opening NPS Tier 1 Account

The NPS Tier 1 Account opening process requires the submission of specific documents. These documents include:

  • A completed registration form.

  • Proof of the applicant's identity.

  • Proof of the applicant's address.

  • Proof of the applicant's age or date of birth.

NPS Tier 1 Account Withdrawal

Withdrawal from the Tier 1 account is defined under specific clauses after compliance with the rules.

Scenario Lump Sum Withdrawal Annuity Requirement
On Superannuation Up to 60% Mandatory for 40%
Before Maturity 20% Mandatory for 80%
Upon Death Full amount No annuity requirement

Taxation Process of Funds in the NPS Tier 1 Account

Tax Rebate for Salaried Individuals:

  • Salaried individuals can contribute up to 10% of their salary (Basic + DA)  to NPS Tier 1 account.

  • Employees are eligible for a tax deduction on their employer's NPS contribution, which is 10% of their salary (Basic + DA). The deduction is capped at Rs. 1 lakh and falls under section 80CCC of the Income Tax Act.

Tax Rebate for Self-Employed Individuals:

  • Contributions are eligible for a tax deduction under Section 80CCD(1) up to Rs. 1 lakh per year.

NPS Tier 1 Tax Implications

Contributions to the National Pension System (NPS) Tier 1 account have certain tax implications in India. 

Here are the key points regarding the tax treatment of NPS Tier 1 contributions:

Contributions

  • 80CCD (1):

    Your permitted deduction is a maximum of Rs.1.5 Lac for the NPS Tier 1 account contributions.

  • 80CCD (1B):

    You can claim an additional Rs.50000 deduction over and above claimed under 80CCD(1).

  • 80CCD (2):

    You can claim a deduction for the employer’s contribution to the NPS Tier I account without any upper limit.

People Also Read: National Pension Scheme

What is the process of closing the NPS Tier-I Account?

To close an NPS Tier-I account, follow these steps:

  • Visit the official website of the National Pension System (NPS).

  • Log in to your NPS account using your user ID and password.

  • Navigate to the "Account Closure" or "Withdrawal Request" section.

  • Fill out the account closure form with the necessary details.

  • Submit the form electronically.

  • Once the form is submitted, your request will be processed by the NPS authorities.

  • After verification, the funds in your NPS Tier-I account will be transferred to your registered bank account.

  • You will receive a confirmation of the closure of your NPS Tier-I account via email or SMS.

Difference Between NPS Tier I and NPS Tier II Accounts 

Understanding the difference between NPS Tier I and NPS Tier II accounts is essential for individuals seeking to make informed decisions about their retirement planning. 

Here's a table outlining the differences between NPS Tier I and NPS Tier II accounts:

NPS Tier I NPS Tier II
Purpose Retirement savings and investment Voluntary savings and investment
Withdrawals Partial withdrawals permitted after 3 years of account opening, subject to certain conditions and limits Unlimited withdrawals permitted at any time
Tax Benefits Tax deduction available on contributions under Section 80CCD(1) of the Income Tax Act, subject to limits No additional tax benefits on contributions
Minimum Contribution Rs. 500 per contribution and a minimum annual contribution of Rs. 1,000 Rs. 250 per contribution, no minimum annual contribution requirement
Investment Options Choice of investment schemes, including equity, corporate bonds, government securities, etc. Choice of investment schemes, including equity, corporate bonds, government securities, etc.
Account Portability Not portable across various sectors and employment types Portable across various sectors and employment types
Lock-in Period Generally until the investor reaches the age of 60 No lock-in period; funds can be withdrawn anytime
Account Type Mandatory for individuals joining the National Pension System (NPS) Optional for individuals who already have an NPS Tier I account

In Conclusion 

NPS Tier 1 is an important investment option for individuals looking to secure their retirement years. It offers numerous benefits such as attractive interest rates, tax benefits, and the guarantee of a stable income stream after retirement. By contributing to the NPS Tier 1 account, individuals can build a substantial corpus over time, ensuring financial security and independence during their golden years.

FAQ's

  • What is the new NPS Tier-1 lock in period? 

    The NPS Tier 1 account has a lock-in till the age of 60. However as mentioned above, you can exit the system prematurely before 60 subject to the terms and conditions mentioned above.
  • What is NPS Tier-1?

    NPS Tier-1 is the primary account of the National Pension Scheme. It is a long-term retirement savings account with certain restrictions on withdrawals, designed to provide a stable income during retirement.
  • Who is eligible to open an NPS Tier-1 account?

    Any Indian citizen, whether resident or non-resident, between the ages of 18 and 65 years can open an NPS Tier-1 account. It is also open to corporate subscribers, such as employees of registered companies.
  • What are the key features of NPS Tier-1?

    • Long-term retirement savings account.

    • Flexibility to choose investment options.

    • Tax benefits on contributions and withdrawals (subject to prevailing tax laws).

    • Option to select Pension Fund Managers (PFMs) for fund management.

  • How do I make contributions to my NPS Tier-1 account?

    NPS Tier-1 contributions can be made through various modes:

    • Electronic Clearing Service (ECS).

    • Standing Instruction (SI) facility with your bank.

    • Online payment using the NPS website.

    • Deposit at a Point of Presence (POP) or a registered intermediary.

    • Contribution through salary deduction, if your employer is registered with NPS.

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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