NPS Tier 1

NPS Tier 1 is the compulsory component of the National Pension Scheme (NPS) designed for the financial stability in the working population’s retired life. Opening a Tier 1 account is the mainstay of the NPS subscription wherein you contribute a percentage of your monthly salary to continue the subscription.

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Your employer also contributes to the account to build a retirement corpus that ensures a regular income in your life after superannuation. In addition, it protects your family’s financial interests even in your absence. 

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

What is NPS?

NPS is the government’s social welfare initiative to provide financial freedom to retired citizens regardless of their residential status. The scheme initially covered the government employees but subsequently extended to all citizens, including the corporate sector and self-employed people. NPS Tier 1 is the primary account. 

However, several restrictions apply to the Tier 1 account like withdrawal on retirement at 60 years and compulsory deployment of the maturity corpus for a regular pension. 

NPS Tier1 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 12-digit PRAN (Permanent Retirement Account Number) allotted on the NPS subscription is essential to open the Tier 1 account.

  • You can open only one NPS account even if you switch employers. 

  • The account is locked in till you are 60, but you can extend for another 10 years.

  • You can withdraw the accumulated corpus as you retire in two tranches of 60% and 40%. 

  • You can withdraw 50% of the accumulated corpus after completing 25 years of service life.

  • You can close your NPS account prematurely after complying with the specific terms and conditions governing withdrawal.

  • You are allowed to withdraw from the Tier1 corpus after completing 15 years of service. 

  • Investment options for the Tier 1 funds are in the government and corporate bonds for the public sector employees. In contrast, a mixed-asset allocation in stocks, bonds, and fixed deposits is the norm for corporate employees. 

  • Choose the investment model from the “active” or “auto” while opening your NPS Tier 1 account. 

  • As per the extant tax laws, you enjoy tax-exemptions for investment in the Tier 1 account.  

NPS Tier 1 Eligibility Criteria

NPS is a voluntary contribution defined pension scheme designed for Indian citizens. You must consider the following eligibility criteria before subscribing to NPS.

  • Individual Indian citizens, residents, or non-residents are eligible to join NPS.

  • Overseas Citizens of India (OCI) and Persons of Indian Origin (PIO) cardholders are eligible for the scheme from October 2019.

  • The minimum age for joining NPS is 18 years, and the upper age limit is 70 years per revision in August 2021.

  • The account can be deferred till 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. 

  1. Online Process

    • Visit the official e-NPS portal and invoke the registration module.

    • Input the necessary information to generate an OTP sent to the registered mobile number.

    • Verify the OTP to log in afresh.

    • Click on the Tier 1 account and select the fund manager from the eight available options.

    • Choose the “active” or the “auto” mode for asset allocation.

    • Complete the nomination process and define the share of each nominee.

    • Upload the KYC documents alongside the registration form.

    • Pay the minimum Rs.500 initial contribution to complete the registration process.

    • Once the above steps are over, your PRAN is generated, and you are now an NPS subscriber.

  2. 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. 

NPS Tier 1 Account Withdrawal

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

  • On Superannuation: You can withdraw up to 60% of the accumulated corpus in a lump sum. However, you must compulsorily purchase a suitable annuity for regular pension with a residual of 40%.

  • Before Maturity: You can withdraw only 20% of the accumulated corpus in a lump sum if you desire to withdraw prematurely and close the Tier 1 account. You must invest the remaining 80% in annuities for a regular pension. 

  • Upon Death: Your nominees registered with the Central Recordkeeping Agency (CRA) can claim the entire corpus without investing in an annuity upon your untimely demise before maturity.   

NPS Tier 1 Tax Implications

You are eligible for tax-exemptions both for your contributions and withdrawal to and from the NPS Tier 1 account. However, the withdrawals are subject to underlying conditions in the IT Act, 1961. 

  1. 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 1 account without any upper limit.  

  2. Withdrawal

    • 60% withdrawal on superannuation is tax-free.

    • 40% withdrawal used to purchase is also tax-free, subject to underlying conditions. However, the pension received is taxable as salary income. 

    Disclaimer: Tax benefit is subject to changes in tax laws.

In Conclusion 

NPS Tier 1 account is the basis for your retirement planning. Subscription to the government-sponsored scheme is compulsory for all employees in the public sector while it is voluntary for others. 

The retirement corpus built around asset allocation in market instruments provides social security and financial stability to the retired working population. The scheme also provides financial security to your family members if the policyholder passes away before maturity.

FAQ's

  • Q. What is the minimum compulsory contribution to the NPS Tier 1 Account?

    A. You must deposit at least Rs.1000 in a financial year in your NPS Tier 1 account to avoid default. 
  • Q. In what form is your contribution held in the NPS Tier 1 account?

    A. Your contribution is converted into units after the fund manager undertakes asset allocation. The value of units credited to your account is determined by the Net Asset Value (NAV) of the units in your account. 
  • Q. How much is the mandatory monthly salary percentage contributed to your NPS Tier 1 account?

    A. For the central government employees, the contribution is 14% of the monthly salary while 10% for the others. 
  • Q. Can you nominate a minor to your NPS Tier 1 account?

    A. Yes, provided you submit the minor’s birth certificate and the guardian’s details. In this case, a claim for the subscriber’s premature demise, the guardian must file the claim supported by the nominee’s birth certificate.
  • Q. Can you contribute to your NPS Tier 1 account before receipt of PRAN?

    A. The PRAN allotment is compulsory to commence contribution to your NPS Tier 1 account regardless of the receipt of the card.
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