The National Pension Scheme (NPS) is a retirement benefits program that provides both tax savings and a pension. NPS Tier 1 and Tier II NPS accounts are the two categories of accounts available in the National Pension System. The National Pension System is governed by the Pension Fund Regulatory and Development Authority (PFRDA) and the Indian government. NPS has a market-linked return rather than a fixed return. The amount of pension one will receive when they retire is determined by the performance of asset classes and the fund manager.
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NPS Tier 1 accounts are the most basic type of NPS account, and they are available in a variety of flavors, including NPS Government, NPS Central Government, NPS Corporate, and NPS All Citizens. All types of accounts are subject to the same basic rules. However, there are a few exceptions to the general guidelines for each of these accounts. Tier 1 accounts are required, whilst Tier 2 accounts are optional.
A Permanent Retirement Account Number (PRAN) is assigned to NPS Tier 1 accounts (PRAN). This account will be open till the investor reaches the age of 60. As a result, the money is locked in until retirement.
The investor has the option of continuing the investment until he or she reaches the age of 70. The investor can withdraw 60 percent of the investment amount in a lump sum at maturity. This is a completely tax-free transaction. The remaining 40% must be utilized to acquire an annuity. Annuity income is taxed in the year it is received, according to the individual’s income tax slab rate.
Throughout the investment’s life, the investor is required to pay annual contributions. To keep the account active, you must make a minimum investment of INR 500. According to the guidelines, the investor can also remove a portion of his or her investment or choose for a premature exit.
Investors who invest in NPS Tier I accounts are eligible for tax benefits. They can claim up to INR 1.5 lakh in tax benefits under Section 80 C of the Income Tax Act, 1961. They can also seek INR 50,000 under Section 80CCD (1B).
The following are the requirements for opening an NPS Tier I account:
An NPS Tier I account can be opened in either online or offline mode. The same is detailed in further detail further down.
A Point of Presence – Service Provider must be found in order to open an NPS Tier I account offline (POP-SP). POP-SPs are banks or branches that are authorized to provide NPS services to NPS members. The steps to enroll in the NPS scheme through the offline mode are as follows:
To open an NPS Tier I account, go to the NPS website and complete the following steps:
The features of the NPS Tier 1 Account are as follows:
The NPS Tier 1 retirement account is a basic pension account. When subscribers open an account, they are given a PRAN (Permanent Retirement Account Number).
There can only be one NPS account per person.
When the investor reaches the age of 60, the NPS account matures. The investor can take up to 60% of the fund’s value at maturity and use the remaining 40% to purchase an annuity plan.
Premature withdrawals are permitted in the NPS Tier 1 account. Only if the subscriber has completed 15 years of service and in the form of a repayable advance. Furthermore, these withdrawals are only possible in the event of an emergency. NPS can also be withdrawn for the purpose of building or purchasing an investor’s first home.
Partially withdrawing funds is permitted, but only up to 50% of the funds, and only if the subscriber has completed 25 years of service.
The government and business bonds are mostly invested in the Tier 1 NPS account for public sector employees. Every year, investors must put 10% of their basic plus dearness allowance into the scheme. In addition, the government contributes the same amount.
The NPS Tier 1 account invests in a mix of fixed deposits, equities funds, the government of India bonds, corporate bonds, and liquid funds for private-sector employees. The subscriber is required to invest at least INR 1,000 per financial year.
The Tier 1 NPS account can be accessed from any location in the United States. Subscribers to the National Pension System (NPS) can switch from public to private sector jobs and vice versa while keeping their NPS account.
Investments in the National Pension Scheme up to INR 1,50,000 are eligible for a tax advantage under Section 80C of the Income Tax Act, 1961.
Subscribers can request an online withdrawal through their National Pension Scheme (NPS) account login. However, the linked POP must allow and verify the request. To begin the withdrawal process, the subscriber must use their “Claim ID” or “User ID.”
Subscribers to the National Pension Scheme can make withdrawals using their Claim ID and IPIN in the CRA system. This must be done within six months of reaching the age of superannuation or the vesting date.
The tax rules for a Tier I National Pension Scheme NPS account are as follows:
In the case of self-employed people, 10% of their gross income is taxed.
Parameters | NPS Tier 1 | NPS Tier 2 |
Eligibility | Between the ages of 18 and 65, Indian citizens | Tier 1 account holders only |
Lock-in period | Until the subscriber reaches the age of 60. | NIl |
Minimum number of contributions per year | 1 | Nil, the subscriber has the option of making no investment for the year. |
Benefits from the contribution in terms of taxes | Section 80C of the Income Tax Act, 1961 allows for a tax deduction on investments up to Rs 1,50,000 every financial year. A tax deduction is available for additional contributions up to INR 50,000 under Section 80CCD (1B) of the Income Tax Act, 1961. | No tax benefit |
Withdrawal taxes | The entire pension fund sum is tax-free when it matures. | The sum is added to the investor’s taxable income and taxed at the appropriate rate. |
Also, read
Everything to know about Atal Pension Yojana
National Pension Scheme | How to join NPS and what are the documents required