NPS, or National Pension System, is a market-linked retirement saving scheme launched by the government through the Pension Fund Regulatory and Development Authority (PFRDA). Considered as a tax-saving instrument, this scheme enables you to earn attractive returns over time, especially from a retirement point of view.
When planning to invest in NPS, it is mandatory to create an NPS account once you receive your Permanent Retirement Account Number (PRAN). However, since there are two types of NPS accounts available to subscribers of the scheme, you might find it confusing to decide which type of account to opt for.
- Tier I:
It is a mandatory retirement account wherein you need to invest a minimum of Rs. 1,000 per financial year to keep your account active. This type of account offers premature withdrawals subject to certain conditions – you need to be invested in this scheme for at least three years, such withdrawals cannot exceed 25% of the fund value, can happen only thrice during the entire tenure and only against specified reasons.
- Tier II:
It is an optional account linked to your PRAN and can be opened voluntarily. In addition, you can withdraw your investment from a Tier II account at any time, making it a liquid asset when compared to Tier I account.
Any individual above the age of 18 up to the age of 65, whether in public, private or government service or self-employed, can open a Tier I NPS account. However, to open a Tier II type of NPS account, you must first have an active Tier I account. Additionally, only Indian residents are eligible to open a Tier II NPS account, while Tier I account can be created by NRIs to invest in this scheme, subject to different conditions under the tax laws.
- Tier I type of NPS account is mandatory to invest in this scheme
- You can make investment contributions to your Tier I account multiple times during a year, with varying sums
- You can choose your investment options and pension fund to maximise your corpus’ growth
- Tier I NPS accounts offer transparent monitoring
- You can also claim tax benefits like a deduction of up to Rs. 1.5 Lakh under section 80C and Rs. 50,000 under section 80CCD(1B) for additional investments
- A Tier II type of NPS account can be opened without any additional annual maintenance charges and closed without any exit load
- This NPS scheme type has its separate nomination facility, making it independent from Tier I account
- No minimum balance is required to maintain a Tier II NPS account type, and you can even transfer funds from this account to your Tier I account
Should you opt for NPS?
Given the benefits of this scheme, it can be a suitable retirement planning tool. Consulting a financial expert is one way to begin investing in NPS. All you need to do is sign up on the platform, set up your NPS investment, decide the payment frequency and amount, select an SIP start date and investment period, followed by selecting a pension fund manager.
You can also look at other investment options like mutual funds and stocks and opt for the services of a financial expert to plan your retirement through investments that are based on your goals and risk appetite.