With increasing life expectancy, retirement planning has become critical for Indian citizens to maintain living standards in the coming years. The National Pension System (NPS) has emerged as a flexible and affordable instrument for retirement saving supported by attractive tax benefits.
Introduced in 2004, NPS aims to offer financial security to all Indians after 60 years of age, when regular income stops for most. It encourages people to save early for old age by offering two types of pension accounts – Tier 1 and Tier 2. Let’s understand both in detail to make an informed decision:
Demystifying the NPS Tier 1 Account
The NPS Tier 1 account is the default pension account providing pure retirement savings. Some key aspects are:
- It had a compulsory lock-in until 60 years ago, which is ideal for long-term goals
- The minimum contribution is just ₹1,000 per year
- Partial withdrawals are allowed only for specified reasons
- On maturity, 60% of the corpus can be withdrawn tax-free as lumpsum
Another significant advantage is that investments up to ₹2 lakh are eligible for tax benefits under Section 80CCD (1), 80CCD (1B) and 80CCD (2).
Opening an NPS Tier 1 Account – Eligibility
| Criteria | Details |
| Eligibility | Resident or non-resident Indian between the ages of 18 and 70 years. |
| If the NRI citizenship status changes, the NPS account will be closed. | |
| Persons of Indian Origin (PIO) and Hindu Undivided Families (HUF) are not eligible. | |
| Corporate bodies can register for NPS and offer the retirement scheme to their employees. | |
| Minimum Amount to Open Account | ₹500 |
| Minimum Annual Contribution | ₹1000 |
| Documents Required for KYC Compliance | 1. NPS account opening form |
| 2. Registration form | |
| 3. Aadhaar card | |
| 4. Proof of identity | |
| 5. Proof of address | |
| 6. Age or Date of Birth (D.O.B) proof |
How About the NPS Tier 2 Account?
The NPS Tier 2 account is a voluntary savings facility that can be opened in addition to the Tier 1 account. It offers flexibility and liquidity for short-term goals, while Tier 1 focuses on retirement.
- Easy withdrawals anytime without exit load
- There is no restriction on the withdrawal amount
- Transfers allowed from Tier 2 to Tier 1 account
- No tax benefits on investments
To open a Tier 2 account, you need an existing Tier 1 account. The minimum investment is ₹1,000, and there is no maximum limit.
Difference Between Tier 1 and Tier 2 NPS Accounts
| Feature | NPS Tier I | NPS Tier II |
| Mandatory | Yes | No |
| Minimum annual contribution | ₹500 | ₹1000 |
| Withdrawal Restrictions | Partial after 3 years, limited | No restrictions |
| Tax Benefits | Available under Sec 80CCD | None (except for government employees) |
| Lock-in | Till age 60 | No lock-in |
| Fund Transfer | Tier II to Tier I allowed | Tier I to Tier II not allowed |
Which One Should You Prioritise in 2025?
For Retirement-Focused Investors:
Tier I remains the apparent priority. The tax benefits, disciplined savings, and retirement-centric structure make it ideal for long-term financial goals.
For Flexibility Seekers and Short-Term Goals:
If you need to dip into your savings, Tier II can act as a pseudo-savings account with higher returns than traditional options. However, remember that it does not offer tax deductions (except for government employees).
Best Practice:
Ideally, start with a Tier I account and make regular contributions to lock in tax savings. Use Tier II as a supplementary account for mid-term goals or temporarily park idle funds.
Conclusion
The National Pension System aims to offer financial freedom to Indians during their retirement years when income generation options are limited. It provides an efficient avenue for retirement planning through regular pension contributions during one’s earning years.
NPS empowers people to secure their sunset years through the steady accumulation of a retirement corpus. The Tier 1 account helps build an adequate nest egg, while Tier 2 offers liquidity to withdraw money in times of need. Smart use of both accounts can enable investors to lead a comfortable retired life without financial worries.
So, if you haven’t already, open an NPS account today and take control of your golden years.
FAQs
Who is eligible to join NPS?
Indian citizens aged 18-70, including NRIs and OCIs, can invest in NPS after KYC compliance.
What are the main benefits of an NPS Tier 2 account?
Easy liquidity, no exit load, flexible withdrawals, transfers to Tier 1 accounts and no tax benefits.
How can I change the nominee for my NPS accounts?
Log in to your NPS account online, go to a service request, fill in details and submit a request to change nominee(s).
Do private sector employees get additional benefits in NPS?
Yes, up to 10% of the basic salary contributed by the organisation is eligible for additional tax benefits for private employees under Sec 80CCD(2).
Can I have more than one NPS account?
As per PFRDA guidelines, investors can only have one NPS Tier 1 and one Tier 2 account.
ThePrint BrandIt content is a paid-for, sponsored article. Journalists of ThePrint are not involved in reporting or writing it.