What Is Tier 1 And Tier 2 In Nps?
National pension scheme or NPS is one of the best retirement solutions from the government of India. The primary purpose of NPS is the retirement savings, however, you can also invest in NPS for growth and short-term goals. NPS offers two categories of accounts as of now:
Tier 1 Account: Meant for retirement savings for govt and private sector employees along with other Indian citizens Tier 2 Account: Meant for general investment
The Retirement Account – Tier 1 Account Tier 1 account is made specifically for retirement purpose. However, it does allow partial withdrawals for special occasions in life. More than that, the account offers the best tax-savings for investors. Here are the salient features of Tier 1 NPS account: Who can Invest? Any Indian citizen is allowed to subscribe to this account as soon as he/she reaches the age of 18.
Maximum age of entering NPS Tier-1 account is 60. How much Can You Invest? There is no upper limit for investment, although tax benefits will only apply to a limited amount based on your income. Also, contribution to NPS is compulsory for government employees, while private-sector employees have a choice.
However, as a self-employed person you can invest as much as you like out of your income (though, tax laws may not fully agree. Check the taxation part for details). The minimum contribution to Tier-1 account has to be at least Rs.500 per transaction and at least Rs 6000 per year.
Also, you need to invest at least once in a financial year. What about Withdrawals from Tier-1 Account? You can withdraw the funds from Tier-1 NPS account upon retirement, resignation or in the case of death, your family members can withdraw. However, in case of resignation before the age of 60 you can only withdraw up to 20% of the corpus in a lump sum, rest should be invested in an immediate annuity account for a pension.
You can also withdraw partially before maturity or resignation, but only after you have stayed invested for at least 10 years. You can withdraw only up to 25% of the corpus built from your own contributions under the following circumstances:
Higher education and marriage of your child, including the one, legally adopted Purchase of the first house property Treatment of any of the specified life-threatening diseases such as cancer, kidney failure, heart surgeries, etc.
Tax Savings: The account helps you save tax at the time of investment and at the time of maturity. At the Time of Investment: Up to Rs.2 lakhs
Employer Contribution: For private-sector employees, the contribution from the employer is tax-exempt if up to 10% of basic + DA. However, government employees can have up to 14% contribution tax-free from their employer. Self-Contribution: Contribution of up to Rs.1.5 lakhs in a financial year is exempt from tax. However, the contribution over 10% of Basic + DA salary will not be counted for the deduction. But, if the 10% of your basic + DA is more than 1.5 lakhs, or you have invested additional amount you can claim another Rs.50,000 as a deduction under section 80CCD(1B).
At the time of Maturity: Normally 60:40, Otherwise 20:80
Withdrawing Before 60: If you are withdrawing before the age of 60, as in the case of resignation. You can only withdraw up to 20% of the corpus in lumpsum. You need to annuitize the rest of the corpus for a regular income; that is, invest the sum in an immediate annuity plan. Withdrawing at or after 60: The NPS Tier 1 account matures once you reach the age of 60. At maturity, you have two options – withdraw or stay invested. If you want to withdraw any time after 60, you can withdraw only up to 60% of the corpus in a lump sum, free from tax. The remaining must be invested into an immediate annuity plan.’
Partial Withdrawals: 25% Only Partial withdrawals from the NPS Tier-1 account is only exempt on up to 25% of own contribution. Anything more will get added to your taxable income for the year. Asset Allocation in Tier 1 Account
Five Asset Choices: You can invest your retirement savings in a mix of these assets – Equity, Corporate debt, Government Debt, Alternate Assets like gold and real estate. Limits to the Asset Class: Your maximum equity allocation cannot exceed 75% of your total portfolio. the maximum allocation to the alternate asset will be limited to 5%. Limits to Choice of Allocation: You can either choose one of the automatic lifecycle-based portfolios or manually decide the ratios of asset allocation. In case you want to decide the asset allocation, it’ll be subject to the conditions above only until the age of 50. After 50 your equity allocation starts to decline and by the age of 60, you cannot have more than 50% of your portfolio into an equity fund.
Automatic Portfolio Management: NPS account offers automated portfolio management based on your age and risk appetite. You have three lifecycle portfolio choices in the declining risk order:
LC75 – Aggressive Lifecycle Fund: Maximum equity allocation 75% up to the maximum age of 35 LC50 – Moderate Lifecycle Fund: Maximum equity allocation 50% up to the maximum age of 35 LC30 – Conservative Lifecycle Fund: Maximum equity allocation 30% up to the maximum age of 35
After the age of 35, your equity and corporate debt allocation start to decline while allocation to government debt securities grows. Investment Account – Tier 2 Account Tier 2 NPS account is an open-access account with all the investment benefits except tax-saving and lock-in hurdles as Tier 1 account.
The account can be started with a minimum contribution of Rs.1000 Minimum one contribution of Rs.250 per year is required Minimum account balance at the end of a financial year should be Rs.2000
Taxation of NPS Tier-2 Account There is no limit to how much you can save or withdraw from the account or when. However, there are no tax benefits either. Upon withdrawal, the gains on your investments are added to your taxable income of the year and taxed as per the slab rates.
The Option of Tax-Saving for Government Employees In recent budget announcements, the finance minister announced the tax saving under section 80C for Tier-2 NPS account to government employees. However, the scheme has not been notified as yet. Few rules which are clear, however, tell us that if you opt for 80C deduction on your NPS Tier 2 account you will have a lock-in period of 3 years.
The rules do not say anything about the tax on maturity value from such contribution. Thus, we can assume that maturity will still be taxable as per slab rates. The deduction is not available to private-sector employees or individual contributors. Similar Retirement Investment Plans The only retirement investment plan which comes close to matching the prowess of NPS Tier-1 account is unit-linked insurance plans (ULIPs).
However, more conservative investors can also consider pension plans from life insurance providers. Life insurance pension plans have similar asset allocation profiles as the conservative lifecycle fund. However, if you are an aggressive investor, and want to build a tax-free pension, ULIPs could be your friend.
Equipped with automated portfolio management strategies and tax-free systematic withdrawals up to the age of 100, you will not need anything else.
What is difference between Tier 1 and Tier 2 in NPS?
How To Claim Tax Benefits for Tier 1 And Tier 2 If you’re keen on finding out how to claim the National Pension Scheme (NPS) tax benefits on your Tier I and Tier II accounts, this article is for you. NPS is a great tax-saving and long-term investment tool.
- One of the prime advantages of retirement planning through NPS is that along with saving for your post-retirement years; you also get to enjoy tax benefits.
- Let’s take a close look at the NPS tax saving advantages.
- NPS is a government-sponsored scheme with the dual benefits of retirement planning and tax saving.
It is managed by the Pension Fund Regulatory and Development Authority (PFRDA). The primary objective of the is to aid investors in building a sizeable retirement corpus. Any citizen of India between 18 and 60 years of age can invest in NPS. There are two types of NPS accounts – Tier I and Tier II.
- While NPS Tier I is well-suited for retirement planning, Tier II NPS accounts act as a voluntary savings account.
- Tier I NPS investment is a long-term one and the amount cannot be withdrawn until retirement.
- This is not the case with Tier II NPS accounts.Now that we have seen the difference between Tier I and Tier II NPS accounts, it’s time to explore the different NPS scheme tax benefits.
Under Section 80CCD (1) of the Income-Tax Act, NPS offers a tax exemption of up to Rs.1.5 lakh. In case a company provides an NPS facility, the employer’s contribution to NPS offers a tax rebate of up to 10% of the salary (basic plus DA) under Section 80CCD(2).For salaried individuals who have claimed tax exemption of Rs.1.5 lakh under Section 80C, NPS offers scope for additional tax savings.
- Both salaried and self-employed NPS account holders with an investment of up to Rs.50,000 qualify for an additional tax exemption under Section 80CCD (1B) of the Income-Tax Act.
- However, this additional deduction under Section 80CCD (1B) applies only to Tier I NPS account holders.
- Unlike a Tier I NPS account, Tier II NPS accounts do not qualify for a tax rebate under Section 80C of the Income Tax Act.When it comes to NPS tax benefits, another point to remember is that the deduction under Section 80CCD (1) is available to both salaried individuals and non-salaried individuals.
However, for salaried professionals, the maximum deduction allowed under Section 80CCD (1) is 10% of the salary for that year. On the other hand, for non-salaried individuals, it is 20% of their total gross income for that year.With this information of the NPS Income Tax benefit in your kitty, we are sure you will be able to grow your wealth and save on tax at the same time! Read more on the here.
Which NPS tier 2 is best?
Top Performing NPS Tier-II Returns 2023 – Scheme E –
| Pension Fund Managers | Returns (as of 31st Jan 2023) | ||
|---|---|---|---|
| 1-year | 3-year | 5-year | |
| SBI Pension Fund | 2.69% | 14.20% | 9.73% |
| LIC Pension Fund | 4.41% | 15.31% | 9.78% |
| UTI Retirement Solutions | 3.08% | 14.73% | 10.03% |
| ICICI Prudential Pension Fund | 2.66% | 14.89% | 10.13% |
| Kotak Mahindra Pension Fund | 3.02% | 14.77% | 10.10% |
| HDFC Pension Management | 3.05% | 14.85% | 10.74% |
| Aditya Birla Sunlife Pension Management | 2.91% | 14.10% | 9.81% |
Note: The returns for Tata Pension Fund, Max Life Pension Fund and Axis Pension Fund are not available since they were launched in August 2022, September 2022 and October 2022, respectively.
Is NPS Tier 2 better than FD?
You can also look at the NPS vs. fixed deposit question from the purview of risk. If you are a risk-averse investor, opening an FD makes more sense. However, if you have the risk-appetite to weather market-linked changes, you can also opt for a tier II NPS account to maximise your returns from your investments.
Is NPS better than MF?
NPS vs Mutual Fund – Difference Between NPS and Mutual Fund – 1. Risk Exposure You must accept some risk whether you invest in mutual funds or NPS. But unlike mutual funds, NPS rarely gives you the chance to manage the risks.While ELSS has a higher exposure to equity-oriented mutual funds than NPS, the investment risk is also higher for ELSS.
On the other hand, the level of risk that an investor is ready to accept is defined by his or her own costs and expenses.2. Tax Advantages Both investment options offer tax benefits. The tax advantages of NPS, however, surpass those of equity mutual funds, whose long-term returns are subject to a 10% exit tax.
Compared to Rs 1.5 lakh for ELSS plans, NPS programs provide a larger tax deduction of up to Rs 2 lakh under Sec 80C. The advantage of NPS is that you may take a lump sum withdrawal of up to 60% of the whole corpus at maturity, with 40% of that amount being tax-free.
NPS may appear to be less tax-efficient than mutual funds at first glance, yet mutual funds often offer larger returns than NPS. The trade-off is therefore between returns and tax: the bigger the potential income opportunities, the lesser the potential tax benefits.3. Distribution of Equity While ELSS invests mostly in equity-oriented mutual funds, NPS allocates less of its assets to these types of mutual funds.
ELSS therefore has a larger chance of generating bigger returns than NPS. Fund Management Fees: NPS is the most cost-effective managed retirement fund, with a 0.1% management fee. The expense ratio imposed by mutual funds or asset management companies runs from 0.50% to 1.50%, which is much more than the expense of NPS administration.4.
Flexibility of Withdrawals Withdrawal limits apply to Tier I NPS investments, which are necessary to open an NPS account. You must wait at least 10 years or until you are 60 before you may recover your whole investment. However, provided the requirements are satisfied, you may withdraw up to 25% of your submission in part.
You consequently have limited investment freedom. You may only invest up to 75% of your entire NPS investment in stocks through NPS.5. Return on Investment The central topic of discussion in the “mutual fund vs. NPS” argument is return on investment. Compared to traditional fixed income securities like bank fixed deposits and sovereign saving plans, NPS often offer better returns.
- The NPS plan has historically provided returns between 8% and 10% annually since its establishment, according to a brief perusal of the document.
- In contrast, when market circumstances are favorable, pure equities mutual funds may offer significantly larger returns than NPS.
- For instance, several equity mutual fund schemes saw their invested money quadruple or even increase by more than double that amount between May 2020 and May 2021.Because of this, mutual funds provide greater potential for development than NPS, and investors who are ready to take on additional risk in order to achieve larger returns choose them.6.
Liquidity Compared to NPS, open-ended mutual fund schemes are more liquid.You cannot withdraw funds from an NPS before turning 60 if you invest in one. When you turn 60, you are only allowed to take 60% of your whole corpus and maintain the remaining 40% with the fund management to get a lifetime pension.
Since the majority of mutual fund programs are open-ended, you can withdraw your money whenever you choose. However, there is a chance that your withdrawal will be subject to an exit load, LTCG tax, or STCG tax (short-term capital gains tax). NPS withdrawals, on the other hand, are tax-free.7. Fund Management Expenses With 0.1% management fees, NPS is the most economical managed retirement fund.
Asset management businesses or mutual funds charge spending ratios ranging from 0.50% to 1.50%, which is much more than the cost of NPS administration.
Who owns NPS?
From Wikipedia, the free encyclopedia Net promoter score ( NPS ) is a widely used market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague.
- The NPS is a proprietary instrument developed by Fred Reichheld, who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix.
- Its popularity and broad use have been attributed to its simplicity and transparent methodology.
- The NPS assumes a subdivision of respondents into “promoters” who provide ratings of 9 or 10, “passives” who provide ratings of 7 or 8, and “detractors” who provide ratings of 6 or lower.
The net promoter score results from a calculation that involves subtracting the percentage of detractors from the percentage of promoters collected by the survey item. The result of the calculation is typically expressed as an integer rather than a percentage.
The core How likely would you be to recommend. question is almost always accompanied by an open-ended “Why?” and sometimes by so-called “driver” questions. The NPS is typically interpreted and used as an indicator of customer loyalty. In some cases, it has been argued to correlate with revenue growth relative to competitors within an industry, although it has also been demonstrated that NPS scores vary substantially between industries.
NPS has been widely adopted by Fortune 500 companies and other organizations. Proponents of the Net Promoter approach claim the score can be used to motivate an organization to become more focused on improving products and services. : 199–200 As of 2020, versions of the NPS are now used by two-thirds of Fortune 1000 companies.
Can I withdraw Tier 1 NPS?
How can I Partially withdrawal from my Tier I account – A subscriber can make partial withdrawal after joining the NPS after 10 years, not exceeding twenty-five per cent of the contributions made by him/her and excluding contribution made by employer, if any, at any time before exit from National Pension System subject to the terms and conditions, purpose, frequency and limits specified under Regulations 8 of PFRDA (Exits & Withdrawals under the NPS), Regulations, 2015.
Can I withdraw money from NPS Tier 2?
How can I withdraw from Tier II account – In order to withdraw from Tier II account, the subscriber needs to submit a duly filled UOS-S12 to the associated POP-SP. On T+3 days, (T being the date of processing) the funds shall be transferred from the Trustee Bank to subscriber’s bank account as registered in the CRA system.
How do I maximize my NPS returns?
Choosing the Right Allocation – “NPS should be a portion of your retirement savings portfolio. It should not be the only standalone investment. It will be wiser to invest for your retirement in EPF, PPF and equity funds also,” said Nadella while sharing the following tips to make the right asset allocation.
For younger people up to 40 years, be aggressive with your retirement savings. Allot copiously to equities. Include NPS in the investment mix. The mid-40s or higher age group should allot a bigger portion of the funds to debt savings (EPF plus PPF). In NPS, invest largely in equities. If your PF corpus isn’t chunky and you have invested heavily in equity funds, then be conservative with NPS for the safety of funds.
“These are some normal approaches to having the right mix of investments. You have unique requirements as an individual investor. It makes sense if you take your own decision. If you feel nervous about making a decision alone, take investment advice from a good investment advisor,” said Nadella.
What is the highest interest rate of NPS?
– LIC Pension Fund Limited – LIC Pension Fund Limited is a public limited company located in Mumbai. It was incorporated on 21st November 2007. The invested amount, or principal, accrues returns throughout the tenure based on the invested assets’ performances.
What is the purpose of tier 2 in NPS?
* Please ensure “Cookies” are enabled in your browser before proceeding for Registration. Click here to know the steps to enable cookies. Note
Tier II is an add-on account which provides you the flexibility to invest and withdraw from various schemes available in NPS without any exit load. You can save the details captured during Tier II Activation process at regular intervals by clicking on ‘Save and Proceed’. In case you would like to complete the Tier II Activation process at a later date, the pending application will be available for completion through ‘Verify PRAN’ for a finite period. # Registration in NPS is completed only after successful payment of initial NPS contribution. In case of an unsuccessful payment, you may re-try the payment process against the same Acknowledgement number. The re-attempt of payment process is not allowed till the time response from Payment Gateway is available. The delay in getting a response from the Payment Gateway can take up from 30 minutes to 2 days.
↑ TOP
What is NPS tier 2 for?
Tier-II account is a voluntary savings facility. The applicant will be free to withdraw his/her savings from this account whenever he/she wishes. This is a not a retirement account and applicant can’t claim any tax benefits against contributions to this account.