If you are planning to save for retirement, you could consider opening a National Pension System (NPS) account that enables exposure to four types of asset categories: equity, government securities, corporate bonds and alternative investment funds (AIFs).
After opening an NPS account, subscribers are given a PRAN (Permanent Retirement Account Number).
For the unversed, there are two categories of NPS accounts. The main NPS account is known as Tier-1, while the second one, i.e., add-on account is referred to as Tier-II account.
Both the accounts are quite different from each other. Let us explain the key differences between the two:
Minimum contribution: Every investor is supposed to invest a minimum of ₹500 in the Tier-1 account at the time of opening of this account, while every year, subscriber must contribute a minimum of ₹1,000.
On the other hand, having an operational Tier-1 account is mandatory to open a Tier-2 account. The Tier-II account can be opened by investing ₹250. After that, no regular contributions to Tier-II are mandatory, reveals NPS Trust portal.
The Tier-II account is often compared to mutual funds that are meant to meet short term financial goal and not for the purpose of accumulating retirement corpus.
Mandatory/ optional: As indicated in the above point, opening of Tier 1 account is mandatory if you are an NPS subscriber, whereas opening of Tier -II account is completely at the discretion of subscriber.
Withdrawal: At the time of retirement, account holder can withdraw 60 percent of corpus from Tier 1 account whereas the remaining 40 percent must be used to buy annuities. On the other hand, the entire corpus of Tier-II can be withdrawn and there is no cap on withdrawal.
Lock-in period: The Tier-1 accounts have a lock-in period till retirement while Tier-II accounts do not have any lock-in period. So, one can withdraw the corpus from Tier-II accounts as and when they please.
Tax deduction: The contribution to Tier-I account is eligible for exemption up to ₹1,50,000 under Section 80CCE of Income Tax Act. An additional exemption is given for contribution of ₹50,000 under section 80CCD(1B).
On the other hand, there is no such tax benefit given on Tier-II contributions.