NPS Returns for Tier I & Tier II Accounts

  • Your Money Articles

TABLE OF CONTENTS

Planning retirement and financial goals post-service is one of the most essential decisions for an individual. Government too pays ample heed to this topic which is why the NPS, National Pension System, came into being in 2004. It is one of the easiest, most profitable, and most convenient ways of saving for your retirement and meeting your financial requirements. An individual can have two types of accounts under NPS, that is, Tier 1 and Tier 2. One must know that opening a Tier 1 account is one of the eligibility criteria for opening a Tier 2 account under NPS.

What Is the Return on NPS?

In simple terms, NPS returns refer to the interest earned by an account holder on the invested money in an NPS account. It is important to note that several factors decide the returns you may earn on your invested money under the scheme of NPS. The way your investment performs in the market is going to decide the returns you will be earning. One can invest in four types of assets –

  • Equity
  • Corporate Bonds
  • Government Bonds
  • Alternative Assets

NPS returns are managed and looked after by the NPS fund managers. An account holder can choose fund managers to manage their NPS fund. The returns on NPS are regulated under and by PFRDA (Pension Fund Regulatory and Development Authority).

How is the NPS return calculated?

There are several schemes offered under NPS. An account holder must choose schemes to invest in either on self-knowledge or through the help of a fund manager. There are no fixed returns on investment. The scheme you choose to invest in and the performance it shows ultimately decide the returns on your investment. Hence, starting early investment and choosing wisely the investment scheme is the key to high and lucrative returns.

What are Tier 1 NPS and return?¹

Tier 1 NPS account can be referred to as the primary NPS account. Here, you need to make a contribution of a minimum of ₹ 500 during the account opening. After your retirement, 60% of the contributed money can be withdrawn by you. The rest of the 40% is used to purchase some annuities that can bring you regular monthly income as a form of pension. Also, the lock-in period (the period after which you can withdraw money) for the Tier 1 account is 60 years. Check out the Interest rate table of NPS tier 1 return rate

Investment

Return in 1 year

Return in 5 Years

Return in 10 years

Equity

15.33%-18.81%

13.11%-15.72%

10.45%-10.86%

Government Bonds

12.95%-14.26%

10.29%-10.88%

9.57%-10.05%

Corporate Bonds

12.46%-14.47%

9.27%-10.15%

10.05%-10.64%.

Alternative Assets

3.98%-16.73%

N/A

N/A


What is tier 2 NPS and return?¹

NPS Tier 2 account is opened only after you have a Tier 1 account. In the Tier 2 NPS account, you need to make a contribution of a minimum of ₹ 1000. Unlike Tier 1, in the Tier 2 account, you can withdraw the contributed amount anytime you want without any compulsory lock-in period. The complete or lump sum investment money can also be withdrawn multiple times. Check out the interest rate table of NPS tier 2 return rate –

Investment

Return in 1-year

Return in 5 Years

Return in 10 years

Equity

15.19%-17.92%

13.05%-15.83%

10.35%-10.58%

Government Bonds

12.61%-13.42%

10.40%-12.00%

9.59%-10.07%

Corporate Bonds

12.71%-16.36%

9.55%-10.17%

9.86%-10.60%


Difference between Tier 1 and Tier 2 in NPS

As mentioned above, Tier 1 and Tier 2 are the two different accounts provided under the NPS. You may choose either condition to fulfil the eligibility criteria. However, wait a while and check the differences between the two accounts before proceeding further.

Tier 1

Tier 2

Tier 1 is the primary account

Tier 2 can only be opened after the opening of Tier 1 account

Money can be withdrawn only after 60 years of age

Money can be withdrawn anytime as per the account holder's will

Minimum contribution of ₹500 at the time of account opening

Minimum contribution of ₹1000 at the time of account opening

Anyone between age 18 to 65 years can open Tier 1 account

Anyone with Tier 1 account can open Tier 2 account

Tax Benefits up to ₹1.5 lakh is available

No tax benefits can be availed under Tier 2


NPS Tier 1 Vs NPS Tier 2 – Which One Should You Choose?

The primary matter of fact is that you only have to decide if you want a Tier 2 account or not. Because to open a Tier 2 account, you will ultimately have to open a Tier 1 account. Choosing Tier 1 or Tier 2 accounts is highly a matter of personal financial goals and requirements. For some, only Tier 1 may be beneficial and for some, Tier 2 can be an ideal choice. To ease your task of choosing one, here are some pointers to consider –

  • Tier 1 requires half the account opening contribution than Tier 2 account. If this is your concern, you may want to consider this point
  • Tier 1 account provides less flexibility in terms of financial management as compared to the Tier 2 account. This is because you cannot withdraw money until maturity/ 60 years of age. However, on the other hand, you are free to withdraw money anytime from Tier 2 account
  • Tier 2 will bring no tax deductions unlike Tier 1 which provides tax benefits up to ₹1.5 lakh

As a matter of retirement plans, you may open a Tier 1 account and then decide if or not you also want a Tier 2 account.

How to open an NPS account in Tier 1 and Tier 2

Any individual (salaried/self-employed) aged between 18 to 65 years can apply for an NPS Tier 1 account. Those who have Tier 1 NPS can apply for a Tier 2 account.

Let's understand in detail how you can apply –

Tier 1 Account Opening Online Method

  • Visit the eNPS website
  • Click on 'National Pension System'
  • Select and fill all the relevant details
  • An OTP will be generated that needs to be submitted
  • Select the preferred account type which will be Tier I
  • Choose your fund manager
  • Then you will have to choose the mode of investment (Auto or Active) where auto mode will do the rebalancing for you and active mode is where you will be in charge of your portfolio
  • Furnish all other details and update the nominee details
  • A few documents will also have to be uploaded like photos, cancelled cheque, passbook copy, PAN Card copy, etc.
  • Finally, make the payment of ₹ 500
  • After the payment is done, PRAN will be generated and sent to you via email ID/SMS
  • Upon receiving an OTP, you need to complete e-sign to confirm and complete the registration process

Tier 2 Account Opening Online Method²

This can be done only after Tier 1 account is opened and contribution has been made

  • Visit the eNPS website
  • Click on "Tier 2 activation'
  • Now enter your date of birth, PAN number, and PRAN number
  • Click on 'verify PRAN'
  • You will receive an OTP. Enter it in the space provided
  • Bank details will be asked to fill
  • Click on 'verify Aadhaar'
  • An acknowledgement ID will be generated. Save it
  • Choose a Pension Fund Manager and investment option and proceed
  • Enter the details of the nominee and upload the required documents
  • Now make the payment of ₹1000. Upon payment, you will receive a receipt
  • Now e-sign the application with your Aadhaar
  • On your registered mobile, you will receive an OTP that you need to enter and submit the form
  • Take a printout of the form and submit it to the NSDL's head office (Mumbai) vis post

Source:
https://npscra.nsdl.co.in/subscribers-corner-knowledge-centre.php

Follow these processes above and open your NPS account without any hassle. You can also open both Tier 1 and Tier 2 accounts simultaneously.

How To Claim Tax Benefits For Tier 1 And Tier 2?

There are no tax benefits provided for Tier 2 account holders. Tier 1 account holders can claim up to ₹1.5 lakh tax benefits. The account holder needs to present the documents of the contributions made to the National Pension System to avail of the tax benefit from the government.

There are a few things you must know before you file your tax claim –

  • Salaried and self-employed Tier 1 NPS account holders can raise tax benefit claims under Section 80CCD(1B)
  • Along with ₹ 1.5 lakh claim, account holders can also claim up to ₹50,000 claims. Hence a total of ₹ 2 lakh can be claimed
  • If the account holder makes a partial withdrawal, then only 25% of the contributions will be eligible for tax benefit
  • Upon maturity, if a lump sum amount is withdrawn, 40% of contributions are exempted from tax deductions and the rest of the amount is used as annuity
  • In case the account holder dies during the account tenure, the nominee receives the account benefits which is exempted from taxation

Frequently Asked Questions

  • What happens to the Tier 1 balance if the subscriber expires before turning 60?

    The registered nominee becomes eligible to receive the invested amount in case the account holder dies before the age of 60/maturity of the account.

  • Is the income from the annuity purchased using the Tier 1 corpus taxable?

    Yes. There is no tax on the corpus used for the annuity. However, the annuity is taxable.

  • Can I open NPS Tier 2 through offline mode?

    Yes. Through the subscriber's POP-SP, one can open a Tier 2 account through an offline method.

  • Are Tier 1 and Tier 2 NPS returns Fixed?

    No. The interest earned on Tier 1 and Tier 2 investments depends on how your investment performs.

  • What is the role of a fund manager for a Tier 1 and Tier 2 NPS account?

    A fund manager assists you in making the right investment plan for your NPS account. NPS returns are also managed by the fund managers.

Sources:

1 https://www.etmoney.com/pension/nps-returns
2 https://npscra.nsdl.co.in/subscribers-corner-knowledge-centre.php
ADV/6/22-23/569

Author

Term Products

ABSLI Life Shield Plan

A term insurance plan that offers you the flexibility of plan options suitable for your family's non- negotiable goals and ensure they need not compromise on their lifestyle. UIN: 109N109V06

  • Choice of 8 plan options
  • Cover your spouse under the same policy
  • Longer Life cover till age 85

ABSLI DigiShield Plan

PROTECTING multiple life needs with one plan is now possible. UIN 109N108V08

  • 10 Plan Options to suit your varied protection needs
  • Flexible death benefit pay-out options
  • Life insurance cover for 1 year or till age 100 yrs

ABSLI Saral Jeevan Bima

A simple plan to protect your family’s financial future (UIN 109N128V01)

  • Simple & affordable plan
  • Flexible premium paying terms
  • Enhance insurance cover with rider

Need help in buying life insurance?

+91
I agree to the Terms of Usage and Privacy Policy and authorize Aditya Birla Sun Life Insurance Company Limited and its associates to call/SMS/Email/WhatsApp me.

Thank you for your details. We will reach out to you shortly.

1800-270-7000 or reach out to us on this number.

Thank you for your details. Currently we are facing issue in our system.

1800-270-7000 or reach out to us on this number.