NPS Returns for Tier 1 & Tier 2 Accounts

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 After your retirement, 60% of the contributed money can be withdrawn by you.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

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 –

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.

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 Method3

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

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