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NPS Tier I and Tier II: Tax and Withdrawal Rules
The National Pension System, or NPS, helps people save money for retirement.
Tier I is the main account and is designed to remain invested for the long term.
It has withdrawal restrictions but can provide several tax benefits.
Tier II is an extra account that can be opened only when someone already has Tier I. It is easier to withdraw money from Tier II.
However, most non-government subscribers do not receive tax benefits for Tier II contributions.
Gains from Tier II investments are generally taxed as income.
At retirement, part of a Tier I balance can be withdrawn as a lump sum and part may need to buy an annuity.
Tier I is generally more suitable for retirement savings, while Tier II may suit people seeking greater access to their money.
Tier I is the primary retirement account, while Tier II is an optional account requiring an active Tier I account.
Tier I requires at least Rs 500 per transaction and Rs 1,000 annually; Tier II requires Rs 250 per transaction with no annual minimum.
Eligible Tier I contributions can receive deductions under Sections 80CCD(1), 80CCD(1B), and 80CCD(2), while Tier II generally lacks tax benefits for non-government subscribers.
Tier I withdrawals and exits are restricted, although updated rules allow up to 80% lump-sum withdrawal in normal exits and require at least 20% annuity in applicable cases.
Tier II permits withdrawals at any time without exit load, but its investment gains are generally taxed according to the subscriber’s income-tax slab.
- Who
- Individuals eligible for NPS, including employees and self-employed people, can use Tier I; Tier II is available to subscribers with an active Tier I account.
- What
- The article explains the contribution, tax, withdrawal, and exit differences between NPS Tier I and Tier II accounts.
- Where
- The accounts operate under India’s National Pension System and applicable Indian tax rules.
- When
- The rules apply when subscribers contribute to, withdraw from, or exit their NPS accounts; the article does not specify a publication date.
- Why
- Tier I is intended for long-term retirement savings and tax benefits, while Tier II provides more flexible access to investments.
Key facts
- Tier I minimum contribution
- Rs 500 per transaction and Rs 1,000 per financial year.
- Tier II minimum contribution
- Rs 250 per transaction, with no annual minimum contribution requirement.
- Additional employee deduction
- Section 80CCD(1B) permits an additional deduction of up to Rs 50,000 for eligible NPS contributions.
- Employer contribution deduction
- The deduction limit is up to 10% of salary under the old tax regime and up to 14% under the new tax regime, subject to applicable provisions.
- Normal Tier I exit
- Generally, up to 80% may be withdrawn as a lump sum and at least 20% used for an annuity; special options apply to certain smaller corpora.
- Premature Tier I exit
- Generally, up to 20% may be withdrawn as a lump sum and at least 80% must be used for an annuity; a corpus of up to Rs 5 lakh may qualify for full lump-sum or other approved payouts.
- Tier II taxation
- Returns or gains are generally treated as income from other sources and taxed at the subscriber’s applicable slab rate.
Sources
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