Understanding NPS Tier 1, its features, returns, and more
The National Pension Scheme (NPS) is an investment cum pension scheme introduced by the Government of India in 2004. It was launched to provide people with financial security during retirement. You can start investing in NPS anytime between the age of 18 and 70. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), this scheme is available for both private and public sector employees.
NPS schemes have two categories: NPS tier 1 and NPS tier 2. The Tier I account is the retirement account and comes with a host of tax benefits, but you cannot withdraw your contributions till you reach the age of 60. The Tier II account has no restrictions, and you can take out money anytime you want. This article will cover all aspects of the NPS tier 1 account.
Features of Tier 1 NPS Account
- Contributions: As an NPS subscriber, you are required to make an initial minimum contribution of Rs 500 under the Tier I account. However, there is no limit on maximum contribution.
- Eligibility: Any individual who is an Indian resident between the age of 18 and 70 years can open a tier 1 NPS account. Furthermore, you may also open an NPS tier 1 account as a non-resident Indian (NRI). If you open the account as a resident of India and then become NRI, the account will continue, but you must invest in Indian currency every year.
- Investment: Under NPS, individual savings are pooled into a pension fund which are invested by PFRDA regulated Professional Fund Managers into diversified portfolios of Government Bonds, Bills, Corporate Debentures and Shares.
- PRAN: You will be assigned a Permanent Retirement Account Number (PRAN) while opening an NPS account. You can contribute every year to this account, even if you switch jobs or switch from the private sector to the public and vice-versa.
- Tax Benefits: In a financial year, you can claim tax deductions of up to Rs.1,50,000 on your tier 1 National Pension Scheme investments under section 80C of the Income Tax act. Under section 80CCD (1B), an additional contribution of Rs. 50,000 can also be claimed as a deduction.
You can also claim tax deductions of up to 10% (14% for central government employees) of your salaries contributed toward their NPS tier 1 account by the employer. This claim is over the limit of up to Rs. 1,50,000.
- Premature Withdrawal: NPS subscribers can opt for partial withdrawal from the Tier-I corpus in certain circumstances such as treatment of critical illnesses, higher education or marriage of children, etc. However, the investor can opt for this after completing 3 years. Also, an investor can withdraw a maximum of 25% of the corpus invested by him/her.
- Withdrawal on Maturity: Once an investor turns 60, up to 60% of the corpus in Tier I accounts can be withdrawn as a lump sum. The remaining 40% has to be used to buy annuity products that will be used to pay post-retirement pension.
How to Open NPS Tier 1 Account
You can open an NPS tier 1 account offline and online.
Step 1: Visit the nearest branch of the authorised Point of Presence-Service Provider (POP-SP), such as a post office or bank.
Step 2: Fill up the application form issued by the POP-SP.
Step 3: Attach identity and address proof such as Aadhaar and PAN card.
Step 4: Pay the initial investment amount through cash or cheque.
Step 5: You will get the PRAN in a few days, and your NPS tier 1 account will become active.
Step 1: Visit the eNPS website to open an account online with a PAN card.
Step 2: Click on the Registration tab. Then choose appropriate options for Register With, Applicant Type, Status of Applicant, and Account Type. Select Permanent Account Number (PAN) in the ‘Register With’ tab.
Step 3: Then enter PAN and fill up bank/non-bank, Demat, or folio account details for KYC verification at the empanelled bank/non-banking entity.
Step 4: The POP-SP selected by you during registration will carry out KYC verification.
Step 5: Please note that you should insert the same name and address details on the documents submitted to the bank or non-bank institution while opening the account. If the details do not match, your application will face rejection.
Step 6: Upon successful verification, you need to fill up the requested details online. While filling out details online, please ensure that you select the NPS tier 1 account, decide the mode of investment (auto or active), and provide the correct information about the nominees.
Step 7: You need to upload the scanned document of your PAN card and cancelled cheque in jpeg, jpg, or png format.
Step 8: The next step involves making an initial investment through internet banking.
Step 9: Once you contribute, you will get a Permanent Retirement Account Number (PRAN).
Step 10: With PRAN in hand, you need to select the option “eSign” from the website.
Step 11: OTP will be sent to your phone number registered with your Aadhar card for authentication.
Step 12: Once authentication is carried out, the registration form will be signed successfully.
Pros And Cons of Tier 1 Account
- Once PRAN is generated, it is easy to make investments regardless of employment.
- You can choose the amount of investment and the mode of investment every year.
- You can avail of tax exemptions up to Rs. 2,00,000 (for self-contributions) every financial year.
- As a subscriber, you can access your account from anywhere in the country.
- If you need funds urgently, you cannot rely on your NPS tier 1 investments, as premature withdrawal is allowed only three times during the tenure.
- The period for maturity is long. You have to reach 60 years of age for the NPS to mature.
- Upon maturity, you are not allowed to withdraw the entire accumulated wealth.
NPS Tier 1 is a basic form of long-term investment scheme to ensure financial security during retirement. You can choose to invest in NPS if you want to diversify your investment portfolio and invest in a risk-free, long-term plan. Along with guaranteed returns upon maturity, you can avail tax exemptions, too. So, this scheme is beneficial for tax saving and retirement planning.
FAQs about NPS Tier 1 Accounts
How does NPS Tier 1 differ from the NPS Tier 2 account?
NPS Tier 1 is the basic form of an NPS account in which you have to contribute till you turn 60, with specific and strict rules for withdrawal and accessibility. If you sign up for NPS, then the tier 1 scheme is what you automatically subscribe to. On the other hand, participation in NPS Tier 2 is voluntary; it acts as a secondary scheme over and above your basic tier 1.
What is the lock-in period for investments in an NPS Tier 1 account?
The lock-in period for investments in an NPS Tier 1 account is till the account holder reaches the age of 60.
Do I need to open another account if I switch employers?
No, you do not need to open another account. You will get a Permanent Retirement Account Number (PRAN), to which you can contribute regardless of your employer. Even if you switch from the private to the public sector, your PRAN will remain the same.