What Are NPS Tier 1 and Tier 2 Accounts

Before we cover NPS Tier 1 vs Tier 2 accounts differences, lets understand the key features of these 2 types of NPS accounts. There are two sorts of NPS accounts: Tier I and Tier II. The withdrawal restriction represents the most significant distinction between the two.

NPS Tier-1: It is mandatory NPS retirement savings account with a lock-in term that extends until the account holder reaches retirement age i.e. 60 years but can be extended up to the age of 75 years under current rules. This account prohibits withdrawals before superannuation at retirement except under exceptional circumstances. Additionally, NPS tax benefits are limited to investments made in NPS Tier 1 account.

The primary purpose of this account is to build a significant sum through regular contributions and investments in various asset classes according to user preference. At retirement, the account holder must use at least 40% of the NPS Tier 1 account to buy an annuity plan that provides monthly pension post-retirement. Users can take out the rest i.e. up to 60% of the account balance as a lump sum. Tier-1 accounts need at least one contribution of Rs. 500 per fiscal year to remain active.

Before we talk about the NPS Tier 1 vs Tier 2 differences, let’s understand the features of Tier 1 account. The features of the NPS Tier-I account are as follows:

• Investment: Minimum annual investment is Rs. 1000. Under Section 80CCD(1B), investors can receive an additional tax deduction of Rs. 50,000 through NPS investments.


• Premature Closure: The Tier-I account allows premature closure under specified circumstances and situations.


• Retirement Account: The NPS Tier 1 Retirement Account program is a basic pension account. When users open an account, they are assigned a Permanent Retirement Account Number (PRAN).


• Maturity: The NPS account matures at age 60 for the investor. The investor may take up to 60% of the fund's value at maturity and use the remaining 40% to purchase an annuity plan.

To understand NPS Tier 1 vs Tier 2 account differences, let’s understand the benefits and features of Tier 2 accounts. This type of account provides you with a variety of perks, including:

• Easy Liquidity: This investment can be withdrawn anytime, according to one's preferences. Therefore, this feature allows customers to tailor their investment strategies to their requirements.
• Flexible Investment Plan: Unlike many other investment programs, the NPS Tier 2 provides flexibility when it comes to withdrawals. In addition to easy withdrawals, NPS Tier 2 allows for an alternative investment option to mutual funds.

There are numerous differences between NPS Tier-1 and Tier-2 accounts. Here are the most significant distinctions between the two types of NPS accounts:

NPS Tier 1 vs Tier 2 Accounts: Eligibility: The Tier-1 account can be opened by any Indian citizen or NRI between the age of 18 and 65, whereas Tier 2 accounts can only be opened by subscribers of Tier 1 accountholders.

Tier 1 and Tier 2 NPS account benefits are virtually identical but differ in terms of investment flexibility and tax advantages. In addition, a Tier 1 account may help build a retirement fund if you are a new investor. Tier 1 account is a low-investment plan that provides tax advantages.