Types of Accounts under the National Pension System

Ashish M. Shaji

11 Sep, 2020

National Pension System is a government-sponsored pension scheme. It is a scheme open to all Indian citizens. NPS invests the contribution of its subscribers to different markets linked instruments like equities and debt, and the final pension amount depends upon the performance of these investments.

Who can open an NPS account?

Any citizen of India in the age group of 18-60 years can open an NPS account. It is administered and regulated by Pension Fund Regulatory Authority of India. The NPS mature at the age of 60 but it can be extended until 70.

What are the types of Accounts under the National Pension System?

A person can open two types of accounts under NPS. The main account is called the Tier I account, and an additional account is called the Tier II account. Now let us look into both these accounts briefly.

• Features of Tier I account

Tier I is the default and proper pension account under the NPS. It is a mandatory account under NPS where you accumulate corpus for your retirement. It is like a recurring deposit bank account. The difference between Tier I NPS account and the Recurring Deposit account is that the amount and the frequency of deposit are fixed in the RD account, but in the Tier I account, the frequency and the amount of money to be deposited is not fixed.

The account can be opened with just 500 rupees as an initial deposit. The minimum amount to deposit at any time is 500 rupees, and you need to deposit a minimum of 1000 rupees in a financial year. If you fail to make a minimum amount of contribution, your NPS account gets frozen, and it can be made unfrozen by paying a penalty of 100 rupees for each year of default with a contribution of 500 rupees.

The NPS was introduced as a substitute for the PF scheme for government employees. The requirement of the minimum number of contributions for government employees is different. Here the contribution is fixed at 10% of basic salary and DA to be made monthly. According to the tax laws, contribution up to 14% made by the central government towards the NPS account of its employee was fully tax-deductible within an overall limit of 6.5 lakh rupees.  

For government employees who have joined after Jan 2004, opening a Tier I account is mandatory. This is optional in case of non-government employees and self-employed people.  Although there is a requirement of minimum amount which one has to deposit, there is not an upper limit for deposit in tier I account though the tax benefit would be available for contributions permissible under the income tax laws.

Since a regular Systematic Investment Plan facility is not available under Tier I account, you have to set up your own SIP by investing a fixed amount every month on a fixed date.

• Features of Tier II account

Tier II is like your savings account, where one can withdraw or deposit any amount. The opening of this type of account is voluntary, which can be opened at the time of opening Tier I account simultaneously or subsequently at any time. For opening the tier II account, no separate KYC is required. Tier II account allows you to put your surplus funds in this account. The money in the Tier II account can be used for making a contribution to tier I account or for creating a surplus fund to meet any exigency; funds are allowed to be transferred from tier II account to tier I account as a contribution but not otherwise.

Non-Resident Indians (NRIs) and persons of Indian origin (PIO) are permitted to open the Tier I account however they are not permitted to open the Tier II NPS account. Once the Tier I account is closed, Tier II also gets closed simultaneously. There is no minimum balance and minimum contribution requirement. The minimum contribution amount for the Tier II account is only 250 rupees. A Tier II account may be opened with an initial contribution of 1000 rupees. In case of default in making a minimum contribution, Tier I and Tier II account both are frozen and unfrozen only if the penalty with a minimum contribution for the Tier I account is paid.

One can make as many withdrawals from the Tier II account as they want. In case of Tier II account, no tax benefits are available except for central government employees who can get tax benefits under section 80 C for the contribution made toward Tier II account with a lock-in period of 3 years.

How Tier I and Tier II National Pension System are accounts common to each other?

The similarity to both Tiers I and Tier II NPS accounts are as follows:

• The money can be put in these accounts either through cash or through cheque or demand draft. One can also contribute towards both these accounts electronically.
• The NPS account is portable, and one doesn’t need to make a request for transfer of your balance from one employer to the other if they are salaried.
• Both accounts work like your investments in a mutual fund scheme where the contributions are converted into units.

What are the benefits of the National Pension System?

The benefits of NPS are as follows:

• This is a benefitting scheme to invest as the investments are made into equities, which may be risky but also provide higher returns as compared with other tax-saving investment schemes like Public PF.
• The tax benefits under NPS are an essential reason why one should invest in this scheme.
• As it is a pension scheme, one must consider themselves invested till 60 years of age. However, with NPS, subscribers can make premature partial withdrawals in special cases.

Conclusion

Read our article:Atal Pension Yojana- What does the scheme comprise of?