The National Pension System (NPS) has two primary account types: Tier-I and Tier-II. A lot of investors get confused between these two account types. The following table explains the differences between the two account types.
|NPS Tier-I Account||NPS Tier-II Account|
|Tax exemption||Up to Rs 2 lakh p.a.||None|
|Minimum contribution||Rs 6,000 p.a.||Rs 2,000 p.a.|
|Maximum contribution||No limit||No limit|
|Central Government employees||Mandatory||Optional|
The Tier-I account is mandatory for all Central Government employees. They must contribute 10% of their basic salary to this account, which is matched by the government.
If you withdraw from the Tier-I account before the age of 60, you will need to use 80% of the accumulated money to purchase annuity. The remaining 20% is given to you in a lump sum.
Side note: Annuity is a fixed amount you pay to an insurance company that gives you regular income in return. This regular income is called pension.
If you withdraw after the age of 60, you need to purchase annuity with only 40% of the savings accumulated in your NPS Tier-! account. The remaining 60% is given to you in a lump sum.
Read more about the tax-saving benefits of the National Pension System here.
If you have any queries regarding tax-saving investments or filing income tax, visit cleartax.in.