Saturday, February 18, 2017

Difference between Tier 1 and Tier 2 Account in New Pension Scheme (NPS)


What is the difference between Tier 1 and Tier 2 Account in NPS? Many Government employees or others subscribed to NPS. However, the majority of them do not know what is the meaning and difference of Tier 1 and Tier 2 Accounts of NPS.

Let us first brief about NPS.

NPS or New Pension Scheme is a retirement product launched by Government of India. It is managed by PFRDA (Pension Fund Regulatory and Development Authority). This product helps you to create retirement corpus.

Any citizen of India (whether resident or NRI) can invest in this scheme. The age of the subscriber must be within 18-60 years of age. However, an individual of unsound mind or existing members of NPS are not allowed to open new account.
Therefore, an individual can open only ONE NPS account.

How to open NPS Account?

You have to fill the application form and provide the relevant KYC documents at your nearest POP-PS (You will find the list in PFRDA portal).

However, if you want to open new Tier 2 account, then the process is different. You have to approach POP-PS with copy of PRAN (Permanent Retirement Account Number) and Tier 2 activation form.

The subscriber has to make the first contribution while opening the account. Minimum contribution for Tier 1 is Rs.500 and Rs.1, 000 for Tier 2.

Note-Now you can open NPS account online and also contribution can be made it online through eNPS portal. Refer my latest post on the same “eNPS – How open and invest in NPS account online?“.

What are the investment choices?

Asset Class E-Invests predominantly in the equity market. You may say high return and high risk.

Asset Class C-Invests in fixed income instruments other than Government Securities. Risk is medium in this category.

Asset Class G-Invests in Government Securities. So lower risk and lower return.
Along with that, you have two different options to choose regarding allocation.

Active Choice-You have the option to choose your investment among E, C or G asset classes. However, if you opted for E asset class, then the maximum equity exposure is 50% only.

Auto Choice-If you don’t want to take active part in switching asset class, then PFRDA will do it according to your age. It is predefined.

You can change both scheme preference and investment choices at any point of time. But it is allowed only once in a year.
Please remember that there is no ASSURED RETURN from NPS.

Your retirement fund will be managed by fund managers appointed by PFRDA. Currently there are six fund managers. They are as below.

ICICI Prudential Pension Funds Management Company Limited, Kotak Mahindra Pension Fund Limited, Reliance Capital Pension Fund Limited, SBI Pension Funds Limited, UTI Retirement Solutions Limited, and Annuity Service Provider (ASP).
You can change your fund manager at any point of time. This change is allowed only one time in a year.

Along with that, PFRDA tied with IRDA approved Life Insurance companies to pay the pension once the subscriber reaches 60 years of age. They are as below.
Life Insurance Corporation of India, SBI Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., Bajaj Allianz Life Insurance Co. Ltd., Star Union Dai-ichi Life Insurance Co. Ltd., Reliance Life Insurance Co. Ltd. and HDFC Standard Life Insurance Co. Ltd.

Following conditions apply:

Subscriber is not covered under employer assisted retirement benefit scheme and also not covered by social security schemes under any of the following laws:

Employee Provident Fund and Miscellaneous Provision Act, 1952

The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948

The Seamen’s Provident Fund Act, 1966

The Assam Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955

The Jammu & Kashmir Employee Provident Fund Act, 1961

Subscriber contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for both Tier1 and Tier II taken together, provided subscriber makes minimum contribution of Rs.1000 per annum to his Tier 1 account
Based on the limitations mentioned above, I think most people reading this blog will be ineligible.

How to exit from NPS?

Once you attain the age of 60 years, you can withdraw up to 60% of accumulation as lump sum and rest 40% will be converted into pension.
If you want to exit from NPS before 60 years of age, then you are allowed to withdraw only 20% accumulated amount. You have to buy a pension product with that 80% fund.

However, in case the death of the subscriber, a nominee is allowed to withdraw 100% of NPS.

I wrote a post on recent changes about new withdrawal of exit rules of NPS. Refer below post.

National Pension System (NPS)-New Partial Withdrawal and Exit Rules

This is the brief about NPS.

Let us come back to the main purpose of this post. I tried to put it the difference in below image.

Note-

-As per recent PFRDA circular dated 8th August, 2016, the minimum contribution in Tier 1 Account is now reduced to Rs.1,000 a year. There will be no minimum investment limit for Tier 2 account (Earlier, it was Rs.250). Also you no need to maintain the minimum balance in Tier 2 account (Earlier, it was Rs.2,ooo).
-From Budget 2016, the 40% withdrawal at the time of your retirement from NPS will be tax-free. Rest 60% of the corpus will be treated taxable income as per old rules. Hope this above table cleared your doubts. 

Conclusion-You notice that when it comes to taxation, NPS is one of the worst products. Everybody concentrating on the tax benefits of NPS while investing. However, they forget the tax issues at retirement or at withdrawal. Along with that, liquidity is an issue with NPS. For Government employees and corporate employees, no option but to invest.

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