NPS: National Pension System Tier 1 vs Tier 2
NPS (National Pension System) is a voluntary, defined contribution retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA), open to all Indian citizens aged 18-70.
Two tiers: (1) Tier 1 — mandatory lock-in till age 60 with restricted withdrawals. Contributions eligible for tax deductions. (2) Tier 2 — flexible voluntary savings account, no lock-in, no tax benefits, but lower expense ratio than mutual funds. Tier 2 cannot be opened without active Tier 1 account.
Tax treatment of Tier 1: contributions deductible under Section 80CCD(1) within the overall ₹1.5 lakh 80C limit, plus exclusive ₹50,000 deduction under 80CCD(1B) — making NPS one of the few tax saving routes that exceed the ₹1.5 lakh 80C cap (old regime only). Employer contributions deductible under 80CCD(2) up to 10% of basic+DA (14% for central government employees), available even under new regime.
Withdrawal at 60: minimum 40% must purchase annuity (PFRDA-approved life insurer); up to 60% can be withdrawn lump sum. 60% lump sum is tax-free; annuity income is taxable as per slab. Partial withdrawal allowed for specific purposes (children's education, marriage, home purchase, treatment) — up to 25% of own contributions, max 3 times in lifetime, after 3 years of account. Early exit before 60 only allows 20% lump sum, 80% must annuitise.
Richify Tip
NPS Tier 1 has 4 fund options: Equity (E, max 75% allocation), Corporate Debt (C), Government Securities (G), Alternative Investment Funds (A, max 5%). Auto-choice (lifecycle fund LC75/LC50/LC25) or active choice. Switching between funds and PFMs is allowed once per FY. Returns historically 9-11% for moderate equity allocation but vary annually.
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