NPS Tier 1 vs Tier 2 Accounts
NPS is a government-backed pension scheme to which you can contribute throughout your earning years, and then withdraw money from it regularly on retirement. NPS is a low-cost retirement product which is market-linked, and also offers a host of tax benefits. There are two different types of NPS account – the Tier 1 account and the Tier 2 account. Let us know about the similarities and the differences between NPS Tier 1 and Tier 2 accounts.
Tier 1 Account
Tier 1 is the basic retirement account and this is created by default when you open an NPS account. On opening this account, you are allotted a PRAN (Permanent Retirement Account Number) which is the unique identification for your NPS account.
Tier 2 Account
Tier 2 account is a voluntary account which can be opened only if you have an existing Tier 1 account. This account is flexible in terms of deposits and withdrawals.
Now, let us understand the similarities between these two.
Similarities between Tier 1 and Tier 2 Accounts
Differences between Tier 1 and Tier 2
The Tier 1 and Tier 2 accounts are the same except for stricter withdrawal rules in the Tier 1 account. At a given time, you can invest in the same scheme of a particular Pension Fund Manager in both Tier 1 and Tier 2 accounts. The returns and expenses will be the same for both, except that you cannot withdraw from the Tier 1 account without meeting the required conditions.
NPS Tier 2 vs Mutual Funds
NPS Tier 2 account is often compared to a Mutual Fund scheme as it is market-linked, and has flexible investment and withdrawal rules. However, unlike mutual funds where only gains are subject to tax, in NPS Tier 2 the entire amount withdrawn is added to your income and taxed according to your applicable IT slab rate.