National Pension Scheme Tier 1

The National Pension System (NPS) is a retirement plan where an individual invests a specific amount of money over their working years. Upon retirement, a portion of the invested sum is received as a lump sum, while the rest is utilized to purchase an annuity for lifelong income. The NPS consists of two main accounts: NPS Tier I and NPS Tier II. NPS Tier I is the primary account, and opening an NPS Tier II account is only possible after having a Tier I account.

Features of NPS Tier 1

The National Pension Scheme (NPS) Tier 1 Account offers a long-term, tax-efficient savings plan for individuals, aimed at securing financial stability post-retirement. The salient features of an NPS Tier 1 account are:

• Contribution Period: You can contribute to your NPS Tier 1 account until the age of 60. After maturity, the account can be extended by an additional 10 years, allowing investments until the age of 70.
• Single Account: Only one NPS Tier 1 account can be opened in your name.
• NPS Tax Benefits: Contributions to the NPS Tier 1 account are eligible for tax deductions under Section 80CCD of the Income Tax Act.
• Partial Withdrawals: You can make partial withdrawals from the Tier 1 account for specific purposes such as medical emergencies, education, or marriage expenses.
• Premature Closure: The account can be closed prematurely, but only under certain specified conditions.

Eligibility Criteria for NPS Tier 1

The NPS Tier 1 Account is designed to provide a secure retirement plan, but certain NPS eligibility criteria must be met to open and maintain the account. These include:

• Age Requirement: Both resident and non-resident Indians (NRIs) between the ages of 18 and 70 years can open an NPS Tier 1 account.
• NRI Account Closure: If an NRI’s citizenship status changes, the NPS account will be closed.
• Ineligible Categories:
  Persons of Indian Origin (PIO) are not eligible to open an NPS account.
  Hindu Undivided Families (HUF) are also not eligible for the scheme.
• Corporate Registrations: Corporate bodies can register for NPS and offer the retirement scheme to their employees.
• Minimum Investment:
  A minimum contribution of ₹500 is required to open an account.
  A minimum annual contribution of ₹1,000 is required to keep the account active.

Documents Required for NPS Tier 1 Account

To open an NPS Tier 1 account, you are required to submit specific documents for KYC compliance. Below is a list of the necessary documents:

• NPS account opening form
• Registration form
• Aadhaar card
• Proof of identity
• Proof of address
• Proof of age or date of birth (D.O.B.)

NPS Tier 1 Lock-in Period

Lock-in Period: The NPS Tier 1 account has a lock-in until the age of 60.
Early Exit Option: You can exit before age 60 after completing 5 years.

Withdrawal Options:

• If you exit early, you can withdraw 20% of your accumulated savings tax-free.
• The remaining 80% must be used to purchase an annuity for a regular pension.

Tax Implications:

• The annuity amount (80%) will be fully taxed based on your tax bracket.
• If total NPS savings are less than ₹2.5 lakh, you can withdraw the entire amount (100%) as a lump sum, which is tax-exempt.

Returns on NPS Tier 1

NPS Tier 1 returns are generated by investing in equities, corporate bonds, government bonds, and alternative assets. The allocation between these assets can be determined based on your preference, with a maximum limit of 75% on equity investment and 5% on alternative assets. You also have the option to choose from 1 of the 11 NPS Pension Fund Managers. NPS returns are linked to the market, similar to mutual fund returns, rather than the fixed returns provided by savings schemes like PPF.

Check more on the differences between NPS & PPF from the linked page.

NPS Tier 1 Tax Benefits

The NPS Tier 1 Account offers attractive tax benefits for both individual and employer contributions, helping reduce your overall tax liability.

Tax Deductions on NPS Tier 1 Contributions

• Under Section 80CCD(1): Contributions up to ₹1,50,000 in an NPS Tier 1 account are eligible for tax deductions under Section 80CCD(1) of the Income Tax Act, 1961.
• Under Section 80CCD(2):
  • For Government Employees: Salaried individuals employed by the government can claim additional tax deductions on their employer’s contributions, with a limit set at 14% of their salary.
  • For Private Sector Employees: Employees in the private sector can claim deductions up to 10% of their salary, including basic pay and dearness allowance.
• Under Section 80CCD(1B): You can claim an additional deduction of up to ₹50,000 on self-contributions, over and above the ₹1,50,000 limit set under Section 80CCD(1).
• Partial withdrawals: Partial withdrawals from the NPS are tax-exempt. After 3 years of investment, you are eligible to make partial withdrawals for valid reasons, as mentioned earlier. These withdrawals from the NPS are completely tax-exempt under Section 10 (12B).

Tax Benefits Upon Maturity of NPS Tier 1 Account

• Lump Sum Withdrawal: At the age of 60, you can withdraw up to 60% of the accumulated corpus as a lump sum, and this amount is entirely tax-exempt.
• Annuity Purchase: The remaining 40% of the corpus must be used to purchase an annuity plan, which also qualifies for tax exemption.

Steps to Open National Pension Scheme Tier 1 Account

You can open an NPS Tier 1 account both online and offline by following these steps:

Apply for NPS Online

• Step 1: Log onto the eNPS website and navigate to the registration section.
• Step 2: Enter all the requested information and authenticate with the OTP sent to your mobile number.
• Step 3: Select the preferred account type and choose ‘Tier 1’ (Note: You cannot open a Tier II account without having a Tier 1 account).
• Step 4: Choose your fund manager from the available options (there are eight fund houses).
• Step 5: Select the investment mode:
  • Auto mode: This mode automatically allocates and rebalances your portfolio based on your age.
  • Active mode: Allows you to choose your assets manually.
• Step 6: Provide the details of your nominees and specify their share in the investment.
• Step 7: Upload the required documents in the prescribed format.
• Step 8: Make the initial contribution (minimum ₹500) and complete the registration.
• Step 9: Upon completion, your Permanent Retirement Account Number (PRAN) will be generated. Store it for future reference.

Apply for NPS Offline

• Step 1: Visit the nearest Point of Presence-Service Provider (POP-SP), such as a bank.
• Step 2: Fill out the offline application form available at the POP-SP.
• Step 3: Attach the required documents (proof of identity, address, and date of birth) with the completed form.
• Step 4: Submit the application form to the POP-SP.
• Step 5: Make your initial contribution and plan for periodic investments to keep the account active.

NPS Tier 1 Withdrawal & Premature Closure

The NPS Tier 1 Account offers both flexible withdrawal options and structured guidelines for premature closure, ensuring that your retirement savings are protected while allowing access to funds in times of need.

• Upon maturity, investors are allowed to withdraw up to 60% of the accumulated corpus as a lump sum. The remaining 40% must be used to purchase an annuity plan for a regular pension.
• Before maturity, you can withdraw a maximum of 25% of your total contributions.
• During the investment period, you are permitted to make a maximum of three partial withdrawals.
• Partial withdrawals are only allowed after being invested in NPS for a minimum of three years.
• Withdrawals are permitted only for specific reasons, such as medical emergencies, higher education, purchasing a home, or marriage, and a valid reason must be provided at the time of withdrawal.

Check more on NPS from the links below:

NPS Tier 1 vs NPS Tier 2

Here’s a detailed comparison between the NPS Tier 1 and NPS Tier 2 accounts, highlighting the key differences: