NPS is divided into Tier 1 and Tier 2 accounts, each serving different investment purposes. Tier 1 NPS is the primary pension account designed for long-term retirement savings with strict withdrawal restrictions and tax benefits.
Like what you're reading?
Get our latest, straight to your inbox.
Features of Tier 1 NPS
- Mandatory for NPS Subscribers: All NPS accounts start with Tier 1.
- Tax Benefits:
- Contributions up to ₹1.5 lakh per year are eligible for deduction under Section 80C.
- Additional ₹50,000 tax deduction under Section 80CCD(1B).
- Partial Withdrawal Allowed: Only under specific conditions, such as:
- Higher education of children
- Purchase of a house
- Medical emergencies
- Retirement Withdrawal Rules:
- At 60 years old, up to 60% of the corpus can be withdrawn tax-free.
- Remaining 40% must be used for annuity purchases.
Investment Allocation in Tier 1
- Equity (E): Can invest up to 75% (higher growth potential but higher risk).
- Corporate Bonds (C): Moderate risk and returns.
- Government Bonds (G): Low risk, steady returns.
- Alternative Assets (A): Minimal exposure (less than 5%).
Who Should Opt for Tier 1 NPS?
- Salaried individuals looking for tax-saving retirement options.
- Self-employed professionals planning for long-term pension benefits.
Tier 1 NPS offers disciplined savings and structured withdrawals, making it a valuable tool for retirement planning.
Disadvantages of Tier 1 NPS
- Limited Liquidity: Withdrawals before 60 are restricted.
- Mandatory Annuity Purchase: At least 40% of the corpus must be converted into an annuity.
- Returns Are Market-Linked: No guaranteed returns like PPF.
Conclusion
Tier 1 NPS is an effective retirement planning tool with tax benefits and market-linked returns. However, investors must consider liquidity constraints before investing. Those looking for structured long-term financial security can benefit significantly from this scheme.
