The National Pension Scheme provides a way for people to raise a corpus for their retirement. Under the scheme, regular contributions to the scheme have to be made and the contributions have to be invested in different funds. The balance in the funds grows and on retirement, these funds have to be used to purchase an annuity plan that will provide regular pensions. The NPS is managed by the Pension Fund Regulatory Development Authority or PFRDA. Any citizen between the age of 18 to 60 can open an NPS account. The account can be opened both online and offline.
Within the NPS scheme, there are two types of accounts that a person can open. There are a few differences between these accounts and once you know them, you can decide whether to open only one account or both.
There are two types of NPS accounts:
Tier I account:
This account is the basic account that every subscriber to NPS has to open. Contributions made to this account get a tax benefit under Section 80CCD of the Income Tax Act up to Rs. 50,000. The minimum contribution required to open this account is Rs. 500.
The funds deposited in this account have premature withdrawal regulations. Premature withdrawal can only be done in certain restricted conditions. There is a 60% tax benefit on maturity for the balance in the Tier I account. The balance has to be used to purchase an annuity plan. To keep this account operative, an annual maintenance charge is charged which has to be paid yearly.
Tier II account:
A Tier II account does not have any regulations. Only a member of the National Pension Scheme can open a Tier II account. The minimum contributions for this account are Rs. 1,000 at the time of account opening and thereon a Rs. 250 contribution to keep the account active. The amount in this account can be withdrawn at any point of time. If the amount is withdrawn on retirement when the subscriber reaches 60 years of age, then the Tier II balance does not have to be used to buy an annuity plan. Consequently, there is no tax benefit on the amount contributed in the Tier II account either. However, if the balance is kept till maturity, then withdrawal tax benefits apply. The amount in this account can be deposited in the Tier I account at any time. A Tier II NPS account only incurs an activation charge.
The National Pension Scheme is an important instrument for creating wealth for the investors. It is a long term instrument with limited liquidity with the sole purpose of raising funds for retirement. The tax benefits on investment and capital gains make it a good investment pick.