Know All the Important Features About NPS Tier 1 Account

The National Pension System (NPS) was introduced in 2004 to replace the Old Pension Scheme. It is a pension-cum-investment scheme where subscribers can contribute to their NPS accounts till the age of 80. Thereafter, a portion of the corpus can be withdrawn as a lump sum amount, while the remaining corpus is converted into an annuity product.

This, in turn, ensures that you can enjoy a steady stream of income after you have retired. Typically, you can withdraw your corpus normally once you attain the age of 60. NPS also permits partial and premature withdrawals, as you'll see below.

When you subscribe to the National Pension System, you need to open an NPS Tier I account. Wondering what this account is and what its features and benefits are? Let's find out.

What is an NPS Tier I Account?

The NPS Tier I account is a mandatory account that needs to be opened by all subscribers under the National Pension System. In other words, it is the default pension account under the scheme. It is also a pension-focused account that is best used for retirement planning. If you wish to start saving up for your retirement and ensure that you have a regular source of income, you can subscribe to the National Pension System by opening an NPS Tier 1 account.

What is an NPS Tier II Account?

The NPS Tier II is a voluntary account that you can open under the National Pension System. It can only be opened if you already have an NPS Tier I account in your name. Unlike the Tier I account, a Tier II account is not a pension account. Rather, it is an investment-oriented account that has much more flexible withdrawal rules than the Tier I account.

The Key Features of an NPS Tier I Account

Before we go ahead and discuss what an NPS Tier 2 account is, check out all the important features of the NPS Tier 1 account below.

• Age Limit and Eligibility

The minimum age limit for opening an NPS Tier I account is 18 years, while the maximum is 70 years. Any citizen of India is eligible to open this account, including Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). On the other hand, NRIs and OCIs cannot open an NPS Tier II account.

• Limits on Contribution

The minimum contribution required to open your Tier I account is ₹500. To keep your account active, you need to make at least one contribution per year. The minimum amount of contribution required for this purpose is ₹1,000 per year.

However, you need at least ₹1,000 to open NPS Tier II accounts, and you should make a minimum annual contribution of ₹250 to keep it active.

• Documents Required to Open the Account

Resident individuals within the age limit specified need the following documents to open a Tier I account:

• PAN card
• Any proof of address
• A proof for an active bank account
• A recent photograph

In addition to the above documents, NRIs need to submit their Indian passport and a proof of an NRE/NRO account. OCIs need to submit their OCI card instead of their passport.

• Nomination for Your Account

You must assign a nominee for your NPS Tier I account at the time of account opening itself. You can have a maximum of 3 nominees for the account. If you have multiple nominees, you need to specify the percentage of your NPS corpus that will go to each nominee.

• Investment Choices Available

You can invest in your Tier I account via the active choice or the auto choice. In the active choice, you can choose to invest in the following asset classes:

• Asset class G: Government securities and instruments
• Asset class C: Corporate bonds and instruments
• Asset class E: Equity and related instruments
• Asset class A: Alternative Investment Funds (AIFs) which include instruments like MBS, CMBS, REITS etc.

If you select the auto choice, you can invest in life cycle funds with pre-defined asset allocations. These are the three different life cycle funds you can invest in, depending on your risk profile:

• Conservative Life Cycle Fund (LC25)
• Moderate Life Cycle Fund (LC50)
• Aggressive Life Cycle Fund (LC75)

• Tax Benefits on Your Tier I Account

Your NPS Tier I account offers the following tax benefits as per the Income Tact .

• Investments made in the account are deductible from the total income up to ₹1.5 lakhs, u/s 80CCD(1)
• An additional deduction of up to ₹50,000 is allowed u/s 80CCD(1B) only for investments made in Tier I accounts

• Withdrawals and Exit

Normal withdrawals from Tier I accounts are permitted after you attain the age of 60 (if you opened your account before attaining 60 years of age), or after the completion of 3 years (if you opened your account after attaining 60 years of age). In case of such normal withdrawals, you can withdraw up to 60% of the corpus as a lump sum amount and use a minimum of 40% to purchase an annuity plan.

Partial withdrawals from Tier I accounts (amounting to 25% of the corpus) are permitted after the completion of 3 years from the date of account opening. During the entire investment tenure, a maximum of 3 such partial withdrawals are allowed.

As for exiting the account, typically, the age limit is 60 years. However, you can choose to remain invested till the age of 75. If you choose the second option, you can still exit the scheme at any time after the age of 60, but before the age of 75.

Conclusion

Now that you know the key features of an NPS Tier 1 account, you can use this information to plan your investments prudently. When you invest in this scheme, ensure that you select the right manner of investment (between the active and auto choices). You also need to pay attention to the asset allocation and make sure that it aligns with your risk profile.