A person can open two accounts under National Pension System (NPS). The main account is called Tier I account and an additional account is labelled as Tier II account. Let us understand about both of these accounts.
Tier I is the default and proper pension account under NPS. This is a mandatory account under NPS where you accumulate corpus for your retirement. This is like a recurring deposit (RD) bank account. The difference between Tier I NPS account and RD account is that in RD account, the amount and frequency of deposit is fixed, but in case of Tier I account neither the frequency of deposit nor the amount of money to be deposited is fixed.
This account can be opened with just Rs 500 as initial deposit. The minimum amount to be deposited at any time is Rs 500 and you need to deposit minimum of Rs 1,000 in a financial year. In case you fail to make minimum amount of contribution your NPS account get frozen which can be unfrozen by paying a penalty of Rs 100 for each year of default with a contribution of Rs. 500/-.
The NPS was introduced as substitute for provident Fund scheme for Government Employees. The requirement of minimum number of contributions in case of government employees is different. Here, the contribution is fixed at 10 per cent of basic salary and DA to be made monthly. As per the tax laws contribution upto 14% made by the Central Government towards the NPS account of its employee was fully tax deductible within an overall limit of Rs. 6.50 Lakhs.
For the government employees who have joined after January 2004 opening a Tier I account is mandatory. However this is optional for non-government employees and self-employed people. Though there is requirement of minimum amount which one has to deposit there is no upper limit for deposit in tier I account though the tax benefit will be available for the contributions permissible under the income tax laws. There are no restrictions on the number of times you can make contribution to NPS account but you have to pay the transaction charges for each transaction.
Though SIP (Systematic Investment Plan) option is yet not available for NPS but as part of money gets invested in equity which is relatively volatile, I would advise you to contribute a fixed sum of money like in an SIP to avail the benefit of rupee cost averaging. With the strategy of investing a fixed amount you buy lesser number of units when the market is high but get to purchase more number of units when the prices are low. Since a regular SIP facility is not available under Tier I account, you have to set up your own SIP by sticking to invest a fixed amount every month on the fixed date. Tax benefits are only available for contribution towards Tier I account within certain limit which we will discuss in another article in future.
Tier II is like your saving account, where one can withdraw or deposit any amount any time. Opening Tier II account is voluntary which can either be opened at the time of opening Tier I account simultaneously or can be any time subsequently. No separate KYC is required to be done for opening Tier II account in case you already have a Tier I account. Tier II account lets you to park your surplus funds in this account. The money deposited in the Tier II account can be used for making contribution to Tier I account or for creating surplus fund to meet any exigency funds, normally, are allowed to be transferred from Tier II account to Tier I account as a contribution but not otherwise. Though Non Resident Indians and Person of Indian Origin are allowed to open Tier I account but they are not allowed to open the Tier II NPS account. Once the Tier I account is closed, the Tier II account gets closed simultaneously. So you can have Tier I account without having Tier II account but the reverse is not true.
Though there is no minimum balance requirement as well as minimum contribution requirement, the minimum contribution amount for Tier II account is Rs 250 only. Tier II account can be opened with initial contribution of Rs 1000. For default in making minimum contribution Tier I and Tier II account both are frozen and unfrozen only when the penalty with minimum contribution for Tier I account is paid.
You can make as many withdrawals from Tier II account as you want. For Tier II account no tax benefits are available except for central government employees who can avail tax benefits under Section 80C for contribution made toward Tier II account with a lock in period of three years.
The money can be deposited in these accounts either by way of cash or through cheque/ demand draft. You can also contribute towards both these account electronically. You are not allowed to deposit an outstation cheque. After your money is credited in your account your Pension Fund Manager credits the units in your accounts. Unlike mutual funds there is some time gap between deposit/ credit of money in the account and credit of the units in your account.
Unlike your provident fund account your NPS account is portable and you do not have to make request for transfer of your balance from one employer to another if you are salaried. Even for self employed, you can operate the same account even if you shift your place.
Both the accounts work like your investments in a mutual fund scheme where the contributions are converted into units and the balances are denominated in no. of units in your account. So for withdrawals request made from Tier II account may be denominated in amount, the amount actually received after redemption of units may differ due to variation in NAV of units on the date your request for withdrawal is submitted and is actually executed and credited in your account.
The writer is Chief Editor of ApnaPaisa and a tax and investment expert. He can be reached at Balwant.jain@apnaPaisa.com