NPS tier I vs NPS tier II | Smart Retirement Planning
We hardly think about old age and life after retirement while we are young. But, sooner or later we have to think about it. A smart investor will always start it early. In this video, we'll learn about the two types of NPS for smarter retirement planning.
What is NPS?
National Pension System is a government-backed pension scheme that was launched in 2004 for government employees. And in 2009, it was opened for private employees.
Under NPS, you can start periodic investments in your employment years and redeem some amount as lump sum in your retirement while the rest of it can go into generating a pension. We also call it annuities.
There are two kinds of NPS accounts.
NPS tier-I and NPS tier-II
If you want to invest in NPS, opening an account in tier-I is mandatory while tier II is optional.
NPS tier -I
NPS tier-I is the basic retirement plan. You can start an NPS account with as low as Rs.500, and invest at least Rs.1000 to keep it active next year. Investing a good amount in your NPS account every year would eventually secure a large corpus for your retirement. So think long-term and invest wisely!
You can avail of a tax rebate of up to Rs. 2 lakh against your NPS investment. You can check out more details here: • National Pension Scheme | NPS for Ret...
NPS tier-I has stringent withdrawal rules. If you withdraw your funds at any point in time before retirement, you receive 20% of it upfront while 80% gets converted into annuities which you receive on a quarterly or yearly basis.
If you hold your funds till retirement, you can upfront avail of 60% at the age of 60 which is also tax-free. The 40% of it gets converted into annuities with the help of insurance companies which you can receive as a quarterly or yearly pension.
NPS tier-II
NPS tier II works like a savings account and is more flexible than NPS tier I. However, you do require a tier-I account to be eligible for a tier II account. A minimum of Rs.1000 is required to open the account but you don't need to invest some each year to keep it active. You can invest and withdraw as you wish. But you can only avail of tax benefits on tier II if you are a government employee.
Who should invest in a Tier II account?
NPS tier-II acts like an open-ended mutual fund scheme. By investing in NPS, your investment amount is diversified into 4 instruments— equity, bonds, government securities, and alternate investments.
If your risk appetite is low and you do not wish to invest in equity mutual funds, you can consider SIPs in the tier-II account. It offers you equity exposure but in a safer mode.
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