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NPS Tier 1

5paisa Research Team

Last Updated: 21 Nov, 2023 05:17 PM IST

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National Pension Scheme Tier 1 is among the ideal schemes for retirement supported by the central government. This financial scheme has some attractive salient features, from withdrawal and deposit flexibility to tax exemptions. The National Pension Scheme Tier comes with various benefits. It is the primary account. The National Pension Scheme Tier 2 is referred to as the secondary account. You can open this account under the central government, state government, corporate, and all citizen models. Keep reading this post till the end to learn more about what is NPS tier 1 and its benefits. 

What is the National Pension Scheme Tier I?

National Pension Scheme or NPS Tier I is India's government-sponsored retirement savings programme. A person pays a certain amount of money during their working years to a retirement corpus under this defined contribution-based pension plan.
Depending on the investor's risk tolerance, the contributions made towards NPS Tier I are invested in a mixture of stock, debt, and government securities. The Pension Fund Regulatory and Development Authority (PFRDA) oversees the system.
In accordance with NPS Tier I, a person's contributions are locked in until retirement age (60 years). Partial withdrawals are nevertheless permitted in some emergency situations, such as life-threatening sickness, lifelong incapacity, etc. Individuals may also profit from the programme under Sections 80C and 80CCD of Income Tax Act.

Features of NPS Tier I Account

The features of the NPS Tier I account are as follows:
●    The National Pension Scheme tier 1 is among the most basic account types.
●    If you work in the private and government sectors, you may avail of this scheme conveniently.
●    You can invest as low as one thousand rupees yearly in the National Pension Scheme account.
●    Under the section of 80CCD(1B), an investor will likely get an extra tax deduction of about fifty thousand rupees.
●    An employer can also claim the tax deduction of their salary's 20% when contributing towards the NPS plan.
●    The returns you earn from the NPS plan will be exempted from tax.
●    Your national pension scheme account will mature when you retire or attain sixty years.
●    When the NPS scheme amount matures, you may withdraw 60% of your accumulated amount while 40% of it will be used for purchasing the annuity plan.
●    On specific conditions, you are allowed to make premature withdrawals.

Interest Rate on NPS

Unlike fixed-return government-backed schemes like the Public Provident Fund (PPF), the National Pension Scheme's (NPS) returns are not predetermined. The returns vary depending on the investor's preferred fund house, as different fund houses offer different returns. There are eight fund houses available for investors to choose from, which include:
●    SBI Pension Fund
●    DSP Blackrock Pension Fund
●    UTI Retirement Solutions Pension Fund
●    Reliance Capital Pension Fund
●    ICICI Prudential Pension Fund
●    HDFC Pension Management Company
●    LIC Pension Fund
●    Kotak Mahindra Pension Fund
If the investor fails to choose a fund house, the default option will be the SBI Pension Fund.
 

NPS Tier I Withdrawal and premature closure

In case of a need for funds, partial withdrawal from the NPS Tier I Account is possible, subject to fulfilling certain withdrawal rules. These rules include the following:
●    A minimum of three years from the investment date is required for withdrawal.
●    Only 25% of remaining fund value may be withdrawn in a single instance.
●    Only 3 maximum withdrawals are permitted during an investment period.
●    Also, the withdrawal must be made for valid financial purposes, such as higher education, purchasing a house, marriage, or medical emergencies.
If you decide to exit and close the NPS Tier I scheme before maturity, it is considered premature closure. In such a case, you may withdraw 20% of the invested amount in lump sum, and the remaining 80% will be utilized to provide annuity benefits. Nevertheless, when the accumulated amount upon closure is less than Rs.1 lakh, then the entire amount can be withdrawn as a huge sum.
 

NPS Tier I tax benefits

The NPS Tier I benefit are the following: 
●    Deductions of up to 1.5 lakhs under the Section 80CCD (1), including deductions under Section 80C 
●    Additional deductions up to fifty thousand rupees under the Section 80 CCD (1B) 
●    Employer contributions up to 10% of the investor’s basic salary and the DA are eligible for deduction under the Section 80 CCD (2) 
●    Tax-free fractional withdrawals from the Tier 1 Account 
●    Tax-free lump sum withdrawal of up to 60% of the accumulated fund value on maturity 
●    Annuity benefits are taxable in the hands at one’s income tax rates.
So, if you open the account, you will be eligible for all these NPS tier 1 tax benefits.
 

How do Tier I NPS investments work?

Upon investing in the NPS Tier I plan, you have the option to choose between two investment techniques – Auto Choice Strategy and the Active Choice Strategy. Under an Active Choice strategy, you can select investment funds of your preference, whereas an Auto Choice strategy allocates funds in the predetermined ratio based on the investor’s risk profile. Hence, the NPS scheme provides a variety of investment funds to choose from, including:
●    Asset Class E, which invests at least 50% of the portfolio in equity
●    Asset Class C which invests in fixed-income instruments except for Government securities
●    Asset Class G, which invests in Government securities only
●    Asset Class A, which invests in alternative assets
Additionally, you have a choice among the 8 pension fund managers to handle the investments you make. These registered fund managers, according to the PFRDA and it includes the following:
●    LIC Pension Fund
●    ICICI Prudential Pension Fund
●    UTI Retirement Solutions Pension Fund
●    Kotak Mahindra Pension Fund
●    DSP Black Rock Pension Fund
●    HDFC Pension Management Company 
●    Reliance Capital Pension Fund
●    SBI Pension Fund
Eight pension fund managers are available to you as options for managing your money. The PFRDA lists the following among these registered fund managers.

Maturity of the scheme

The National Pension Scheme (NPS) matures upon reaching the 60 years, with an option to defer it until the age of 70. After maturity, 60% of accumulated corpus can be withdrawn as a huge sum, while the residual 40% is utilized for receiving lifetime pensions at the guaranteed rate. Various annuity payout choices are available, including the frequency of payments. One can also opt for the joint-life annuity with their spouse to ensure continued annuity payments after their death.
 

Eligibility to open an account in NPS Tier I

To be eligible for opening the NPS Tier I account, the applicant must be eligible following the criteria as mentioned below:
●    The applicant must be an Indian citizen, non-resident or resident to be able to apply for the NPS account.
●    The applicants must be eighteen to sixty years when submitting the NPS account form.
●    Non-resident Indians can also open an account. However, the account will be closed if they change their residing country. 
●    To open this account, you must contribute a minimum of five hundred rupees. So, in one financial year, you should contribute a minimum of 1000 rupees to the NPS account.
 

Documents Required

The most important documents that you must submit with the NPS tier 1 account opening form are:
●    Correctly filled registration form
●    Applicant's ID proof
●    Applicant's address proof
●    Applicant's age proof or DOB
 

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Frequently Asked Questions

The taxation rules concerning the NPS Tier I Account are subject to the discrepancy. Nonetheless, here are the NPS tax benefits applicable to individuals registered in the NPS Tier 1 Account.

Tax Rebate for all the salaried individuals
Under the Income Tax Act, there are two tax benefits available for individuals contributing to the NPS Tier 1 Account:
●    Employee's own contribution is eligible for a tax benefit of up to 10% of their salary (Basic + DA) under Section 80CCD, with a maximum limit of Rs. 1 lakh per annum.
●    The employee is also eligible for a tax deduction on the employer's NPS contribution, which is 10% of their salary (Basic + DA), with a limit of Rs. 1 lakh as per Section 80CCC.

Tax rebate for all the self-employed individuals
●    The Income Tax Act allows for a tax rebate of up to Rs. 1 lakh per annum, which is up to 10% of the individual's gross income, as per Section 80CCD.
 

Here is the meaning of NPS tier 1. The NPS Tier I account is designed mainly for retirement savings, requiring a minimum contribution of ₹500 during account opening. Once you retire, you can withdraw up to 60% of your total accumulated amount, while the remaining 40% of the corpus is used to purchase annuities to provide a steady monthly income in the form of a pension.

The applicant of the National Pension Scheme tier 1 must be 18 to 60 years to be eligible for opening the account.

Premature withdrawals are permitted under NPS Tier 1. However, there are several restrictions. Only three years after the investment into the programme may you make a partial withdrawal from the account. A maximum of three withdrawals are permitted throughout the investment period, and a maximum of 25% of the available fund value may be taken at once. The withdrawal must be made to meet a legitimate financial need, such as a higher education, a marriage, the purchase of a home, or an unexpected medical expense. 

Premature closure would be ending the programme and closing the account entirely. When you do this closure, you can take out 20% of the corpus as a lump amount, with the remaining 80% going towards paying annuities. However, the full accrued corpus will be reimbursed in one lump amount if it is less than Rs. 1 lakh at the time of such closure.
 

The applicant can partially withdraw the NPS tier 1 investment after completing twenty-five years of service.

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