What is the difference between NPS Tier 1 Account, Tier 2 Account and Swavalamban scheme?

You have several options when it comes to opening an NPS account, and if you are just starting out — it is better to familiarize yourself with at least these three options:

  1. Tier 1 NPS Account
  2. Tier 2 NPS Account
  3. Swavalamban Scheme

In this post, I’m going to talk about them briefly, discuss what differentiates one from the other, and which one is appropriate for what type of investor.

Tier 1 NPS Account

The first account is called Tier 1 NPS Account, and the Tier 1 Account is mandatory for all central government employees. It is mandatory for them to contribute 10% of their basic salary plus DA plus DP every month towards this account, and the government matches this contribution.

There are severe restrictions on how money can be withdrawn from the Tier 1 account, as it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before age 60. You can keep the remaining 20% with you.

When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.

Even if you are not a government employee, you can still open a Tier 1 account, and if you are interested in NPS, you will need to open a Tier 1 account as that’s necessary in order to open a Tier 2 account, which I’ll come to in a moment.

There is a minimum that you have to commit to investing in NPS, and for the Tier 1 account that minimum is Rs. 6,000 per year.

Tier 2 NPS Account

The Tier 2 NPS account is very similar to the Tier 1 account, and if you are not a government employee who wants to invest in NPS, you would want to invest the minimum of Rs. 6,000 in Tier 1 and then invest the rest of your money in the Tier 2 account.

This is because Tier 2 is quite similar to Tier 1 in all respects except for the harsh withdrawal conditions. You are free to withdraw your money from the Tier 2 account any time that you want without any penalties.

Minimum amount for opening Tier 2 account is Rs. 1,000 and minimum balance required at the end of the year is Rs. 2,000. You need to make at least 4 contributions in a year.

Swavalamban Scheme

This scheme is really for the financially less fortunate members of the society and is really a way for the government to incentivize investments for them.

The government pays Rs. 1,000 every year for four years, if you open a NPS account under the Swavalamban scheme, but there are limitations on who can open an account under the Swavalamban scheme.

Following conditions apply:

  • Subscriber is not covered under employer assisted retirement benefit scheme and also not covered by social security schemes under any of the following laws:
    • Employee Provident Fund and Miscellaneous Provision Act, 1952
    • The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948
    • The Seamen’s Provident Fund Act, 1966
    • The Assam Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955
    • The Jammu & Kashmir Employee Provident Fund Act, 1961
  • Subscriber contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for both Tier1 and Tier II taken together, provided subscriber makes minimum contribution of Rs.1000 per annum to his Tier 1 account

Based on the limitations mentioned above, I think most people reading this blog will be ineligible.

Conclusion

If you are not a Central Government employee who has to put in money mandatorily in NPS then you should be very cautious about saving money here.

This is because there are restrictions on where you can invest your money after you get it at retirement. They make you buy annuities which are not the greatest products right now. I don’t see much value in investing in NPS as it stands today because of the frequent changes, and uncertainties surrounding this scheme. You may as well invest this money on your own in the a debt or equity product based on your preference, and stay away from the restrictions imposed on you by the scheme.

This post is from the Suggest a Topic page.

53 thoughts on “What is the difference between NPS Tier 1 Account, Tier 2 Account and Swavalamban scheme?”

  1. My question is, I was working in Non Govt company and contributing to NPS every month. Now i changed my job, my new employer have no NPS plan as i earlier had. How i can continue contributing in my NPS tier 1 account. there is no guidance on this. please suggest

  2. I am a govt. servant in odisha state govt as a Junior Clerk in District carder and also a nps subscriber. How i can draw some money from my deposit as the GPF subscriber withdraw money from their deposit & refund the amount in installments.

  3. Hi Sir,
    Iam a central government employee allready iam Join in NPS Tier I My amount deducted in my salary 10% per month for last 9 years . But my question is can i withdraw some amount just like GPF , i have no idea in this NPS how to withdraw to my acount. If not possible , so please explain Tier II Option, whether i joined Tier II and i contribute Rs.1000/-per month , so government how much will give as a double 1000+1000/- are not given if given after how many months my amount withdraw, can u explain me sir . Please dnt mind sir i ask to so many officers but nobody can explain whether withdraw option is availability r not . Thanking you Sir,

  4. I am a state government employee. I want to open an NPS Tier-2 Account. My age is 39. What benefit will i get if i open that account?

  5. Thanks for clearly written article for NPS. Since we are unsure when in future we will need money, this Tier-2 option gives private sector workers a flexibility.

  6. Hi,
    I just want to know that,is government contribution is same as employee’s contribution in tier 2 account as in case of tier 1account
    Thanx

    1. govt contribution is equal to mandatory contribution made by the central govt which……10% basic salary(grade pay+ pay in pay band).

  7. Hello Manshu,

    The article written by you gives a lot of information.

    I work for a private sector and have opened a NPS account on my own.

    As quoted by you” The Tier 2 NPS account is very similar to the Tier 1 account, and if you are not a government employee who wants to invest in NPS, you would want to invest the minimum of Rs. 6,000 in Tier 1 and then invest the rest of your money in the Tier 2 account.”

    But the contributions which I make automatically goes into Tier-II. Is it possible for me to put in the contributions to Tier-I as only Tier-I is exempted from tax.

    Awaiting for your response.

    Regards,
    Shweta

  8. hi
    can u please guide me the detailed procedure of withdrawal of NPS Tier 1 account if the investor is dead.
    i’ve no idea of the account no. nor I know about the nominee.

  9. I have a tier 1 a/c coz I ma govt employe.

    But I want to create tier 2 a/c can it suitable for me or not.

  10. Very Nice article, thanks.

    One question – what is the tax status of withdrawals from Tier 2 account?

  11. Hi You said in a reply to Nadeem that contribution to Tier 2 is qualified for tax saving, is it true? I do not think so.

  12. My employer is offering NPS in Corporate Model from this year. I am not sure what advantages will i have if i opt for it. I heard that there will be tax exemption of max 10% of basic contributed by employer (part of CTC) above 80C limit. Is it correct?
    Is it only for Tier 1 account?

    Why Tier 2 option provided , tax exemption for this account too?

    Thanks

    1. Yes Nadeem, there is a new provision – 80CCD(2) which allows the employer to put up to 10% of your salary in NPS and then get exemption on that over and above what 80C gives.

      The purpose of Tier 2 is to allow you to give you a way to add more to NPS account without having the restrictions on withdrawing the money before 60. That also qualifies for tax savings, and is a good thing.

      Here is a TOI article with more details on 80CCD(2) http://timesofindia.indiatimes.com/business/india-business/You-can-save-additional-tax-with-NPS/articleshow/11866847.cms

  13. If an employer is offering NPS and is willing to make a matching contribution then from tax point of view it is good since the employer contribution can deducted separately from 80C.

    For most people NPS can wait until DTC kicks in.

    Incidentally central govt subscribers have a mandatory 85% debt component. So returns will be EPF +a little extra.

    Buying an annuity for a small portion of your total retirement corpus is not a bad idea.

    1. I wasn’t aware of the 85% debt component rule Pattu – thanks for bringing it up. Is there a link that shows the returns on these so far?

        1. Thanks – I have seen that article before, wanted to see the source of the data, but it looks like they feel it is not necessary to share it with the public.

    1. Thanks for noticing Yash – I will have an update on Monday of things that I plan to implement based on the feedback from the last post.

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