National Pension Scheme (NPS) Returns for Tier 1 & Tier 2

NPS is a government-backed savings scheme that aims to provide retirement benefits to its citizens. The scheme was initially launched in 2004 for government employees and later was made available to the general public in 2009. This scheme allows investors to invest in Tier 1 and Tier 2 accounts and gain returns as well as tax benefits from their investments. Given below are the meaning of the NPS returns for Tier 1 and Tier 2 accounts and their related details.

Read More: Similarities and difference between NPS Tier 1 and Tier 2

What is Tier 1 and Tier 2 account in NPS?

Tier 1 account is the primary account that comes with a long-term investment feature and few restrictions. This account is a mandatory account for all NPS subscribers. The contributions made to this account are eligible for tax benefits under Section 80CCD(1) of the Income Tax Act.

The key features of a Tier 1 account include,

• Withdrawal restrictions where the subscriber is allowed withdrawals only after he/she reaches the age of 60 years or under specific circumstances such as the subscriber’s terminal illness or death.
• The minimum contribution to a Tier 1 account is Rs. 500 per year.
• The contributions made to the Tier 1 account are eligible for tax deduction up to Rs. 1,50,000 under Section 80CCD(1) of the Income Tax Act and up to Rs. 50,000 under section 80CCD(1B).

Tier 2 account is an add-on account that offers more flexibility and liquidity than a Tier 1 account. This is an optional account and has no withdrawal restrictions and subscribers need to have a Tier 1 account to open a Tier 2 account.

The features of a Tier 2 account are as follows:

• There are no restrictions on withdrawals from a Tier 2 account, and the subscriber can withdraw the funds as and when required.
• The minimum contribution to a Tier 2 account is Rs. 1,000 to open the account and Rs. 250 subsequently.
• The contributions made to the Tier 2 account are not eligible for tax benefits under Section 80C of the Income Tax Act unlike Tier 1 accounts

Average returns for Tier 1 and Tier 2 accounts of NPS for 1yr, 5yrs and 10yrs

Subscribers of NPS have the choice of investment in any of the four investment options namely, Equity, Corporate bonds, Government Securities, and Alternative Investment Funds (AIFs). The returns of Tier 1 and Tier 2 accounts depend on the market performance of the option chosen by the investors. 

The average returns for the Tier 1 and Tier 2 accounts based on the investments made as of Feb 2023 are

NPS Returns for Tier 1 accounts

Investment option	1-year return	5-year return	10-year return
Equity	15.33%-18.81%	13.11%-15.72%	10.45%-10.86%
Corporate Bonds	12.46%-14.47%	9.27%-10.15%	10.05%-10.64%
Government Bonds	12.95%-14.26%	10.29%-10.88%	9.57%-10.05%
Alternative Assets	3.98%-16.73%	NA	NA

NPS Returns for Tier 2 accounts

Investment option	1- year return	5-year return	10-year return
Equity	15.19%-17.92%	13.05%-15.83%	10.35%-10.58%
Corporate Bonds	12.71%-16.36%	9.55%-10.17%	9.86%-10.60%
Government Bonds	12.61%-13.42%	10.40%-12.00%	9.59%-10.07%

Understanding differences between Tier 1 and Tier 2 accounts of NPS

Some of the key differences between the Tier 1 and Tier 2 accounts of NPS are given below.  

Category	NPS Tier 1	NPS Tier 2
Eligibility	This account can be opened by any Indian citizen between the age of 18-65 years.	Tier 2 accounts can be opened by any subscriber of a Tier 1 account.
Minimum contribution to open account	The minimum contribution to open a Tier 1 account is Rs. 500	The minimum contribution to open a Tier 2 account is Rs. 1,000
Minimum amount for future contributions	Investors need to make a minimum contribution of Rs. 1,000 per year in the subsequent years.	Investors need to make a minimum contribution of Rs. 250 in the subsequent years.
Minimum number of contributions every year	Investors need to make at least 1 contribution to the account per year.	There are no such restrictions on Tier 2 accounts.
Tax benefits	Investors get a tax deduction of up to Rs. 1,50,000 on their contribution to the Tier 1 account under section 80C and an additional deduction of up to Rs. 50,000 under section 80CCD(1B)	No such tax benefits are available for subscribers of Tier 2 accounts
Lock-in period	NPS Tier 1 accounts have a lock-in period for investors till they reach the age of 60 years.	There is no lock-in period for investors under NPS Tier 2 accounts.
Withdrawal limit	Investors can withdraw 60% of the fund upon maturity and the balance of 40% will be contributed to any pre-selected annuity plan	There is no restriction on the withdrawal of funds in Tier 2 accounts.
Tax on withdrawals	Investors are not liable to pay any tax on withdrawal amount as it is exempt.	There is no exemption on withdrawal amount and it is added to the taxable income  thereby being taxed as per applicable slab rates.

Conclusion

Most investors think they can invest only in Tier 1 accounts of NPS. However, investments in Tier 1 and Tier 2 accounts of NPS are available to all investors at large. The choice between these accounts should be based on criteria like liquidity requirements, tax benefits, investment horizon, etc. Investors can also take professional help to create their investment portfolio and include NPS contributions to meet their financial goals.

FAQs

Related Links

• Similarities and difference between NPS Tier 1 and Tier 2
• How to plan your retirement with National Pension System (NPS)?
• A gift for retirement – National Pension Scheme
• Top Questions on NPS Answered
• How to Plan a Happy Retirement with NPS?