By :Balwant jain
When the National Pension Scheme (NPS) was introduced a few years ago, a person was required to open only one account. But, later on, to give flexibility to the account holders under NPS, the government introduced an option to open one additional account under NPS along with his main NPS account. The main account to be opened under NPS is called Tier I account and the additional account to be opened, which is optional, is labeled Tier II account.
Tier I account:
This is the main NPS account where your deposits get accumulated till you reach the age of retirement, which is 60 years for NPS. This account is akin to the recurring deposit (RD) bank account where you keep on depositing certain sums of money periodically and at the end of the period you get the accumulated balance. The difference between Tier I NPS account and RD account is that in RD account, the amount of money and frequency of deposit of the money is fixed, but in case of Tier I account neither the frequency of deposit nor the amount of money to be deposited is fixed. But you have to make at least one deposit during the entire financial year. The minimum amount to be deposited at any time is Rs500 and you should deposit minimum Rs 1,000 in a financial year. In case you fail to make the minimum number of contributions or minimum amount of contribution, a nominal penalty will be levied. Your failure to make minimum contribution will leave the account as dormant and can only be revised on payment of penalty and minimum contribution for each period of delay.
This requirement of minimum number of contributions in case of government employees is different. Here, the contribution is fixed at 10% of basic salary and DA monthly and an equal amount is contributed by the employer. For the government employees, opening a Tier I account under NPS is mandatory, but for non-government employees and self-employed people opening of an account under NPS is optional. It is rather a facility extended by the government to the citizens of India who are not government employees to avail the features of low cost NPS scheme.
One more difference between NPS Tier I account and a regular RD account is that the dates for deposits in this account are not prefixed and you can make your contributions as and when you want to, however, subject to you complying with minimum of one contribution and a minimum contribution of Rs 1,000 in a financial year. Please note that there are no restrictions on the maximum amount that you can deposit in this account. In addition to yourself, your employer can also make deposits in this account towards your superannuation. Though there are no limits on the number of times you can deposit money in this account, however, in order to take the benefit of rupee cost averaging, which is available in SIP (systematic investment plan), you can decide to contribute a fixed sum of money on a fixed date or at a fixed interval of time. It is important to do that, since part of your contribution will be invested in the equity where the prices fluctuate, the strategy of investing fixed sum of money will ensure that you purchase lesser number of units when the prices are high and get to purchase more number of units when the prices are low. Thus you will be able to ensure the benefit of rupee cost averaging available in SIP. A regular SIP facility is not available under NPS Tier I account and you will have to set up your own SIP by sticking to invest the fixed sum of money at fixed dates or at fixed intervals.
Tier II account:
Unlike Tier I account, which has features of a RD account, the Tier II account is like your saving account, where you can deposit and withdraw any amount. Opening of Tier II account is voluntary and not mandatory. However, you need to have an existing Tier I account before you can open Tier II account. Please note that you can open both the accounts at the same time. No separate KYC norms are required to be complied with for opening Tier II account. The PRAN (Permanent Retirement Account Number) card, issued to you while opening Tier I account, will be sufficient KYC compliance for opening a Tier II account.
The purpose of this account is to let the NPS account holder park his surplus funds in this account, which he can use for the purpose of making contribution to his regular NPS account and for creating surplus fund to meet any exigency before reaching the age of retirement. You can transfer funds one way from your Tier II account to Tier I account as a contribution; however, you do not have the facility to transfer any amount from Tier I account to Tier II account.
It is mandatory for you to fill in the details of your bank account for opening a Tier II account. In Tier II account also you have to make minimum of one contribution each year. You are also required to maintain a minimum balance of Rs 2,000 at the end of the financial year. In case you fail to make even a single contribution in a year or fail to maintain the minimum balance of Rs2,000 at the end of each financial year, a nominal penalty is levied.
You can withdraw the amount lying to the credit of your account in Tier II account as many times as you want. The contributions made by you in both these accounts are denominated as Units; hence though the withdrawal request is to be made in amount, the amount actually received after redemption of units may differ due to difference in NAV of units on the date of withdrawal request and date of actual redemption.
Features common to both the accounts:
You can deposit the money in these accounts either by cash or cheque/demand draft. Money can also be transferred electronically to your Tier I and Tier II accounts. You cannot deposit any outstation cheque in any of these accounts. Once your money is credited in your account, the pension fund manager nominated by you will buy the units with the money contributed by you. There is some time gap between deposit /credit of money in the account and credit of the units in your account. Both the accounts are portable and you can operate these accounts from anywhere even after you have shifted place or have changed your job. Unlike your EPF account, you do not have to submit any request for transfer of the balances.
So with this basic information in hand, you can go ahead and open you NPS account now.
Read More post By [Balwant Jain] [BUDGET-2017]
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)By Balwant Jain (CA, CS and CFP)The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at email@example.com and @jainbalwant