The National Pension System, or NPS, has been in the news this year, thanks to the number of changes introduced by the regulatory authority and the development of pension funds (PFRDA).

Awareness around NPS as an increased pension avenue, as seen in a growing customer base. Even though this is a retirement planning scheme, it offers customers options to invest for their other purposes too. They can do it through Tier-II, or investment account.

What kind of account can be opened under NPS?

You can open a TIER-I (Retirement) account and TIER-II (Investment). The latter is optional and can be opened only if you already have a TIER-I account, which is the default retirement account. The contribution to this main account brings tax benefits under the 80CCD (1), 80CCD (1B) and 80CCD (2). Your contribution to this account meets the requirements for tax benefits to the extension of the 80C Rs 1.5 lakh, while additional contributions to 50,000 Hospital can be claimed as a reduction below 80 CCD (1B). The 80CCD section (2) plays a role if your employer contributes to your NPS account – up to 10 percent of your basic salary and dear allowance is allowed as a reduction in your total income. On the other hand, the contribution to Tier-II will result in tax damage.

Why do I have to open an investment account when I already have Tier-i with NPS?

Since Tier-I is a retirement account, it comes with some restrictions – the aim is to ensure that you do not dip into the corpus for other purposes. For one, you cannot draw the amount you invest until you are 60 years old. Even then, you can attract up to 60 percent as a lump-sum, while the balance must be converted into an annuity. Now, annuity income is taxed. Partial withdrawals are not permitted except in certain extraordinary circumstances. So, you can attract up to 25 percent of your contribution if you need to fund your children’s higher education, purchasing or home construction and treatment of critical illness. In terms of premature withdrawals for other reasons, you will get access to only 20 percent of your corpus, the 80 percent balance must be used to buy annuities.

Tier-II is free of all these restrictions and, therefore, can be used to build cats for other long-term goals. However, there are some conditions you have to fulfill. For one, there is no level-II without tier-i. And, you need to invest at least Rs 1000 to start, and a minimum of Rs 250 per year. Beyond this, you are free to invest and draw at will.

What is the cost associated with two accounts?

There is no difference in the filling structure for both account categories. Registration will cost Rs 200, while you have to pay 0.10-0.25 percent of the total contribution as a service fee. If you choose a physical route to contribute, close the maximum cost will be Rs 25,000. If you choose virtual mode, Enps, the maximum cost will be limited to 10,000 rs. Then, there was an investment management fee of 0.03-0.09 percent. CENTER NOTE PRODUCTS – KARVY AND NSDL – will charge the RS 39.36-RS 40 fee as account opening fees and RS 57.63-RS 95 as an account maintenance. The cost of NPS Trust will amount to 0.005 percent of assets managed per year, while the cost of custodian assets will be 0.0032 percent per year.

Why should I open an investment account under NPS when I can invest in mutual funds?

As mentioned earlier, it is not mandatory to open a TIER-II account. However, it comes with several benefits, especially among them into a structure of accusations, which is one of the lowest in the world. For example, the cost of maximum fund management for the NPS E scheme (equity) is 0.09 percent per year, which is much lower than what is even mutual fund mutual funds (0.3-1 percent). It’s separate, you can switch between pension fund managers without drawing Capital Gain taxes, unlike with mutual funds.