NPS · Decision support, not a verdict
NPS Tier 1 vs Tier 2
Same PRAN, same fund managers, same investment choices — Tier 1 and Tier 2 hold your money in identical underlying assets. The entire difference is in the rules around getting it back out, and what tax benefit you get for putting it in. If you already have an NPS account and want to project its maturity value, the EPF & NPS retirement calculator does that in more depth — this page is about which account to prioritise, and why.
Tier 1 vs Tier 2, at a glance
| Tier 1 | Tier 2 | |
|---|---|---|
| Purpose | Mandatory retirement account — this is "NPS" in the sense most people mean it. | Voluntary, flexible investment account. |
| Lock-in | Until age 60. | None — withdraw any amount, anytime, no exit penalty. |
| Partial withdrawal | Up to 25% of your own contributions (not employer's), after 3 years, only for specified reasons — critical illness, disability, children's education/marriage, or a home purchase. Capped at 3 withdrawals over the account's life. | Not applicable — it's already fully liquid. |
| Your contribution deduction | 80CCD(1): up to ₹1,50,000 (shares the overall 80C cap, not additional) + 80CCD(1B): extra ₹50,000 — old regime only. | None, for individual subscribers, in either regime. |
| Employer contribution deduction | 80CCD(2) — survives both regimes. Private-sector cap: 10% of Basic+DA (old regime) or 14% (new regime, since Budget 2024). Government employees: 14% in both regimes. | Not applicable. |
| Tax on withdrawal | Up to 60% of the lump sum is tax-exempt under Section 10(12A); the annuitised portion is taxed as pension income when received later. See the withdrawal-rules note below — this is an area with recent, ongoing change. | Commonly treated as taxed at your income slab rate on withdrawal (principal + gains together) — there's no dedicated capital-gains or indexation provision for it in the tax law. |
A note on the withdrawal rules — this changed recently
PFRDA amended NPS exit norms in December 2025, and the split between government and non-government subscribers now matters more than it used to. Government-sector Tier 1 subscribers still follow the older rule: up to 60% lump sum, with at least 40% used to buy an annuity. Non-government subscribers (most private-sector and self-employed individuals) now get more flexibility: corpus up to ₹8,00,000 can be withdrawn entirely as a lump sum; between ₹8,00,000–₹12,00,000, up to ₹6,00,000 can be taken immediately with the rest via staggered withdrawal or annuity; and above ₹12,00,000, up to 80% can be taken as a lump sum with a minimum 20% annuitised. Separately — and this is easy to miss — the income-tax exemption under Section 10(12A) still only covers up to 60% of the withdrawal as tax-free; PFRDA permitting an 80% lump sum doesn't automatically mean all of it is tax-free, and whether that extra portion gets a tax exemption is still unresolved as of this writing. Given how recently and how specifically this changed, verify the current PFRDA circular and your subscriber category before assuming either the old or new figures apply to you.
Contribution projector
Money grows identically in both tiers — same investment, same return. What differs is the tax benefit on the way in.
Market-linked, not guaranteed — applies identically to both tiers since the underlying investment is the same.
The 80CCD(1B) benefit below only applies under the old regime.
Used only to work out the marginal tax saved by the ₹50,000 80CCD(1B) deduction — same slab logic as the regime comparator.
Tier 1 vs Tier 2 Projection
CONTRIBUTION PROJECTORTAKEAWAY
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Enter your contribution and horizon above.
Frequently asked questions
Do I need a Tier 1 account to open Tier 2?
Yes. Tier 2 is an add-on — you can't open one without an active Tier 1 account first. They share the same PRAN (Permanent Retirement Account Number), so opening Tier 2 is a quick add-on step once Tier 1 exists, not a separate onboarding process.
Which tier should I prioritise if I'm on the new tax regime?
Honestly, the case for Tier 1 is weaker here — the 80CCD(1B) deduction that's often the main reason people cite for it doesn't apply under the new regime. What's left is the discipline of the lock-in itself (money you genuinely can't touch until 60 tends to actually stay invested) and, if your employer contributes, the 80CCD(2) benefit which does survive the new regime. If neither of those matters much to you and you just want market-linked growth with full flexibility, Tier 2 — or a regular mutual fund — is a reasonable alternative to weigh against Tier 1's lock-in.
How much of my Tier 1 corpus can I take as a lump sum at 60?
It depends on your subscriber category and corpus size, and this has changed recently — see the withdrawal-rules note above. Broadly: government-sector subscribers still work with a 60% lump-sum / 40% annuity split, while non-government subscribers now have more flexibility (up to 80% lump sum for larger corpuses, following PFRDA's December 2025 amendment). Separately, only up to 60% is currently confirmed tax-exempt under Section 10(12A) regardless of how much PFRDA lets you withdraw — check the latest circular rather than assuming either figure applies to your situation.