Tier I account
The mandatory NPS retirement account: restricted withdrawals, a 75% equity cap, tax benefits and compulsory annuity purchase with part of the corpus on exit.
In plain language
Every NPS subscriber has a Tier I account. It is the retirement account proper — the workbook calls it the primary retirement savings account — and it is built to stay locked until retirement.
A subscriber may also open a Tier II account, which is a voluntary investment account with no withdrawal restrictions. But Tier II cannot exist without Tier I: a subscriber must have a Tier I account to open a Tier II account.
The restrictions on Tier I are the price of its benefits. The contributions earn tax deductions, the returns are not taxed while they accumulate, and in exchange the money is available only on the terms of the exit regulations, with part of it compulsorily converted into a lifelong pension.
How it works
Opening. Online or at a Point of Presence, through whichever model applies — Government, Corporate or All Citizen. Contributions may come from the subscriber alone or from subscriber and employer, depending on the model.
Nominations. Up to three nominees, with a percentage for each. They do not carry over to Tier II.
Tier I against Tier II, from the workbook's comparison:
| Particulars | Tier I | Tier II |
|---|---|---|
| Account | Mandatory | Optional |
| Withdrawal | Conditional and restricted | Yes |
| Minimum at opening | Rs 500 | Rs 1,000 |
| Minimum subsequent contribution | Rs 500 | Rs 250 |
| Minimum per year | Rs 1,000 | — |
| Minimum contributions per year | One | — |
| Equity exposure | Capped at 75% | Up to 100% |
| Tax benefits | Yes | No (except NPS-TTS for eligible Central Government subscribers) |
| Use of corpus | Exit regulations; part must buy a life annuity | No restriction |
Transfers. Money may move from Tier II to Tier I; Tier I to Tier II is not permitted.
Third-party contributions are not allowed into Tier I or Tier II.
Tax. The NPS is under the EEE regime. Contributions qualify under section 123 read with Schedule XV (the 80C limit of Rs 1.5 lakh), with an additional Rs 50,000 under section 124(3) (80CCD(1B)), and employer contributions under section 124(1) (80CCD(2)). The first two are generally old-regime benefits; the employer-contribution deduction is governed separately and may be available under the new regime within its limits. Returns are not taxed during accumulation. On exit, the lump sum is exempt up to 60 percent of the amount payable and the amount used for the annuity is not taxed at purchase; the annuity income is taxable.
A worked example
Illustrative figures. Kavya, 32, a salaried employee under the All Citizen Model, has both accounts.
Keeping Tier I active. In one financial year she contributes once, Rs 500. That meets the minimum-per-contribution rule but not the Rs 1,000 a year minimum; she needs at least another Rs 500 before the year ends.
Moving money. She has Rs 2,00,000 in Tier II and wants to lock part of it away for retirement. She may transfer it into Tier I. A year later she regrets it and asks to move Rs 50,000 back to Tier II — not permitted. Once in Tier I, the money is governed by the exit regulations.
Using the tax benefit (old regime, from the workbook's own example). She puts Rs 1,00,000 into PF, Rs 50,000 into PPF, Rs 50,000 into housing-loan principal and Rs 60,000 into Tier I:
Section 123 / Schedule XV (80C): PF 1,00,000 + PPF 50,000 = Rs 1,50,000 (limit reached)
Section 124(3) (80CCD(1B)): from the NPS contribution = Rs 50,000
Total deduction = Rs 2,00,000
The NPS contribution is what unlocks the extra Rs 50,000 beyond the Rs 1.5 lakh ceiling — a benefit available only because it went into Tier I.
On exit at 60 with a corpus of Rs 40 lakh: up to Rs 32 lakh lump sum, at least Rs 8 lakh to an annuity. A Tier II balance, by contrast, could be withdrawn in full at any time.
Why NISM asks about it
Chapter 4, section 4.1.3 (Types of NPS Account), defines the Tier I account and sets out the Tier I / Tier II comparison table; section 4.1.5 gives the contribution rules, section 4.2.4 the exit rules, and section 4.5 the tax treatment. Expect the minimum-contribution figures, the one-way transfer rule, the 75 percent equity cap against Tier II's 100 percent, and "which account is mandatory / carries tax benefits" as direct recall.
Common exam traps
- Tier II to Tier I: allowed. Tier I to Tier II: not allowed.
- Rs 500 per contribution, Rs 1,000 a year, at least one contribution a year for Tier I; Tier II is Rs 1,000 at opening and Rs 250 thereafter.
- The workbook gives conflicting minimums. The Tier I / Tier II table says Rs 500 at account opening; the 2026 PoP charge schedule in section 4.1.4 says the minimum contribution is ₹250 at onboarding and ₹10 for subsequent contributions. The table appears to reflect the earlier rules; note both.
- 75 percent equity cap in Tier I (Common Schemes, Active Choice). Tier II may go to 100 percent.
- Up to three nominees in Tier I; Tier I nominations do not apply to Tier II.
- NRIs and OCIs can hold Tier I but not Tier II.
- Lump-sum tax exemption is stated at 60 percent even though normal exit now permits up to 80 percent as lump sum for non-government subscribers; the workbook does not say how the excess is taxed.
- No third-party contributions — contrast NPS Vatsalya, where relatives and friends may contribute.
Check yourself
1.Under Active Choice in a Tier I account, what are the maximum permitted allocations to equity (E) and alternative investments (A)?
- a)100% in E and 25% in A
- b)75% in E and 5% in A
- c)50% in E and 10% in A
- d)65% in E and 15% in A
Show the answer
Answer: (b) 75% in E and 5% in A
"The only restriction is that THE PROPORTION INVESTED IN ASSET CLASS E CANNOT EXCEED 75 PERCENT and that in ASSET CLASS A IS RESTRICTED TO 5 PERCENT."
These are not soft guidelines. An application breaching either is rejected outright: ⚠️ "In case of active choice, IF THE ALLOCATION TO EQUITY (E) CATEGORY EXCEEDS 75 PERCENT AND/OR ALTERNATIVE INVESTMENT PRODUCTS (A) CATEGORY EXCEEDS 5 PERCENT, THE APPLICATION SHALL BE REJECTED" — as is one where the asset allocation does not add up to 100 percent.
Two places where higher equity is possible: ⚠️ Tier II schemes can invest up to 100% in equity, and the MSF high-risk variant permits up to 100% — described as a departure from the 75 per cent equity cap that continues to apply to Common Schemes.
And one where it is lower: a subscriber joining beyond 65 is capped at 15% under Auto and 50% under Active.
2.Farida, a private-sector employee with an active NPS Tier I account, has her recognised provident fund balance transferred to her NPS account. How is the transfer treated?
- a)The transferred amount is taxable as salary income in the year of transfer
- b)Only 60 percent of the transferred amount is exempt; the rest is taxable
- c)The amount is not treated as income for the current assessment year and no tax is payable on the transfer
- d)The transfer is allowed only into the Tier II account, where the gains are taxed at slab rates
Show the answer
Answer: (c) The amount is not treated as income for the current assessment year and no tax is payable on the transfer
The workbook says: Employees can now get their recognized provident fund/superannuation fund transferred to the NPS. They must have an active NPS tier I account and approach the provident fund/superannuation fund through their current employer. The fund will issue a cheque to the nodal office/PoP with a letter saying the amount being transferred is to be credited to the Tier I NPS account of the subscriber. The amount so transferred will not be treated as income for the current assessment year and there will be no tax payable on the transfer. So option C is correct.
Why the others are wrong:
- Option A contradicts the express rule that the transfer will not be treated as income.
- Option B borrows the 60 percent exemption that applies to the NPS lump sum on closure or opting out. It has nothing to do with a PF-to-NPS transfer.
- Option D is wrong on the destination. The money goes to the Tier I account. The slab-rate taxation of gains arising out of Tier II is a separate rule.
3.Anil did not contribute the minimum amount to his NPS Tier I account during the financial year. What are the consequences?
- a)His account can be frozen and becomes dormant; if Tier I is frozen his Tier II is frozen too; he must make a minimum contribution of Rs 500 to unfreeze it, and a dormant account is closed when its value falls to zero
- b)Only his Tier II account is frozen; Tier I continues normally
- c)His entire corpus is paid out to him and the PRAN is cancelled
- d)Nothing happens, because the NPS has no minimum annual contribution
Show the answer
Answer: (a) His account can be frozen and becomes dormant; if Tier I is frozen his Tier II is frozen too; he must make a minimum contribution of Rs 500 to unfreeze it, and a dormant account is closed when its value falls to zero
Tier I requires at least one contribution made to the Tier I account in a financial year. If the subscriber does not contribute at least Rs.1000 per year to the NPS account, then the account would become dormant. A dormant account will be closed when the account value falls to zero.
On freezing: the subscribers account can be frozen if the minimum contribution requirement in the year is not met. If the Tier I account of a PRAN is frozen, the Tier II account will also be frozen. To unfreeze the account, the subscriber is required to make a minimum contribution of Rs.500.
So option A is correct.
Why the others are wrong:
- Option B reverses the link. Freezing starts with Tier I and carries over to Tier II. Tier II has no annual minimum of its own.
- Option C: a frozen or dormant account is not paid out. The corpus stays invested, and a dormant account closes only when the account value falls to zero.
- Option D: there is a minimum. While there is a minimum limit on the contribution (Rs.1000 per annum), there is no upper limit.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- All Citizen ModelThe voluntary NPS model for Indian citizens, resident or non-resident, and OCI cardholders, in which the subscriber alone contributes, makes the choices and bears the Tier I and Tier II charges.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Permanent Retirement Account NumberThe unique account number issued when an NPS account is opened; it stays with the subscriber for life and across employers, which is what makes NPS portable in a way EPF historically was not.
- AnnuityAn insurance contract in which a corpus paid as a lump sum or in instalments buys a periodic payment from the insurer, at a rate fixed at purchase and guaranteed for life or the contracted term.
- NPS Tier-II Tax Saver SchemeA Tier II NPS option for Central Government subscribers with an active Tier I account whose contributions qualify for the old-regime deduction, subject to a three-year lock-in per contribution.
- Tier II accountThe voluntary NPS investment account open only to holders of an active Tier I account, with no withdrawal restrictions, no mandatory annuity and, except for NPS-TTS, no tax benefit.
- NPS VatsalyaA saving-cum-pension scheme introduced in Budget 2024 under which a parent opens and operates an NPS Tier 1 account in a minor child's name until the child turns 18.
- Accumulated pension wealthThe official NPS term for the money value of the pension investments in a subscriber's Permanent Retirement Account — the figure that decides how much can be taken as a lump sum and how much must buy an annuity.
- Corporate modelThe NPS model that lets companies and other registered entities offer their employees a pension benefit through the NPS architecture, funded by the employer, the employee, or both.
- D-RemitA facility that lets NPS subscribers make voluntary contributions straight from their bank account into their NPS account, via a dedicated virtual ID, with same-day investment if received before the cut-off.
- Dormant accountAn NPS account that goes dormant when the subscriber fails to contribute at least Rs 1,000 in a year, and is closed outright once its value falls to zero.
- Protection from attachmentThe rule that no accumulated pension wealth in an NPS Tier-I account can be seized, attached or sequestered by any court at a creditor's instance, and that any pledge or assignment of it is null and void.
- Premature exitExit from the NPS before the qualifying event — resignation, or before 60 — where only up to 20 percent comes out as a lump sum and at least 80 percent must buy an annuity.