Tier 1: The Retirement Account
NPS Tier 1 is a locked-in retirement account. Contributions qualify for deductions under 80CCD(1) up to ₹1.5 lakh (within the 80C basket) and an additional ₹50,000 under 80CCD(1B). At retirement (age 60), 60% of the corpus is tax-free and 40% must be used to purchase an annuity.
Tier 2: The Flexible Account
Tier 2 has no lock-in and no tax benefits (except for central government employees). Gains are taxed as per your slab, similar to debt fund taxation post-2023. The main advantage is liquidity and the ability to invest across the same fund options as Tier 1.
The Verdict
For most salaried individuals, Tier 1 is worth maxing out for the additional ₹50,000 deduction under 80CCD(1B) — it's one of the few deductions not available in the old regime that even old-regime investors should use. Tier 2 is mainly useful if you want NPS-style fund management without locking up money.