National Pension Scheme Tier II

Home / Glossary / Saving Schemes / National Pension Scheme Tier II

Introduction

The National Pension Scheme (NPS) is a government-backed pension program regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed to provide financial security post-retirement by offering structured investment opportunities. The scheme is divided into two accounts: the National Pension Scheme Tier 1 Account and the National Pension Scheme Tier 2 Account. While Tier 1 is a mandatory retirement savings account with tax benefits and restrictions on withdrawal, Tier 2 NPS Account is a voluntary investment account that offers greater flexibility.

What is an NPS Tier 2 Account?

The NPS Tier 2 Account is an optional savings account under the National Pension Scheme, allowing subscribers to make contributions and withdraw funds freely without any lock-in period. Unlike the NPS Tier 1 Account, which is meant for long-term retirement savings, Tier 2 NPS investments provide liquidity and can be withdrawn at any time.

Key Features of NPS Tier 2 Account:

Voluntary Contribution: Investors can deposit and withdraw funds at any time.
No Lock-in Period: Unlike Tier 1, there are no restrictions on withdrawal.
No Additional Tax Benefits: Tier 2 contributions do not qualify for tax deductions under Section 80C.
Low Fund Management Charges: Compared to mutual funds, the NPS Tier 2 account offers a cost-effective investment option.
Investment Choices: Subscribers can choose between equity, corporate bonds, and government securities.
Exclusive for NPS Tier 1 Holders: To open a Tier 2 account, one must already have an NPS Tier 1 Account.

Eligibility to Open an NPS Tier 2 Account

To open an NPS Tier 2 Account, applicants must fulfill the following eligibility criteria:

Must be an Indian citizen (both resident and non-resident Indians can apply).
Should already have an NPS Tier 1 Account.
Must be between the ages of 18 and 70 years.
Must comply with the Know Your Customer (KYC) norms.

You may also want to know LIC vs PPF

How to Open an NPS Tier 2 Account?

Opening an NPS Tier 2 Account is a simple process, and it can be done both online and offline:

Online Method:

Visit the NPS official website (www.npscra.nsdl.co.in or www.kfintech.com).
Log in using your PRAN (Permanent Retirement Account Number).
Select ‘Tier II Activation’.
Fill in the required details and choose investment preferences.
Make an initial contribution (minimum Rs. 1,000).
Submit the form and complete the e-KYC verification.

Offline Method:

Visit a Point of Presence (PoP) (banks or post offices offering NPS services).
Collect and fill out the NPS Tier II Activation Form.
Provide KYC documents (Aadhaar, PAN, etc.).
Make the minimum required contribution.
Submit the form and collect the acknowledgment receipt.

Investment into NPS Tier II Account

Subscribers can invest in different asset classes under NPS Tier 2 investments:

Equity (E) – Stocks and shares for higher returns.
Corporate Bonds (C) – Debt instruments issued by companies.
Government Securities (G) – Safe investments with stable returns.
Auto-Choice Investment – Portfolio managed based on age and risk appetite.

NPS Tier 2 Benefits

Flexible Withdrawals: No restrictions on withdrawals, allowing greater liquidity.
Diverse Investment Options: Choice of equity, bonds, and government securities.
Lower Costs: Fund management charges are among the lowest in the financial sector.
Higher Returns: This can generate competitive returns depending on asset allocation.
Portfolio Switching: Investors can change their asset allocation or fund managers anytime.

You may also want to know EPF Form 11

Withdrawals and Closure of Tier 2 NPS Account

Withdrawal: Funds can be withdrawn anytime without penalties.
Account Closure: Subscribers can close their Tier 2 NPS Account at any time, with the entire balance transferred to their bank account.

Tax Implications on NPS Tier 2 Account

No Tax Benefits: Unlike Tier 1, Tier 2 does not provide deductions under Section 80C, 80CCC, or 80CCD.
Tax on Returns: Returns are subject to capital gains tax based on the holding period:
- Short-term capital gains (STCG) if held for less than three years.
- Long-term capital gains (LTCG) if held for over three years.

Conclusion

The National Pension Scheme Tier 2 Account is a flexible investment option that allows individuals to invest in market-linked assets without a lock-in period. Unlike the National Pension Scheme Tier 1 Account, it does not offer tax benefits but provides liquidity, making it an attractive choice for those looking for short-term investment options. Investors should consider their financial goals, risk appetite, and tax liabilities before choosing Tier 2 NPS investments.

Calculate your pension here at NPS Calculator