NPS Tier 2

What is an NPS Tier 2 Account?

An NPS Tier 2 account is a flexible, non retirement account under the National Pension System (NPS). It operates under the same Permanent Retirement Account Number (PRAN) as the Tier 1 account and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

A Tier 2 account cannot be opened on its own. An active Tier 1 account is a prerequisite, although both accounts can be opened together. 

Key Features of NPS Tier 2 Account

The features below describe regular Tier 2 accounts under the All Citizen Model.

1. Voluntary Account Linked to the Tier 1 PRAN

   A Tier 2 account is opened voluntarily and shares the PRAN of the Tier 1 account. A regular Tier 2 account closes when the Tier 1 account exits. For the Tier 2 Tax Saver Scheme, withdrawal is restricted until the three-year lock-in period is completed. 

2. More Flexible Contributions

   The minimum contribution to open a Tier 2 account is ₹1,000, while subsequent contributions can be as low as ₹250. There is no minimum annual contribution, no minimum balance and no maximum limit on contributions. The NPS minimum contribution rules cover both tiers.

3. No Lock In Period

   Subscribers can withdraw any amount at any time, with no limit on the number of withdrawals. Central Government employees who claim a tax deduction under the Tier 2 tax saver scheme must keep the contribution invested for three years.

4. Diverse Investment Choices

   Contributions can be invested through two routes. Under Active Choice, the subscriber selects the allocation across Equity (E), Corporate Bonds (C) and Government Securities (G). Under lifecycle-based schemes, the asset allocation adjusts according to the subscriber’s age and the selected lifecycle option.

   • Equity (E): shares of listed companies.
   • Corporate bonds (C): fixed income instruments other than government securities.
   • Government securities (G): bonds issued by the Central and State Governments.

5. Option to Choose Fund Manager

   Subscribers can choose among the PFRDA registered pension fund managers. The pension fund manager charges a small investment management fee, which is deducted from the fund value.

6. Transfer to Tier 1 and Nomination

   Funds can be transferred from the Tier 2 account to the Tier 1 account at any time, but transfers from Tier 1 to Tier 2 are not permitted. A nominee can be named for the Tier 2 account, and the nominee can differ from the Tier 1 nominee.

Eligibility Criteria for NPS Tier 2 Account

The following conditions apply to a new Tier 2 account.

• Citizenship: Indian citizens who meet the applicable eligibility and KYC requirements may subscribe to NPS. However, NRIs and OCIs cannot activate a Tier 2 account, and PIO cardholders are not eligible to subscribe to NPS.
• Age: 18 to 85 years at the time of joining, subject to the applicable NPS eligibility and KYC requirements.
• Tier 1 account: An active Tier 1 account is required, or both accounts can be opened together.
• Bank account: A bank account in the name of the subscriber.
• KYC: PAN and identity and address proof.

Advantages and Disadvantages of NPS Tier 2 Account

A Tier 2 account suits subscribers who want market linked investing with easy access, and it does not suit those who need a tax deduction or enforced savings.

1. Advantages

   The main advantages of an NPS Tier 2 account are liquidity, low cost and flexibility.

   • Withdrawals are allowed at any time, and no exit load applies.
   • The pension fund management charges are low.
   • Professional fund managers handle the investments across equity and debt.
   • Funds can be transferred to the Tier 1 account as required.
   • The account suits short to medium term goals because of its liquidity.

2. Disadvantages

   The main disadvantages relate to tax treatment, saving discipline and market risk.

   • Contributions do not qualify for a tax deduction, except under the Central Government tax saver scheme.
   • Gains on withdrawal do not receive the Tier 1 tax treatment.
   • The absence of a lock in can weaken long term saving discipline.
   • Returns are market linked and not guaranteed.
   • The account needs to be tracked separately from the Tier 1 account.

How to Open an NPS Tier 2 Account

A Tier 2 account can be activated online by an existing Tier 1 subscriber or opened offline through a Point of Presence (POP).

1. Online Process

   The online route suits existing Tier 1 subscribers with an active PRAN. The steps are as follows.

   1. Open the eNPS website and select the option to open a Tier 2 account.
   2. Enter the PRAN and date of birth, and verify the details with an OTP.
   3. For a regular Tier 2 account, select Active Choice or Auto Choice and a pension fund manager. The Tier 2 Tax Saver Scheme does not offer asset allocation choices, and pension fund changes are permitted only after the three-year lock-in period.
   4. Confirm the nominee details.
   5. Pay the minimum opening contribution of ₹1,000 through the available payment methods.
   6. Download the acknowledgement after the Tier 2 account is activated.

2. Offline Process

   The offline route suits subscribers who prefer to submit a form at a POP. The steps are as follows.

   1. Collect the Tier 2 activation form from a POP, such as a bank branch authorised for NPS.
   2. Fill in the PRAN, personal details, bank details and nominee details.
   3. For a regular Tier 2 account, select the investment route and pension fund manager. Under the Tier 2 Tax Saver Scheme, pension fund changes are permitted only after the three-year lock-in period. 
   4. Attach a copy of the PRAN card, PAN, identity proof, address proof and a cancelled cheque.
   5. Submit the form and pay the opening contribution of at least ₹1,000.
   6. The POP forwards the form to the Central Recordkeeping Agency (CRA), which activates the account.

Charges on NPS Tier 2 Account

The cost of a Tier 2 account has three parts. The CRA charges an annual maintenance fee, which for Tier 2 is aligned with the Tier 1 fee of the same sector. A Tier 2 balance of ₹1,000 or less at the end of a quarter incurs no annual maintenance charge. The pension fund manager deducts a small investment management fee from the fund value.

The third part is the Point of Presence (POP) charge. From 1 October 2026, the revised structure provides for a one time onboarding charge of ₹200 per PRAN, or ₹100 for eligible fully digital onboarding. It also provides for an annual charge of 0.20% of assets under management (AUM), plus applicable taxes. Dormant accounts are not charged. Subscribers onboarded through eNPS who make subsequent contributions through eNPS or D Remit are exempt from POP charges.

Compare NPS Tier 1 & Tier 2 Accounts

The two accounts differ in purpose, access and tax treatment.

Returns on NPS Tier 2 Account

Returns from an NPS Tier 2 account depend on the allocation across equity, corporate bonds and government securities, and on the performance of the chosen fund manager. A higher equity share can raise returns over a long period and can also increase volatility. The NPS calculator can be used to estimate the corpus for different contribution amounts and return assumptions.

Withdrawal and Closure of NPS Tier 2 Account

Tier 2 withdrawals do not follow the Tier 1 NPS withdrawal rules because there is no annuity requirement and no limit on the amount.

1. How to Withdraw

   An online request can be raised on the CRA portal with the PRAN and password. For an offline request, the Tier 2 withdrawal form is submitted to the POP, which raises the request with the CRA. The amount is paid at the Net Asset Value (NAV) on the redemption date and credited to the registered bank account within about 3 working days.

2. How to Close the Account

   A Tier 2 account can be closed through the eNPS website or by submitting a closure request to a POP. The balance is paid to the linked bank account. When the Tier 1 account exists, a regular Tier 2 account is closed along with it. For the Tier 2 Tax Saver Scheme, closure is subject to the three-year lock-in period. 

Key Takeaways

An NPS Tier 2 account gives Tier 1 subscribers a liquid, market linked option with low minimum contributions and no lock in. It carries no tax deduction for most subscribers and no guaranteed returns. It can be used as a flexible addition to the Tier 1 account, while Tier 1 continues to serve the retirement goal. Subscribers who also want a guaranteed income in retirement can comparepension plans from life insurers.