Everything You Need to Know About NPS Tier-II

The Tier-II account in NPS is an optional savings account. It gives you the freedom to put in money and take it out anytime you want. This makes it a good choice if you want both easy access to your money and a chance to earn returns. You can open a Tier-II account online using your PAN or Aadhaar card.

Let’s take a closer look at what NPS Tier-II offers, how it works, and how it is different from the Tier-I account.

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About Tier-II Account

The Tier-II account is an optional savings account under the National Pension Scheme (NPS), available for you with a Tier-I account. Unlike Tier-I, it offers more flexibility for short-term savings and withdrawals.
Key features of Tier-II accounts are as follows:

• Investment Options: You can invest in a variety of funds, including equities, debt, or a mix, based on your preferences.
• No Lock-In Period: The Tier-II account has no lock-in period, allowing you to withdraw money anytime.
• Additional Savings: The Tier-II account gives you a chance to build extra savings alongside your Tier-I retirement fund.
• Equity Exposure: You can allocate up to 50% of your total amount in equity funds (for government employees and senior citizens), or up to 75% for others, offering potential market growth.
• Auto-Choice Option: The auto-choice option automatically adjusts your fund allocation based on your age, risk, and income.

How To Open an NPS Tier-II Account

You can either go for an offline or online method to open a National Pension Scheme Account:

1. Offline:

   • Visit your nearest POP-SP (Point of Presence – Service Provider)
   • Download Annexure-I Tier-II detail form
   • Fill it correctly and send it to POP-SP
   • Provide bank account details
   • Withdrawals will be directly transferred to your registered bank account

2. Online:

   • Open the electronic National Pension Scheme (eNPS)
   • Click the Tier-II activation tab
   • Fill in the required details like,
     • Permanent Retirement Account Number (PRAN)
     • Date of Birth
     • PAN card
   • OTP will be generated on your registered mobile number
   • Next, fill in your bank account details
   • Validate your Aadhaar card
   • Next, select your Pension Fund Manager
   • Click on the suitable investment option, that is,
     • Auto choice
     • Active choice
   • Upload all the necessary documents
   • Make a minimum payment of ₹1,000 in the account
   • e-Sign the application
   • Your Tier-II account is successfully activated

Benefits Of Tier-II Account

A Tier-II account under the National Pension Scheme comes with the following benefits.

• Flexible withdrawals
• No lock-in period
• No exit load application
• No annual maintenance charges
• Easy transfer of funds from Tier-I to Tier-II as and when required
• A nominee can be assigned

Eligibility Under Tier-II Account

The National Pension Scheme (NPS) is ideal for individuals who want to plan early for retirement and prefer a low-risk investment. Below are the eligibility conditions for joining NPS:

• Tier-I Account: It is mandatory to have a Tier-I account in order to open a Tier-II account under NPS.
• Indian Citizens Only: Only Indian citizens, including both residents and Non-Resident Indians (NRIs), are allowed to invest in NPS.
• Age 18 to 70: The person must be between 18 and 70 years old at the time of applying for NPS.
• KYC Required: The applicant must complete the KYC process by providing valid identity and address proof.
• Legally Capable: The individual must be legally competent to sign a contract under the Indian Contract Act.
• OCI, PIO, HUF Not Allowed: Overseas Citizens of India (OCI), Persons of Indian Origin (PIO), and Hindu Undivided Families (HUFs) are not eligible.
• Personal Account Only: NPS accounts must be opened in the name of the individual. It cannot be opened for someone else.

How to Exit NPS Tier-II Account

The exit process from an NPS Tier-II account depends on the reason for withdrawal. Each scenario has its own set of rules, as outlined below:

1. Normal Superannuation

   • 60% of the account balance can be withdrawn as a lump sum after retirement, with the remaining 40% used to purchase an annuity.
   • The annuity provides a monthly pension to the subscriber.
   • The remaining balance is returned as a lump sum.
   • If the total corpus is less than or equal to ₹5,00,000, complete withdrawal can be made without purchasing an annuity.

2. Death

   Upon the death of the subscriber, the entire accumulated pension corpus (100%) will be transferred to the nominee or legal heir. The nominee can claim the full amount without any deductions.

3. Premature Exit

   • 80% of the account balance must be used to purchase an annuity.
   • The annuity provides a monthly pension to the subscriber.
   • The rest of the balance is returned as a lump sum.
   • If the total corpus is ₹2,50,000 or less, the subscriber may withdraw the entire amount as a lump sum without opting for an annuity.

Tax Benefits for NPS Contributions

The Income Tax Act provides specific deductions for contributions made to the National Pension Scheme (NPS). These deductions fall under three sections: 80CCD(1), 80CCD(1B), and 80CCD(2).

1. Section 80CCD(1): Employee’s Own Contribution

   • Eligible individuals: Salaried and Self-employed 
   • Deduction limit:
     • Deduction up to 10% of Basic + Dearness Allowance is allowed.
     • For self-employed individuals, the deduction can go up to 20% of their gross income.
   • Maximum claimable amount: Included within the overall ₹1.5 lakh limit under Section 80CCD(1)
   • Example:
     • Rajesh’s annual Basic Salary + Dearness Allowance is ₹15,00,000
     • 10% of ₹15,00,000 = ₹1,50,000
     • Rajesh can claim ₹1,50,000 as a deduction under Section 80CCD(1)
     • This amount is counted within the ₹1.5 lakh ceiling that also includes investments such as LIC, PPF, or ELSS

   Note: If you’ve already used your ₹1.5 lakh limit on other eligible investments, you cannot claim this NPS deduction unless you lower those contributions.

2. Section 80CCD(1B): Additional Deduction

   • Eligible individuals: All NPS subscribers
   • Deduction allowed: Up to ₹50,000
   • Not included in: The ₹1.5 lakh limit under Section 80CCD(1)

   Example:

   • Rajesh has already used up the ₹1.5 lakh limit through investments like EPF, LIC, and PPF
   • He invests an additional ₹50,000 in his NPS account
   • This ₹50,000 qualifies separately under Section 80CCD(1B)
   • So, Rajesh still receives a tax benefit even after reaching the 80CCD(1) limit
   • His total deductions rise from ₹1.5 lakh to ₹2 lakh with this contribution

3. Section 80CCD(2): Employer’s Contribution

   • Eligible individuals: Employees receiving employer contributions to the NPS
   • Deduction limit: Deduction allowed up to 10% of salary under the old tax regime, and up to 14% under the new tax regime.
   • This deduction is separate from: The ₹1.5 lakh limit under Section 80CCE

   Example:

   • Rajesh’s Basic Salary + Dearness Allowance is ₹10,00,000
   • His employer contributes ₹1,00,000 (10% of salary) to his NPS account
   • Rajesh can claim this full ₹1,00,000 under Section 80CCD(2) as a deduction
   • This is a separate benefit and does not reduce the ₹2 lakh he can already claim under Sections 80CCD(1) and 80CCD(1B)

Wrapping Up

The National Pension Scheme Tier II account offers a flexible and accessible way to invest, making it a practical choice for those seeking liquidity without long-term commitment. With no lock-in period and the freedom to withdraw funds anytime, it suits short-term financial goals and evolving investment needs. By understanding its features and benefits, you can use the Tier II account as a smart tool in your broader financial strategy.