NPS Tier 2 Account Advantages and Disadvantages

NPS, or the National Pension Scheme, is an initiative taken by the Central Government that protects the holder's interests via regulations and offers them higher interests and returns. NPS Tier 2 is a voluntary savings account facility that you can enable only if you have a tier 1 account. Government employees can also avail of NPS tier 2 tax benefits under sections 80C and 10(10D) of the Income Tax Act, 1961.

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The applicant would be free to withdraw their savings anytime. The minimum initial contribution to open a tier 2 account was INR 2,000, but PFRDA revised it to INR 1,000 in 2016.

What are the Features of an NPS Tier 2 Account?

There are several features of NPS Tier 2:

  • Voluntary – NPS Tier 2 account is voluntary, i.e., you can contribute at any given point in a financial year and change the amount you want to save every year. 

  • Simple and Easy – It is very simple to open an account with any of the Points of Presence.

  • Flexibility- A subscriber is allowed to select the Pension Fund and Investment Pattern as per their choice at the time of registration under NPS. Further, he may also make a withdrawal from NPS tier 2 accounts. 

  • Portable – It is also portable, meaning the subscribers can operate their account from anywhere, even if they move to another city or change their employment path through vast networks of Point of Presence.

  • Transparency – It has transparent investment rules, and consistent monitoring is done by NPS trust. PFRDA regulates it, and the performance of fund managers is reviewed regularly.

What are the Pros and Cons of an NPS Tier 2 Account?

With NPS Tier 2 advantages, it has several limitations too. The following table represents the pros and cons of an NPS Tier 2 account:

Pros Cons
Flexibility - The account holder is free to choose any of the registered Pension Funds and Investment Options, as this scheme offers a variety of choices. Subscribers can even shift from one investment option to another.  This account will not provide you with a pension when you retire. It will just help you to accumulate the retirement corpus.
Withdrawal from NPS tier 2 account– Funds deposited in the NPS Tier 2 account can be withdrawn. A policyholder can anytime make a withdrawal from NPS tier 2 account.  Single Account – A person can only maintain a single NPS account in their lifetime. Even if you change your career path or move to another city, you don't need another account.
Better Returns – Depending on the risk appetite of the subscriber, account holders can decide on a suitable asset allocation pattern. No Guaranteed Returns – The account corpus is created according to the returns, which are generated under corporate bonds, securities by the government, and equity. Market fluctuations can affect the returns adversely. 
Tax Benefits – NPS tier 2 Tax benefits on all the contributions made to Tier 2 are only available for government employees. NPS tier 2 tax benefits cannot be claimed by private employees.  Taxability – The amount can be withdrawn just like in bank FDs. However, unlike the bank FDs where only interest is taxed, the complete fund withdrawal from NPS tier 2 is taxable here.
Low Management Cost – The NPS Tier 2 is the lowest-cost pension product as it has a low management cost. As the account maintenance is low, the benefit of accumulated pension wealth to the subscriber becomes larger. Only government employees are eligible to enjoy NPS tier 2 benefits. Although, withdrawal from NPS tier 2 is taxable.
Easily Accessible – It is a very simple and seamless procedure. Contributing to Tier 2 is easy and convenient. An active Tier 1 account is necessary to open a Tier 2 account.
Fund Managers – All the funds are invested by qualified and experienced fund managers. These funds are invested per the approved investment guidelines.  Limited Managers – Investors have only limited options to choose from for fund managers. They cannot choose one fund manager for both debt and equity.
Frequency – You can deposit money at any time, whether yearly, half-yearly, quarterly, or monthly. You can also increase or decrease the contribution but make sure the minimum contribution is made. NPS tier 2 Withdrawal Restrictions –NPS tier 2 withdrawal cannot be higher than the total sum of all the contributions made by the subscriber. 
Low Investments – The Tier 1 and Tier 2 accounts can be opened with a minor investment. The amount can be deposited through cheque, cash, or demand draft. Investment Restrictions – There are certain guidelines mentioned for investment. You cannot invest more than 50% of your total investment in the NPS account. 
Wide Coverage – All the citizens of India and the NRIs are eligible to open a Tier 2 account but only if they already have a Tier 1 account. It has a vast age span starting from 18 years to 60 years. Freelancers, self-employed people, etc., can also invest in this scheme. Certain risks are associated with NPS, such as credit risk, modified duration, average maturity, etc.

What are the Eligibility Criteria to Open an NPS account and avail of the NPS Tier 2 tax benefit?

The eligibility criteria for opening an NPS Tier 2 account are as follows:

  • You need to be a citizen of India, resident or non-resident. 

  • You need an active Tier 1 account.

  • Only the people who are aged between 18-60 years on the date of submission of the application to the POP-SP. After attaining 60 years of age, you will not be granted to make further contributions to your NPS account. Further, for withdrawal from NPS tier 2, you must apply to POP=SP.

  • The subscriber should comply with the Know Your Client compliances as given in the subscriber registration form.

  •  You must be a government employee in order to avail NPS Tier 2 tax benefit. You will not get any NPS tier 2 tax benefits if you are a private employee. 

How to Open an NPS Tier 2 Account?

There are two methods to open an NPS Tier 2 account-

Online:

  • To apply online, you must visit the eNPS website and click on 'National Pension System.'

  • Then a pop-up will appear. Next, you need to click on 'Tier 2 Activation.'

  • You need to enter your PRAN number (Permanent Retirement Account Number), Date of Birth, PAN number (Permanent Account Number), and the Captcha on the next page.

  • Then, click on 'verify PRAN.'

  • Once your PRAN details are verified with your already existing Tier 1 account, your Tier 2 account will get activated. 

Offline:

  • You must use the 'Subscriber's POP-SP' to open a Tier 2 account.

  • Next, the subscriber needs to install the Annexure 1 Tier 2 information form and send the filled form to the PPOP-SP.

  • Your bank details will be submitted to open a Tier 2 account so that the amount will be directly sent to your bank account in case of withdrawals from the NPS tier 2 account.

Once the PRAN account setup is completed, the subscriber will be given a login id and password. Then, they can log in and review their NPS account online with just one click.

In Conclusion 

An NPS Tier 2 account is a voluntary account that serves as a regular bank account from which basic transactions in the form of deposits and withdrawals from NPS tier 2 can be made. A Tier 2 account functions like an investment option and does not have mandatory withdrawal rules as a Tier 1 account. It also does not have a fixed rate of interest. The government employee can avail of NPS tier 2 tax benefits and can make a withdrawal from NPS tier 2 account.

FAQ's

  • How the policyholder may avail NPS tier 2 tax benefit?

    A policyholder may avail of the NPS tier 2 tax benefit under sections 10(10D) and 80C of the Income Tax Act 1961. 
  • Can a private employee enjoy the NPS tier 2 tax benefit?

    No, only government employees can enjoy the NPS tier 2 tax benefit. Therefore, private employees can neither enjoy the NPS tier 2 tax benefit on premiums nor returns.
  • How can I make withdrawal from NPS tier 2 account?

    To withdraw from the NPS Tier 2 account, the subscriber must submit a duly filled UOS-S12 (form) to the associated POP-SP (Power of presence- service provider).
    Can a policyholder enjoy NPS tier 2 tax benefits in case of withdrawal from NPS tier 2 account?
    In case of withdrawal from an NPS tier 2 account, a policyholder cannot avail of the NPS tier 2 tax benefit.
  • Are NRIs eligible to open an NPS Tier 2 account?

    Yes, an NRI is eligible to open an NPS Tier 2 account. The country in which you are residing doesn't matter. You just need to be a citizen of India. If the subscriber's citizenship is changed, their account will be closed.
  • Who is the regulator for NPS?

    Pension Fund Regulatory and Development Authority is an authority set up by the Government of India, which regulates pension funds to protect the interests of subscribers. All the activities, including withdrawal from NPS tier 2 and NPS tier 2 tax benefits are operated by its regulator.
  • Are withdrawal from NPS tier 2 proceeds provided through cash or demand draft?

    Ans. No, withdrawal from NPS tier 2 proceeds are credited directly to the bank account of the subscriber. Therefore, the subscriber must have a bank account before creating an NPS account.
  • Who is a POP-SP, and what is their role?

    Points of Presence are the initial interaction points that provide several customer services to the NPS subscriber. They act as collection points and extend their services for withdrawal from NPS tier 2 accounts.
  • What are the documents that are needed to be submitted for opening an NPS account?

    Several documents are needed to open an NPS account-
    • Subscriber Registration Form
    • Identity Verification 
    • Address Proof
    • Age/Date of Birth Proof
    Identity, address, and DOB can be verified through a single document, i.e., an Aadhar card but sometimes separate documents are required.
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