The NPS Tier 2 Account is a voluntary savings facility linked to the National Pension System (NPS) in India. It offers flexible investment options and easy withdrawals, catering to those seeking an additional investment option. However, the NPS Tier 2 comes with its own set of advantages and disadvantages. You can learn more about them in this article.
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An NPS Tier II account is a voluntary investment account associated with your National Pension System (NPS) account. Unlike Tier I, which is mandatory for retirement savings, Tier II offers more flexibility for your savings.
However, contributions to Tier II do not qualify for tax deductions, unlike Tier I contributions.
Below are the features of the NPS Tier 2 account:
Feature | Description |
Contribution Type | Voluntary |
Eligibility | Available to Indian citizens and NRIs aged 18-70 years. |
Minimum Contribution |
|
Contribution Flexibility | No minimum contribution limit during the year. Change contribution amount annually. |
Maximum Contribution | No upper limit. |
Investment Options | Similar to NPS Tier 1: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investments (A). |
Investment Choice | Select from a variety of Pension Fund Managers (PFMs) and investment options (equity, debt, etc.). |
Withdrawal | No lock-in period. Funds can be withdrawn anytime. |
Tax Benefits | No tax benefits on contributions. |
Account Maintenance | No annual maintenance charges. |
Account Transfer | Can be transferred from one POP (Point of Presence) to another. |
Additional Features | - Nominate a beneficiary to receive account proceeds. - Transfer funds from Tier II to Tier I account. |
Regulator | Regulated by the Pension Fund Regulatory and Development Authority (PFRDA). |
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NPS Tier 2 accounts offer flexibility, tax benefits, and accessibility. However, limitations, including no pension payouts, tax implications, and investment restrictions, pose challenges. Below, you can see the advantages and disadvantages of engaging with NPS Tier 2 for retirement planning:
Advantages | Disadvantages |
Liquidity: No lock-in period, funds can be withdrawn anytime. | No Tax Benefits: Contributions are not eligible for tax deductions. |
Flexibility: No restrictions on withdrawals. | Lower Priority: Often considered as a secondary option compared to Tier 1. |
Low Cost: Low fund management charges similar to Tier 1. | No Mandatory Savings Discipline: Lack of lock-in period may discourage long-term savings discipline. |
Professional Management: Managed by professional fund managers. | Tax on Gains: Withdrawals are subject to capital gains tax. |
Flexible Contributions: No upper limit on contributions and minimum contribution amounts are low. | Not Ideal for Long-Term: May not be the best option for long-term retirement savings due to the lack of tax benefits. |
Ease of Access: Can be easily accessed for short-term financial needs. | Separate from Tier 1: Separate from Tier 1 account, requiring different management and monitoring. |
There are two main criteria to open an NPS Tier II account:
Existing Tier I Account: You must already have an active Tier I NPS account and a Permanent Retirement Account Number (PRAN) assigned. Tier I accounts are mandatory for certain demographics, but Tier II is voluntary.
Age and Residency: You must be an Indian citizen (Resident/ NRI/ OCI) between 18 and 70 years of age.
NOTE: There is no upper age limit to continue contributing to an existing Tier II account once you have opened it, but you cannot open a new one after 70.
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There are two ways to open an NPS Tier 2 account:
Visit the eNPS website and click 'National Pension System'.
Click on 'Tier 2 Activation' in the pop-up.
Enter your PRAN number, Date of Birth, PAN number, and Captcha.
Click 'verify PRAN'.
After PRAN verification, your Tier 2 account will be activated.
Use the 'Subscriber's POP-SP' to open a Tier 2 account.
Fill out the Annexure 1 Tier 2 information form and send it to the POP-SP.
Submit your bank details for direct withdrawal from the NPS Tier 2 account.
After PRAN account setup, you will receive a login ID and password to access your NPS account online.
NPS Tier 2 presents a flexible and accessible investment avenue with tax advantages. However, the absence of guaranteed returns, tax implications, and limited fund choices underscore the need for careful consideration. Balancing its advantages and disadvantages is the key to informed retirement planning.
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.
*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
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