NPS Tier 2 Account Advantages and Disadvantages

The National Pension Scheme (NPS) is a government-backed initiative designed to safeguard investors' interests and provide competitive returns. NPS Tier 2 is an optional savings account linked to Tier 1. It extends tax benefits to government employees under sections 80C and 10(10D) of the Income Tax Act 1961, making it a comprehensive retirement savings solution.

Read more
  • Peaceful Post-Retirement Life

  • Tax Free Regular Income

  • Wealth Generation to beat Inflation

We are rated~
rating
6.7 Crore
Registered Consumers
51
Insurance Partners
3.4 Crore
Policies Sold

Invest ₹6,000/month & Get Tax Free Monthly Pension of ₹60,000

Get the best returns & make the most of your Golden years

+91
Secure
We don’t spam
Please wait. We Are Processing..
Your personal information is secure with us
Plans available only for people of Indian origin By clicking on "View Plans" you agree to our Privacy Policy and Terms of use #For a 55 year on investment of 20Lacs #Discount offered by insurance company
Get Updates on WhatsApp
We are rated~
rating
6.7 Crore
Registered Consumers
51
Insurance Partners
3.4 Crore
Policies Sold
Pension Funds
Pension Funds Most Popular
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
11,524 Cr
Returns
23.12%
Returns
23.47%
Highest Return
Returns
22.51%
Get Details
3,999 Cr
Returns
25.01%
Highest Return
Returns
21.37%
Returns
21.09%
Get Details
5,754 Cr
Returns
23.44%
Highest Return
Returns
19.51%
Returns
20.39%
Get Details
4,690 Cr
Returns
28.29%
Highest Return
Returns
26.79%
Returns
20.21%
Get Details
35,480 Cr
Returns
20.31%
Highest Return
Returns
19.38%
Returns
19.81%
Get Details
12,180 Cr
Returns
15.83%
Returns
17.02%
Highest Return
Returns
16.53%
Get Details
2,636 Cr
Returns
15.87%
Returns
16.13%
Highest Return
Returns
15.02%
Get Details

What are the Features of an NPS Tier 2 Account?

Below are the features of the NPS Tier 2 account:

  • Voluntary: The 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: You can contribute to your Tier II account at any time and in any amount. There is no minimum or maximum contribution limit. You can also choose to invest your contributions in a variety of asset classes, including equities, bonds, and alternative investments.

  • No Exit Load: Unlike Tier I accounts, there is no exit load on withdrawals from Tier II accounts. This means that you can withdraw your money at any time without penalty.

  • 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 Advantages and Disadvantages of an NPS Tier 2 Account?

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: 

  1. Advantages:

    • Flexibility: NPS Tier 2 offers account holders the flexibility to choose from a variety of registered Pension Funds and Investment Options. Subscribers can easily shift between different investment options based on their financial goals and risk tolerance.

    • Withdrawal Flexibility: Funds deposited in the NPS Tier 2 account can be withdrawn at any time. This flexibility provides policyholders with the convenience to manage their funds according to their financial needs.

    • Better Returns: Depending on the subscriber's risk appetite, NPS Tier 2 allows for a suitable asset allocation pattern. This flexibility enables account holders to achieve better returns on their investments.

    • Tax Benefits: While tax benefits on contributions to NPS Tier 2 are available only for government employees, this advantage still makes it an attractive option for certain individuals. The tax benefits can contribute to the overall savings and returns on investment.

    • Low Management Cost: NPS Tier 2 stands out as a low-cost pension product because of its low management cost. The reduced account maintenance fees contribute to a larger accumulated pension wealth for the subscribers.

    • Easily Accessible: Contributing to Tier 2 is a simple and seamless process. The ease of access makes it convenient for individuals to manage and contribute to their accounts regularly.

    • Experienced Fund Managers: Qualified and experienced fund managers handle all funds in NPS Tier 2. These professionals invest funds according to approved guidelines, providing subscribers with confidence in the management of their investments.

    • Frequency of Contributions: Subscribers can deposit money at their convenience, whether on a yearly, half-yearly, quarterly, or monthly basis. The flexibility to adjust contribution frequencies adds to the convenience of managing the account.

    • Low Initial Investments: Both Tier 1 and Tier 2 accounts can be opened with a relatively minor investment. This accessibility allows a broad spectrum of individuals, including freelancers and self-employed individuals, to invest in the scheme.

    • Wide Coverage: NPS Tier 2 is accessible to all citizens of India and NRIs, provided they already have a Tier 1 account. The wide age span of eligibility, from 18 to 60 years, ensures inclusivity for various demographics.

    People also read: best pension plan in india

  2. Disadvantages:

    • No Pension Payouts: Unlike Tier 1, NPS Tier 2 does not provide a pension when the subscriber retires. It primarily functions to accumulate a retirement corpus.

    • Single Account Limitation: Each individual is limited to maintaining a single NPS account throughout their lifetime, irrespective of career changes or relocations.

    • No Guaranteed Returns: The returns on NPS Tier 2 are subject to market fluctuations as they are generated from corporate bonds, government securities, and equity. This lack of guaranteed returns exposes the corpus to market volatility.

    • Taxability of Withdrawals: Unlike bank FDs where only interest is taxed, the entire fund withdrawal from NPS Tier 2 is taxable, reducing the post-tax returns for the subscribers.

    • Limited Eligibility for Tax Benefits: Tax benefits on NPS Tier 2 contributions are exclusive to government employees, excluding private sector employees from this advantage.

    • Tier 1 Account Requirement: An active NPS Tier 1 account is a prerequisite for opening a Tier 2 account, adding an extra layer of complexity to the enrollment process.

    • Limited Fund Manager Options: Subscribers have limited options for choosing fund managers, and they cannot select the same manager for both debt and equity funds, potentially restricting their preferred investment strategies.

    • Withdrawal Restrictions: NPS Tier 2 withdrawal is capped at the total sum of all contributions made by the subscriber, limiting the flexibility of accessing funds.

    • Investment Restrictions: Guidelines restrict subscribers from investing more than 50% of their total contributions in the NPS account, potentially limiting diversification and investment strategies.

    • Associated Risks: Various risks, including credit risk, modified duration, and average maturity, are inherent to NPS, requiring subscribers to be aware of potential market fluctuations and associated risks.

What is the Eligibility Criteria to Open an NPS Account and to Avail NPS Tier 2 Tax Benefit?

The eligibility criteria for opening an NPS Tier 2 account and to avail the NPS Tier 2 Tax Benefits 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. 

People also read: National Pension Scheme

How to Open an NPS Tier 2 Account?

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

  1. 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. 

  2. 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

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.

Frequently Asked Questions

  • Does Tier 2 NPS have tax benefits?

    No, Tier 2 NPS contributions don't offer any tax benefits. Unlike Tier 1, you can't deduct your contributions from taxable income.
  • Is NPS Tier 2 better than FD?

    Not necessarily. Tier 2 offers flexibility and higher potential returns than FDs but comes with market risks and no guaranteed returns. It depends on your investment goals and risk tolerance.
  • Is NPS Tier 2 good for the short term?

    No, Tier 2 NPS isn't ideal for short-term goals. It's meant for long-term wealth creation due to lock-in periods and potential market volatility.
  • 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.

*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.
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^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.

Secure Your Retirement Today
Start Investing ₹6,000/month
Get Pension ₹60,000/month+
Including Life Cover
View Plan
Pension Plans
+Standard T&C Applied
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
Secure your Retirement today!
START INVESTING
₹6,000/month
GET PENSION
₹60,000/month+
Heart
INCLUDING LIFE COVER
+ Standard T & C Apply*
Pension Calculator
Pension Calculator
How much do you need to save for retirement?
₹ 20,000
₹ 25,000
₹ 30,000
Monthly Expenses in 2024
Edit Done
Your expense go up every year by
Today 2024 Your expenses today in 2023, at the age of 34 Yrs
Your expenses in 2043, at the age of 55 Yrs
For a monthly pension of ₹77,300
you need to invest
₹14,300/month
Calculated as per past performance of 15%
View Plan Recalculate?

Pension plans articles

Recent Articles
Popular Articles
Pension Calculator

13 Feb 2024

Pension calculator helps you calculate the amount you could
Read more
NPS vs ULIP - Which One Is Better?

10 Oct 2023

NPS (National Pension System) and ULIP (Unit Linked Insurance
Read more
Best Mutual Funds for Retirement

21 Sep 2023

Planning for a secure and comfortable retirement is a financial
Read more
Mahila Samman Savings Certificate (MSSC)

04 Sep 2023

The Mahila Samman Savings Certificate (MSSC) or Mahila Samman
Read more
Single-Premium Pension Plan

28 Aug 2023

A Single-Premium Pension Plan is a retirement savings option
Read more
Top 15 Pension Plans in India
The Pension Plan, also known as a Retirement Plan is the best investment instrument allowing individuals to build
Read more
Sevarth Mahakosh
Sevarth Mahakosh Portal is a one-stop solution for all state government employees' financial transactions and
Read more

top
Close
Download the Policybazaar app
to manage all your insurance needs.
INSTALL