NPS Tier 2 Account Advantages and Disadvantages

NPS or the National Pension Scheme is an initiative taken by the Central Government that protects the holders' interests via regulations and offers them higher interests and returns. NPS Tier 2 is a voluntary savings account facility which you can enable only if you have a tier 1 account. The applicant would be free to withdraw his/her savings at any point in time. The minimum initial contribution to open a tier 2 account was INR 2,000, but PFRDA removed it in 2016.

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What are the Features of 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 one of the Points of Presence.

  • Flexibility – You can choose your pension fund and investment options and see the results. You can also change the pension scheme or the fund manager if you are not happy with their performance. 

  • 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 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 Fund 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Withdrawal – Funds deposited in the NPS Tier 2 account can be withdrawn at any point in time without any restrictions.

Single Account – A person can only maintain a single NPS account in his or her 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 the corporate bonds, securities by the government and equity. The market fluctuations can affect the returns adversely. 

Tax Benefits – Tax benefits on all the contributions made to Tier 2 are only available for government employees.

Taxability – The amount can be withdrawn just like in bank FDs. But, unlike the bank FDs where only interest is taxed, here the complete fund withdrawn is taxable.

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 Indian citizens are eligible to open a Tier 2 account who are aged between 18-60 years.

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 able professionals and experts.  They are qualified, 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.

Withdrawal Restrictions – The 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.

There are certain risks associated with NPS such as credit risk, modified duration, average maturity etc.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.

What are the Eligibility Criteria to Open an NPS Tier 2 Account?

The eligibility criteria for opening an NPS Tier 2 account is 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.

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

How to Open an NPS Tier 2 Account?

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

  1. Online:

    • For applying online, you need to visit the eNPS website and then click on 'National Pension System.'

    • Then a pop-up will appear. 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, Tier 2 account will get activated. 

  2. Offline:

    • You need to 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 in case of withdrawals, the amount will be directly sent to your bank account.

    Once the PRAN account setup is completed, the subscriber will be given a login id and password. He or she 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 can be made. A Tier 2 account functions like an investment option, and it does not have mandatory withdrawal rules as a Tier 1 account. It also does not have a fixed rate of interest.

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Written By: PolicyBazaar - Updated: 27 December 2021
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