NPS Tier 2

The NPS Tier 2 account is the non-retirement component, while the Tier 1 account is the retirement component and primary account in the National Pension Scheme. As per the governing rules of PFRDA, the NPS subscriber can voluntarily open the account but only after the Tier 1 account. The Tier 2 account is flexible in free withdrawals without any cap on the minimum balance or compulsory contributions. You can build on the Tier 2 corpus to enjoy financial freedom after retirement in addition to the well-defined provisions in your Tier 1 account.

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What are the Features of NPS Tier 2 Account?

The NPS Tier 2 account adds flexibility to your retirement plan under the government-sponsored scheme. Let us explore the salient features of the account:

  • Your investment in the NPS Tier 2 account is voluntary, but you can open it only after Tier 1 account to seal your NPS subscription.

  • A bank account in your name is mandatory while opening the account with an initial minimum Rs 1000 contribution.

  • Even though there is no minimum balance requirement, you can deposit at least Rs 250 once in a financial year.

  • The all-citizens NPS model does not specify a tenure for the Tier 2 account, but a lock-in of three years applies to the government employees. 

  • You can transfer funds from Tier 2 to Tier 1 accounts. In addition, you do not have to comply with rules for withdrawals both in amount and the number of occasions. 

  • Tier 2 account contributions enjoy tax deductions, provided the investment is locked for three years. 

Eligibility Criteria

You must fulfil specific NPS membership eligibility criteria and open a Tier 2 account. Let us find out the requirements:

  • Any Indian citizen can subscribe to the NPS, whether residents or non-residents.

  • OCI (Overseas Citizens of India) and PIO (Persons of Indian Origin) cardholders can join the NPS from October 2019 onwards. 

  • The applicable age criteria are a minimum of 18 years and a maximum of 70 years at entry, with an option to continue the subscription till 75 years. 

  • A Tier 1 account is the prerequisite for opening the Tier 2 account. However, you can choose to open both accounts simultaneously. 

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How to Open an NPS Tier 2 Account?

Your NPS subscription is suitable for opening the NPS Tier 2 account, as you have already received the PRAN (Permanent Retirement Account Number) Card and opened the Tier 1 account. You can choose between online and offline modes to open the account.

  1. Offline Mode 

    • Visit your nearest Point of Presence – Service Provider (POP-SP) and obtain the Tier 2 account opening form. Alternatively, you can download the relevant form.

    • Fill in the form indicating the nominee details, “active” or “auto” investment model, and the preferred fund manager. 

    • Attach the mandatory documents like the PAN and Aadhaar for KYC compliance and submit them along with the form.

    • Do not forget to mention your bank details to ensure withdrawals are correctly credited to the account when needed. 

  2. Online Mode

    • Visit the e-NPS portal and select the Tier 2 Account Activation option.

    • Enter all the relevant details like the PRAN and your personal information on the new page.

    • If in order, the entered details are compared with your Tier 1 account credentials to activate the account.

    • Finally, you must deposit the initial Rs.1000 account opening contribution to complete the Tier 2 activation process. 

NPS Tier 2 Account Returns

Returns on investment are intrinsic to your financial planning and more so for retirement. Unlike the other government-sponsored social welfare savings schemes, NPS does not offer fixed interest. The yield on your investment depends on your asset allocation while opening the Tier 2 account. 

Assets are allocated based on your chosen “active” or “auto” mode, and the preferred Asset Management Company (AMC) is aligned to your risk appetite. 

Funds are usually allocated in four asset classes:

  • Equities

  • Government bonds

  • Corporate bonds

  • Alternative securities

Historically, Tier 2 investments have yielded 10 to 12% annually with a 50% equity allocation.

What is the Withdrawal Process of NPS Tier 2 Account?

You must follow the steps detailed below to redeem funds in the account.

  • Fill in and submit the UOS-S12 form specified for withdrawal.

  • You must submit the form at the POP-SP registered with the particular CRA for the account.

  • The redemption amount depends on the NAV value of the Tier 2 account redeemed units on the withdrawal date. 

  • It takes approximately three working days to transfer to your bank account for the redeemed amount.

Taxation in NPS Tier 2 Account

  • Contribution: Private employee NPS subscribers do not enjoy any tax benefit for contributing to the NPS Tier 2 Account. In contrast, government employees can claim tax deductions up to Rs. 1.5 Lac under Section 80 C of the IT Act, 1961 for which the account is locked for three years.

  • Withdrawal:  You must contend with tax liability for all withdrawals from your Tier 2 account.

  • Short Term Capital Gain Tax: All withdrawals within one year attract STCG. The applicable rate is 15% for equity funds. The redeemed amount is added to your income to be taxed at your applicable tax slab rate for debt funds. 

  • Long Term Capital Gain Tax: If the withdrawal is after one year, LTCG applies. The applicable rate is 10% for equity funds exceeding Rs.1 Lac. The rate is 20% with indexation benefit and 10% without indexation for debt funds. 

In Conclusion

NPS Tier 2 account supplements the Tier 1 account to build a robust retirement corpus. Though voluntary, its flexibility and unrestricted usage help you better manage the fund. In addition, the NPS Tier 2 account matches the Tier 1 account in terms of yield as the investment pattern is identical providing an equally rewarding investment vehicle.

Now tax benefits are available to the funds invested in the account, and it is worth parking while enjoying liquidity in financial emergencies.

FAQ's

  • Q. What is the closure procedure of your NPS Tier 2 account?

    A. You can close your NPS Tier 2 account by placing an online request at the e-NPS portal. Alternatively, you can visit the nearest POP-SP and place the closure request by submitting the appropriate form. The closure proceeds are transferred to your linked bank account once approved.
  • Q. Who are the fund managers for the NPS Tier 2 account?

    A. You have to choose your preferred fund manager from the PFRDA authorized eight. They are:
    • LIC
    • SBI
    • UTI
    • HDFC
    • ICICI Prudential.
    • Aditya Birla Sun Life Pension Fund
    • Kotak Mahindra
    • Reliance
    • DSP Black Rock
  • Q. Is it mandatory to nominate the same persons as in the Tier 1 account?

    A. You are free to name a different set of nominees for your NPS Tier 2 account and not necessarily the same as in the Tier 1 account.
  • Q. Can you transfer funds from the Tier 2 account to other accounts?

    A. You can freely transfer funds from the Tier 2 account to the Tier 1 account while the reverse is not valid.
  • Q. What do you mean by “active” and “auto” investment mode in the NPS Tier2 account?

    A. By choosing the “active” mode while opening the account, you control the asset allocation assisted by your fund manager within the PFRDA framed rules for investment. While in the “auto” mode, the fund manager decides the asset allocation according to your risk profile to corner the maximum yields.

*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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