Savings Schemes
by 5paisa Research Team Last Updated: 2023-08-22T16:07:26+05:30

National Pension Scheme Tier II was introduced by the Indian Government, which is a retirement-focused pension scheme. Initially, it was exclusively for government employees, but later it was made accessible to the general public. Currently, the NPS scheme is widely accepted by investors who seek to build long-term retirement funds through regular investments. You can select between two types of investment accounts when investing in the NPS scheme: Tier 1 and NPS Tier 2. Keep reading to know what is NPS tier 2.

What is National Pension Scheme Tier II?

The National Pension Scheme Tier II, created by the Government of India, is a retirement-focused pension programme. The programme was first solely available to government personnel but was subsequently opened to the general public.

Today, investors seeking to build a long-term retirement corpus through monthly investments find the NPS plan highly popular. When investing in the NPS Tier 2 system, you would have an option between two different types of investment accounts. The Tier 1 Account is the first, and the NPS Tier 2 is the second.

Unlike the Tier I account, the meaning of NPS tier 2 states that there is no minimum balance requirement for the Tier II account, where the subscriber must have a minimum balance of Rs. 1,000 every year. The subscriber can begin with a $1,000 minimum commitment and add to it whenever it suits them.

The NPS Tier 2 account offers members an extra investment option, and the monies placed there are invested using the same strategy as those in the Tier I account. The NPS Tier II account also provides users with several tax advantages.

What are the Features of an NPS Tier 2 Account?

The NPS Tier 2 account boasts several features, including:
●    Voluntary Contribution: You can contribute to the NPS Tier 2 account at any point in a financial year and change the amount you want to save annually.
●    Ease of Use: Opening an account is straightforward and can be done at any point of presence.
●    Flexibility: As an account holder, you can select the Pension Fund and Investment Pattern during registration under NPS. Additionally, withdrawals can be made from NPS Tier 2 accounts.
●    Portability: The account is portable, which means you can access it from anywhere, even if you relocate to another city or change jobs, thanks to a vast network of Points of Presence.
●    Transparency: NPS Tier 2 has transparent investment rules, and the NPS trust regularly monitors. PFRDA regulates it, and the fund managers' performance is reviewed periodically.

NPS Accounts

●    Tier 1 Account 
It may be opened by any Indian citizen aged 18 to 65. The minimum investment is 500 rupees. The lock-in period for Tier 1 accounts lasts until the investor turns 60. Contributions up to Rs. 1,50,000 per year are eligible for deductions under Section 80C of the Income Tax Act. Additional deductions up to Rs. 50,000 are allowed under Section 80CCD(1B).

●    Tier 2 Account
Anyone can open a Tier 1 account which is an Indian citizen. You must invest at least Rs. One thousand to get started. Accounts in Tier 2 do not have a lock-in period. Contributions made to Tier 2 are not tax-exempt. Your NPS Tier 2 account allows you to withdraw or contribute to the programme. You have no restrictions on how much money you can remove from your NPS Tier 2 investments at any time.

NPS Tier 2 Benefits

●    Freedom to choose: Subscribers can choose any registered Pension Fund and Investment Options that suit their preferences. They can even switch between investment options. 
●    Withdrawal facility: The funds deposited in the NPS Tier 2 account can be withdrawn by the policyholder at any time.
●    Asset allocation pattern: Account holders can select a suitable asset allocation pattern based on their risk appetite.
●    Tax benefits: Tax benefits on contributions made to Tier 2 are only available to government employees. Private employees cannot claim NPS Tier 2 tax benefits.
●    Low-cost pension product: NPS Tier 2 has a low management cost, making it the lowest-cost pension product available. This, coupled with low account maintenance fees, can result in substantial pension wealth accumulation.
●    Simple and convenient: Contributing to Tier 2 is easy and hassle-free.
●    Minor investment requirement: The Tier 1 and Tier 2 accounts can be opened with a minor investment and funded through cheque, cash, or demand draft.

Eligibility to Open an NPS Tier 2 Account

To be eligible for opening an NPS Tier 2 account, you must fulfil the following criteria:
●    You must be an Indian citizen, whether resident or non-resident.
●    An active Tier 1 account is a prerequisite.
●    Only individuals aged between 18 and 60 when applying the POP-SP can open an NPS Tier 2 account. After attaining the age of 60, you cannot make further contributions to your NPS account. To withdraw from the NPS Tier 2 account, you must apply to the POP-SP.
●    The subscriber must comply with the Know Your Client compliances stipulated in the registration form.
●    NPS Tier 2 tax benefits are only available to government employees. Private employees cannot avail of NPS Tier 2 tax benefits. 

How to Open an NPS Tier 2 Account?

A Tier 2 account can be created offline or online. You should apply for the opening of the account at the branch of your bank before submitting an online application. However, the procedure is less complicated for online applications. This is what it is:
●    Visit the online portal of eNPS and choose the National Pension System option.
●    Insert the PRAN or permanent retirement account number given to you when you first opened the NPS account.
●    Enter your DOB and PAN card number and verify the captcha code.
●    After verifying the PRAN number, you can make the deposit to open the NPS tier 2 account.
●    A minimum of at least Rs. 1000 should be made to activate the NPS tier 2 account.
The offline process is as follows:
●    'Subscriber's POP-SP' is required to establish a Tier 2 account.
●    Installing Annexure 1 Tier 2 information form is the next step, and the subscriber must email the completed form to the PPOP-SP.
●    The details of your bank will be provided to create a Tier 2 account so that, in the event of withdrawals from the NPS Tier 2 account, the money will be delivered straight to your bank account.
When the PRAN account creation is complete, a login ID and password will be sent to the subscriber. Then, with just one click, customers can check in and examine their NPS account online.

Investment into NPS Tier II Account

There are two investing options available for Tier II NPS Account investments:
●    Active Choice Strategy enables you to choose from the available investment money as per your preference.
●    Auto Choice Strategy allows you to choose a risk profile wherein the plan will allocate the investment to other funds depending on the age and chosen risk profile. 
The following are the four funds that are accessible for investment:
●    Asset Class A investing in the alternate instruments.
●    Asset Class C invests in fixed-income instruments but not government securities.
●    Asset Class E investing in the equity.
●    Asset Class E investing government securities.
When the NPS Tier 2 Account matures, you should continue investing there until you are 60. Another 10 years can be added to the maturity date, but no more contributions are necessary.

Withdrawals and Closure of Tier 2 NPS Account

As previously stated, NPS Tier 2 allows free withdrawals at any time. However, premature closure is not permitted if the Tier 1 account is active. If you close your Tier 1 account, your Tier 2 account will also be closed, and you will receive the account balance in a lump sum.

Tax Implications on NPS Tier 2 Account

Under the Section 80C of 1961 Income Tax Act, investments made in the Tier II account of the National Pension Scheme (NPS) are eligible for tax advantages. Up to Rs. 1.5 lakh in taxes may be deducted in total every fiscal year.

Investments made in the NPS Tier II account are also eligible for a tax advantage of up to Rs. 50,000 under Section 80CCD(1B) of the Income Tax Act of 1961 and the tax deduction under Section 80C. Only individual taxpayers are eligible for this extra deduction, in addition to the Section 80C cap of Rs. 1.5 lakh.

It is crucial to remember that the tier 2 NPS tax benefits on investments made this accounts are only accessible if the funds are locked in for a minimum of three years. If the investment is withdrawn before the three-year period has passed, the tax advantages previously claimed will be erased, and the investor will be required to pay taxes on the investment's earnings. So, one must choose the scheme depending on the NPS tier 2 advantages and disadvantages.

Additionally, the gains gained on the investment are taxed according to the individual's income tax bracket when the subscriber withdraws money from the NPS Tier II account. Like other mutual fund schemes, the tax treatment for withdrawals from an NPS Tier II account is the same.

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Frequently Asked Questions

Low management cost is one of the main benefits of investing in the NPS tier 2 scheme. This is the lowest product related to pension. The benefits of the accumulated fund to the investor get higher as maintaining the account is easy.

There is no NPS tier 2 tax benefit. Additionally, it is important to note that taxes apply to the NPS tier 2 returns generated by NPS Tier 2. While investments in NPS Tier 2 do not offer tax deductions, government employees can claim tax deductions under Section 80C of the Income Tax Act, 1961, for their investments in the National Pension Scheme Tier 1.

The Pension Fund, Regulatory and Development Authority, is a government-established authority that regulates pension funds to safeguard the interests of subscribers. All activities related to NPS Tier 2 accounts, including withdrawals and tax benefits, are overseen by this regulatory body.

No, withdrawals from tier 2 NPS profits are deposited to the subscriber's bank account. As a result, before opening an NPS account, the subscriber must have a bank account.

Points of Presence (PoPs) are the primary interaction points for NPS subscribers and provide various customer services. They also function as collection points and offer NPS Tier 2 account withdrawal services.

While Tier 1 of the NPS is a rigid retirement plan, Tier 2 offers more flexibility for withdrawals as needed. Depending on one's requirements, one can determine which scheme best suits their needs.