What is NPS Tier 2 Account in India

NPS National Pension Scheme tier 2 account is a voluntary savings account managed by the authorised Pension Funds under the National Pension Scheme in accordance with the PFRDA (The Pension Fund Regulatory & Development Authority) Act. This government-supported initiative is a boon for those seeking flexibility with their funds in a safe investment vehicle.

The NPS tier 2 account can be opened only if an individual already holds a PRAN (Permanent Retirement Account Number). Hence, the first step to investing in tier 2 NPS is opening a tier 1 NPS account. However, there are no tax benefits offered for non-government employees.

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Key features of an NPS tier 2 account

• Optional: The NPS tier 2 account is 100% voluntary. An individual can choose to opt in or out of opening this account based on their investment preferences and goals.
• Quick and simple: Opening an NPS tier 2 account is as easy as it gets. It may be done either offline or online; it is quickly activated and simple to use.
• Flexibility: Unlike the restrictions in a tier 1 account, individuals are allowed the freedom and flexibility to withdraw funds from their NPS tier 2 account as and when they please.
• No mandatory annual contribution: Individuals are not required to contribute a minimum or maximum amount every year to the tier 2 NPS account.
• Portability: Individuals can operate an NPS tier 2 account from anywhere, anytime, regardless of changes in employment or location, i.e., movement within a government job or even between a corporate and government job.

Who can open an NPS Tier 2 account

An individual fulfilling all the criteria outlined below is eligible to open an NPS tier 2 account:

1. An Indian citizen (resident or non-resident)
2. Aged between 18 and 60 years on the date of submission of application
3. An existing subscriber to the NPS holding an active NPS tier 1 account
4. Valid KYC (Know Your Customer) documentation

The NPS tier 2 account can be opened simultaneously while an individual opens an NPS tier 1 account. Indian citizens may opt-in for NPS as an individual or in the capacity of an employer-employee group.

The NRI’s contributions to NPS accounts are subject to RBI and FEMA regulations. If the Indian citizenship status of an NRI changes, their NPS account shall be closed.

Eligibility to open an NPS tier 2 account

To be eligible for an NPS Tier 2 account, you must meet the following conditions:

• You must be a resident Indian between 18 and 60 years of age.
• You should already have an active Tier I NPS account with a valid PRAN (Permanent Retirement Account Number).
• A minimum deposit of Rs. 1,000 is required to open the Tier 2 account. After that, you must contribute at least Rs. 250 in each financial year to keep the account active.

How do you open an NPS tier 2 account

An individual may choose to open an NPS tier 2 Account via offline or online mode.

Online:

1. Go to the eNPS website and select ‘National Pension System’.
2. On the next page, select ‘Tier II Activation’. This can be displayed in Hindi or English.
3. Fill in the details of PRAN (Permanent Retirement Account Number), DOB (Date of Birth), PAN (Permanent Account Number) and the Captcha.
4. Next, click 'Verify PRAN’ and input the OTP.
5. After the verification process is complete, the NPS tier 2 account will be activated.

Offline:

1. Download the Annexure 1: Tier II details form from the ‘Subscriber Registration’ section of the NPS website and fill in the required details.
2. This completed application form must be submitted to a Point of Presence (POP) - Service Provider (SP).
3. Subscribers must also furnish their bank details. Any NPS tier 2 withdrawals would be transferred directly to this bank account.

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Can you avail any tax benefits with NPS tier 2

If you are a government employee, the NPS tier 2 tax savings scheme provides an additional tax deduction benefit from the employer’s (either Central or State Government’s) contribution to the employee’s NPS account.

Also Read - NPS vs PPF

What are the pros and cons of an NPS tier 2 account

Pros

• Any-time withdrawal: No restrictions are imposed for withdrawal of funds from the tier 2 NPS account.
• Inter-account transfers: Individuals holding a PRAN may freely transfer their retirement funds from an NPS tier 2 account to their tier 1 pension account
• No additional AMC: There is no additional annual maintenance charge levied to maintain the tier 2 NPS account.
• No minimum balance: There is no minimum balance required to set up and keep a tier 2 NPS account operative. The minimum contribution amount is Rs. 250.
• No Exit Load: There are no charges levied for any withdrawals an individual might choose to make from their tier 2 NPS account.

Cons

• Selective tax benefits: There are no tax benefits given for non-government employees who are working in the private sector, which makes gains in the tier 2 NPS account liable to tax at prevailing slab rates.
• Selective lock-in period: There is a lock-in period of 3 years imposed on government employees who are opting for tax benefits on their NPS tier 2 tax saver investment.
• Ambiguous returns: The NPS tier 2 does not guarantee a fixed return rate to its investors. The funds will play out to market movements and pension fund manager’s investment decisions.
• No Pension: The NPS tier 2 does not have an option for pension payouts when the subscriber retires; it essentially functions like a retirement corpus and not a pension fund.

NPS offers the potential for higher returns due to its investment in market-linked assets. In contrast, fixed deposits offer a guaranteed interest rate that is locked in for the duration of your investment. This provides stability and predictability, especially important for risk-averse investors.

Withdrawals and closure of NPS tier 2 account

The NPS Tier 2 account provides flexibility to withdraw funds anytime, unlike Tier 1. However, premature closure is not allowed while your Tier 1 account remains active. If the Tier 1 account is closed, the Tier 2 account is automatically closed as well, and the total balance is paid out as a lump sum.

Tax Implications of NPS Tier 2 Account

Contributions to a Tier 2 NPS account do not generally offer tax benefits and are treated as part of your taxable income, taxed according to your income tax slab. However, recent provisions allow Central Government employees to claim tax benefits on Tier 2 contributions under specific conditions:

• Contributions up to Rs. 1.5 lakh are eligible for deduction under Section 80C of the Income Tax Act, 1961.
• Only Central Government employees can claim this deduction.
• Tier 2 accounts with tax benefits come with a mandatory 3-year lock-in period, during which withdrawals are not allowed.
• Government employees can invest in three types of NPS accounts: the compulsory Tier 1 account, a flexible Tier 2 account with free withdrawals, and a tax-saving Tier 2 account with a 3-year lock-in.
• Investments in the tax-saving Tier 2 account are pre-allocated across asset classes: equity (10–25%), debt (up to 90%), and money market instruments (up to 5%).
• If the Tier 1 account is closed during the lock-in period, no further investments into the Tier 2 account are permitted. Once the lock-in period ends, the Tier 2 account can be closed.
• Investors can choose a pension fund manager, but switching managers is allowed only after the lock-in period.

The Tier 2 account is ideal for additional NPS investments due to its flexibility and easy withdrawals. However, it is important to consider the tax implications, as contributions are taxable for all except Central Government employees.

Conclusion

There are two sides to the decision of whether or not to open an NPS Tier 2 account. The foremost set of advantages include flexibility, freedom for contribution, and NPS tier 2 withdrawal. The absence of tax benefits or pension pay-outs, however, weighs down the benefits of tier 2 NPS accounts. Individuals should view the NPS tier 2 tax saver scheme with due consideration to their retirement goals and medium— and long-term savings plans.

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