NPS Tier 2 Account Advantages and Disadvantages

The NPS Tier 2 Account is a voluntary savings facility linked to the National Pension System (NPS) in India. It offers flexible investment options and easy withdrawals, catering to those seeking an additional investment option. However, the NPS Tier 2 comes with its own set of advantages and disadvantages. You can learn more about them in this article.

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Disclaimer: ##Rs 60,000 are the monthly pension amounts at the assumed rate of return of 8% p.a. and 4% p.a. for unit linked insurance plans. This is an illustrative example and the returns are not guaranteed & dependent on the policy term and premium term availed along with the other variable factors. The market linked return of 60K per month is for an 18 year old investing 6k per month for 20 years in a whole life policy having policy term 82 years in which Systematic partial withdrawals start at the age of 65 years at 5% rate of withdrawal per year. The investment risk in the policy is borne by the policyholder. All Plans listed here are of insurance companies’ funds. *Tax benefits and savings are subject to changes in tax laws. All Plans listed here are of insurance companies’ funds. Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

Fund Name

AUM

NAV

Returns (in %)

3 Year

5 Year

10 Year

Max Life High Growth Fund

AUM:8,482 Cr

8,482 Cr

NAV

119.99

1.59%

Returns

23.95%

Returns

31.9%

Highest Return

Returns

20.47%

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Tata AIA Whole Life Mid Cap Equity Fund

AUM:13,435 Cr

13,435 Cr

NAV

158.69

2.49%

Returns

21.08%

Returns

27.7%

Highest Return

Returns

20.43%

Get Details

Bajaj Allianz Accelerator Mid-Cap Fund II

AUM:6,452 Cr

6,452 Cr

NAV

86.49

1.27%

Returns

17.79%

Returns

22.67%

Highest Return

Returns

16.96%

Get Details

HDFC Standard Opportunities Fund

AUM:40,966 Cr

40,966 Cr

NAV

78.44

1.16%

Returns

15.75%

Returns

23.42%

Highest Return

Returns

16.86%

Get Details

Disclaimer:
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

What is an NPS Tier 2 Account?

An NPS Tier II account is a voluntary investment account associated with your National Pension System (NPS) account. Unlike Tier I, which is mandatory for retirement savings, Tier II offers more flexibility for your savings.

However, contributions to Tier II do not qualify for tax deductions, unlike Tier I contributions.

Features of an NPS Tier 2 Account

Below are the features of the NPS Tier 2 account:

Feature	Description
Contribution Type	Voluntary
Eligibility	Available to Indian citizens and NRIs aged 18-70 years.
Minimum Contribution	Initial contribution: ₹1,000; Subsequent contributions: ₹250 per transaction.
Contribution Flexibility	No minimum contribution limit during the year. Change contribution amount annually.
Maximum Contribution	No upper limit.
Investment Options	Similar to NPS Tier 1: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investments (A).
Investment Choice	Select from a variety of Pension Fund Managers (PFMs) and investment options (equity, debt, etc.).
Withdrawal	No lock-in period. Funds can be withdrawn anytime.
Tax Benefits	No tax benefits on contributions.
Account Maintenance	No annual maintenance charges.
Account Transfer	Can be transferred from one POP (Point of Presence) to another.
Additional Features	- Nominate a beneficiary to receive account proceeds. - Transfer funds from Tier II to Tier I account.
Regulator	Regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

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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:

Advantages	Disadvantages
Liquidity: No lock-in period, funds can be withdrawn anytime.	No Tax Benefits: Contributions are not eligible for tax deductions.
Flexibility: No restrictions on withdrawals.	Lower Priority: Often considered as a secondary option compared to Tier 1.
Low Cost: Low fund management charges similar to Tier 1.	No Mandatory Savings Discipline: Lack of lock-in period may discourage long-term savings discipline.
Professional Management: Managed by professional fund managers.	Tax on Gains: Withdrawals are subject to capital gains tax.
Flexible Contributions: No upper limit on contributions and minimum contribution amounts are low.	Not Ideal for Long-Term: May not be the best option for long-term retirement savings due to the lack of tax benefits.
Ease of Access: Can be easily accessed for short-term financial needs.	Separate from Tier 1: Separate from Tier 1 account, requiring different management and monitoring.

Eligibility Criteria to Open NPS Tier 2 Account

There are two main criteria to open an NPS Tier II account:

Existing Tier I Account: You must already have an active Tier I NPS account and a Permanent Retirement Account Number (PRAN) assigned. Tier I accounts are mandatory for certain demographics, but Tier II is voluntary.
Age and Residency: You must be an Indian citizen (Resident/ NRI/ OCI) between 18 and 70 years of age.

NOTE: There is no upper age limit to continue contributing to an existing Tier II account once you have opened it, but you cannot open a new one after 70.

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How to Open an NPS Tier 2 Account?

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

Online:
- Visit the eNPS website and click 'National Pension System'.
- Click on 'Tier 2 Activation' in the pop-up.
- Enter your PRAN number, Date of Birth, PAN number, and Captcha.
- Click 'verify PRAN'.
- After PRAN verification, your Tier 2 account will be activated.
Offline:
- Use the 'Subscriber's POP-SP' to open a Tier 2 account.
- Fill out the Annexure 1 Tier 2 information form and send it to the POP-SP.
- Submit your bank details for direct withdrawal from the NPS Tier 2 account.
- After PRAN account setup, you will receive a login ID and password to access your NPS account online.

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?

You can not avail of tax benefits under Section 80C and 10(10D) on your contributions to the NPS Tier 2 account.
Can a private employee enjoy the NPS tier 2 tax benefit?

No, private employees cannot enjoy tax benefits on contributions made to their Tier 2 NPS accounts.
How can I make a withdrawal from an NPS tier 2 account?

To withdraw from the NPS Tier 2 account, you must submit a duly filled UOS-S12 (form) to the associated POP-SP (Power of presence- service provider).
Can I 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, you 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 does not matter. You just need to be a citizen of India. If your citizenship is changed, your 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?

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.
Can I open a tier 2 account without a tier 1 account?

No, you cannot open a Tier 2 account without a Tier 1 account. The Tier 2 account is considered an add-on feature to the Tier 1 account. In order to activate a Tier 2 account, you must already have a Tier 1 account established and possess a Permanent Retirement Account Number (PRAN).

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^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
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
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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.