National Pension Scheme is a retirement oriented pension scheme introduced by the Indian Government. Earlier the scheme was meant only for the employees of the Government but later on it was made available to the public too. Today, the NPS scheme is quite popular among investors looking to create a long term retirement corpus with regular investments. When you invest in the NPS scheme, you would be given a choice of two types of investment accounts. The first one is the Tier 1 Account while the other one is the NPS Tier 2 Account.

NPS accounts

Tier 1 Account is compulsory and should be opened by all individuals who want to subscribe to the NPS scheme. Tier 2 Account, however, is optional in nature. So, let’s have a detailed look into the NPS Tier Account and its different features.

Tier 2 NPS Account

Tier 2 NPS is a voluntary account which you can open if you have already opened a Tier 1 Account. The account of NPS Tier 2 allows you flexibility of withdrawals or investments into the scheme. You can withdraw from your NPS Tier 2 investments as and when required without any limits. Moreover, no exit load is charged when you withdraw funds from your account of Tier 2 NPS.

NPS Tier 2 Benefits

Many investors opt to open a Tier 2 NPS Account because of the benefits which the account gives. Here’s a look at the main NPS Tier 2 benefits –

  • You don’t have to pay any additional annual maintenance charge
  • You can use the account to fund your emergency expenses or day to day expenses because the account allows easy and flexible withdrawals without any exit load
  • You can choose to transfer funds from NPS Tier 2 to NPS Tier 1 Account whenever you want
  • There is no requirement to maintain a minimum balance in NPS Tier 2 Account
  • You can nominate an individual to receive the account proceeds in case of your death
  • You can invest in Tier 2 NPS in the same manner as you do in NPS Tier 1 Account

Eligibility to open an NPS Tier 2 Account

To open a Tier 2 NPS account, the following eligibility criteria should be fulfilled –

  • You should be a resident Indian aged between 18 and 60 years
  • You should have a Tier I Account and a PRAN number allotted to you
  • You need to deposit a minimum amount of Rs.1000 to open a Tier II Account. Once opened, however, a minimum deposit of Rs.250 should be done every financial year to keep the account active

How to open an NPS Tier 2 Account?

You can open a Tier 2 account online or offline. For online application, you should visit your bank’s branch and apply for the opening of the account. For online application, however, the process is simpler. It is as follows –

  • Visit the link to active Tier 2 NPS account
  • Provide the Permanent Retirement Account Number (PRAN) which was allotted to you when you opened Tier 1 NPS Account
  • Enter in your date of birth in DD/MM/YYYY format
  • Enter your PAN Card number and the captcha code.
  • Your PRAN number would be verified and once verified, you would be allowed to make a deposit to open the Tier 2 Account
  • Make the minimum deposit of Rs.1000 and your NPS Tier 2 Account would activate

Investment into NPS Tier II Account

When you invest in Tier II NPS Account, you would be given two choices of investment strategies –

Invest in elss funds
  1. Active Choice wherein you can choose between the available investment funds and invest
  2. Auto Choice wherein you just select the risk profile and the scheme automatically allocates your investment to different funds based on your age and risk profile selected

Every year, as you get older, your investments are reallocated so that equity exposure slowly reduces and debt exposure increases. This allows you to protect your returns from market volatilities.

The four funds which are available for investment are as follows –

  • Asset Class A which invests in alternate instruments
  • Asset Class C which invests in fixed income instruments except for Government securities
  • Asset Class E which invests in equity
  • Asset Class G which invests only in Government securities

Investments into the NPS Tier 2 Account should continue till you reach 60 years of age when the scheme matures. You can also defer the maturity by another 10 years but further investments are not required on such deferment.

Withdrawals and closure of Tier 2 NPS Account

As mentioned earlier, Tier 2 NPS allows you free withdrawals whenever you want. Premature closure is, however, not allowed if Tier I Account is active. If you close your Tier I Account, Tier 2 account would also close and you would get the account balance in lump sum.

Tax implications on NPS Tier 2 Account

The deposits that you make towards the Tier 2 Account would not get any tax benefits. They would form a part of your taxable income and taxed at your income tax slab rates. However, in recent changes, the PFRDA has allowed tax benefits to Central Government employees if they deposit in Tier 2 Account. The rules of such tax benefits are as follows –

  • Deposits up to Rs.1.5 lakhs in Tier 2 NPS account would be allowed as a deduction under Section 80C of the Income Tax Act, 1961
  • This deduction can be claimed by only Central Government employees
  • The Tier 2 Account which offers this deduction would have a compulsory lock-in period of 3 years during which withdrawals would not be allowed
  • Government employees would have the choice of three investment accounts under NPS – Tier 1 account which would be compulsory, Tier 2 account which has no tax benefits and allows free withdrawals and Tier 2 account with tax benefits which have a lock-in period of 3 years
  • The investor would not get a choice in allocating his/her investments. The amount invested in the tax-saving Tier 2 Account would be allocated to equity (10% to 25% allocation), debt (up to 90% allocation)and money market instruments (up to 5% allocation)
  • If a Tier I account is closed during the lock-in period of a Tier 2 account, further investments into a Tier 2 account would not be permitted. Thereafter, after the completion of the lock-in period, the Tier 2 account would also be closed
  • You can choose the pension fund manager of your choice. Changing between the chosen fund managers, however, would be allowed after the completion of the lock-in period

So, if you are looking for additional investment into the NPS scheme, you can choose to open an NPS Tier 2 account. The account is flexible and offers easy withdrawals. However, understand the tax implication of investing in the account because your investments would be taxable if you are not a Central Government employee.

mutual fund investment