National Pension Scheme Tier-2

What is National Pension Scheme?

National Pension Scheme is a retirement saving scheme that was introduced by the Government of India. NPS was initially offered only to government employees but later, it was made available for the general public. As of now, any citizen of the country who is willing to invest in NPS can opt for this scheme.

NPS is a retirement scheme that helps an employee or individual to build a good retirement corpus by making regular deposits over the period till their retirement. In the NPS Tier 1 account, the contribution is made by the employees & employers in the case of the government, corporate sector & APY models. While the contributions are made by the individuals in the case of the All Citizen model on a regular basis to create a good corpus for their retirement. After retirement, an employee or subscriber can withdraw up to 60% of the corpus as a lump sum, and at least 40% of the corpus needs to be used to buy an annuity which will provide regular pension payouts to the holder. 

There are two types of account offered under the national pension scheme which are:

1. NPS Tier-1

2. NPS Tier-2

In this article, we will cover everything about the NPS Tier-2 account. Let’s have a look:

What is NPS Tier-2?

An employee or subscriber who wants to subscribe for the NPS Tier-2 account would need to have an NPS Tier-1 account. If an employee or subscriber doesn’t have a Tier-1 account, then they cannot apply for the Tier-2 account.

NPS Tier-2 account is a voluntary account as it is not mandatory for every individual or employee to have a Tier-2 account. But generally, individuals or employees also choose to have a Tier-2 account as it can be used for regular savings purposes as it also offer more liquidity than the Tier-1 account. The account doesn’t have a lock-in period. An employee or the account holder can withdraw anytime from their Tier-2 account as per their needs and requirements. Also, there are no limits on withdrawals with respect to frequency or amount. An account holder can withdraw as many times as they want and that too without any exit load or any other charges.

Features of NPS Tier-2

There are many features of the NPS Tier-2 account which are:

• An employee or individual needs to have an active NPS Tier-1 account to subscribe for a Tier-2 account.
• There is no additional annual maintenance charge for the Tier-2 account.
• NPS Tier-2 account does not have a lock-in period. The lock-in period of 3 years is applicable in the case of tax-saving investments by the government employees.
• The amount from the Tier-2 account can be withdrawn at any time as per the requirement of the account holder.
• An employee or individual can contribute to the Tier-2 account as per their financial goals as it is not mandatory to contribute every year into the Tier-2 account.
• The minimum amount to contribute at the time of opening the Tier-2 account is Rs.1000 and the minimum amount for the subsequent contributions is Rs.250.
• All the asset classes which are available for investment in the Tier-1 account are also available in the Tier-2 account.
• A government employee can get a tax deduction of Rs.1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961 but to get the deduction, the NPS Tier-2 account will have a lock-in period of 3 years.
• At the time of withdrawal, the gains will be added to the income and will be taxed as per the tax slab rate of the individual.

Investment Options in NPS Tier 2 account

The NPS scheme invests in different asset classes as mentioned below:

Class A: Invests in Alternative investment

Class C: Invests in Corporate Bonds

Class E: Invests in Equity Securities

Class G: Invests in Government Bonds

The allocation to these asset classes is as per the chosen investment choice. The NPS gives two options to its subscribers for choosing asset allocation in their investments:

1. Active Choice: In this option, the subscriber has to decide the asset allocation among the mentioned asset classes for their investment subject to the mentioned limits. Here, the fund manager will only invest as per the allocation given by the subscriber. The subscriber has the flexibility to change the allocation at any time as per their needs and requirements.
2. Auto Choice: In this option, the subscriber need not decide the asset allocation of their investment. Asset allocation is done on the basis of a lifecycle-based approach. Here, the allocations to different asset classes will keep on changing with the change in the age bracket of the subscriber. In this option, the subscriber will be given 3 options suitable for investors with different risk profiles to choose for their investment. The options are aggressive lifecycle fund, moderate lifecycle fund & conservative life cycle fund.

Taxation on NPS Tier-2 Account

NPS Tier 2 account doesn’t give the benefit of tax deductions under Section 80C of the Income Tax Act, 1961. 

Only the government employees who have the Tier 2 account can have the benefit of the Tax deduction, but then it will need to have a lock-in period of 3 years. The employees can only take deductions of up to Rs.1.5 lakh per financial year on the deposited amount under Section 80C of the Income Tax Act, 1961.

At the time of withdrawal, the returns or gains which are earned under the scheme will be treated as taxable income. It will be added to the income of the individual and will be taxed as per the income tax slab rate of the individual.

Who can apply for NPS Tier-2?

There are some eligibility criteria to apply for the NPS Tier 2 account which are:

• NPS Tier-2 can be opened by any citizen of India.
• An individual needs to have an active Tier-1 account to apply for the Tier-2 account.
• An individual should be in the age bracket of 18 years - 60 years.
• NRIs can also apply for the Tier-2 account if they are eligible as per the above-mentioned criteria.

How to open NPS Tier-2 Account?

NPS Tier-2 account can be opened in two ways i.e online mode and offline mode as well.

Steps to apply online for NPS Tier 2 account:

1. Click here to visit the NPS official website. You will be redirected to the NPS website in a new window.
2. Now, you need to click on the National Pension System.
3. After clicking it, a top-up page will open and there you need to click on TIER-II Regular/Tax Saving Scheme Activation.
4. There you will have two options: Tier-II regular and Tax Saving Scheme. You need to click on Tier-II regular. And in case you are a government employee and want to invest for tax-saving purposes then you can choose the tax-saving scheme option which comes with a lock-in period of 3 years.
5. Now, you need to enter the requested details like your Permanent Retirement Account Number (PRAN), Date of Birth, and PAN number.
6. Then you need to click on the “Verify PRAN” option.
7. After verifying, you need to enter your bank account details and click on validate.
8. You will need to choose the investment option & allocation for your account and then click on save.
9. If you want to add the nominee, you can enter the required details to add the nominee.
10. Now, you need to upload the required documents and then need to make the first payment into the account.
11. Once the payment is done, you will get the receipt for the payment.
12. And, at last, you need to e-sign the application using your Aadhar card.

After E-sign, you can download the application if you want to and your NPS Tier-2 account will be activated.

Note: An individual can also apply for the NPS account through the third-party & other platforms offering the facility to open an NPS account. 

Steps to apply offline:

1. You need to visit the nearest NPS Point-of-Presence (PoP).
2. By visiting the nearest point, you will need to fill the required form there and submit all the required documents to activate the Tier-2 account.
3. You also need to make the first contribution into the Tier-2 account there itself.

By following these simple steps. You can activate your Tier-2 account.

Frequently Asked Questions (FAQs)

Q. What is the NPS Tier-2 account?

A. NPS Tier-2 is a voluntary retirement saving account. It is not mandatory for every NPS holder to have a Tier-2 account. Like a Tier-1 account, a Tier-2 account also gives the same investment & allocation options to the account holders. This account doesn’t have any maturity tenure and offers flexible withdrawals to the subscribers. 

Q. What is the lock-in period for the NPS Tier-2 account?

A. The NPS Tier-2 account doesn’t have any lock-in period. The account holder can withdraw their money from the account anytime as per their needs and requirements.

Q. Who is eligible to open NPS Tier-2 account?

A. An individual should be between the age bracket of 18-60 years and should have an NPS Tier-1 account to apply for the NPS Tier-2 account.

Q. What is the minimum balance required for the NPS Tier-2 account?

A. There is no requirement for a minimum balance in the NPS Tier-2 account. But, the account holder needs to deposit a minimum of Rs.1,000 at the time of opening the account.

Q. What is the minimum subsequent contribution amount in the NPS Tier-2 account?

A. The minimum additional contribution amount in the NPS Tier-2 account is Rs.250.

Q. Does the NPS Tier-2 account give tax benefits?

A. The NPS Tier-2 account doesn’t offer any tax benefits except to the government employees which will have a lock-in period of 3 years. The deposited amount by government employees is eligible for claiming tax deductions of up to Rs.1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961.

So, the NPS Tier-2 account provides tax benefits to only government employees.