Everything You Need to Know About NPS Tier 2 Account
NPS stands for National Pension System. The system offers one of the best retirement plans and is backed by the Government of India. Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS. It is a social security initiative the Government of India took to provide financial security to Indian citizens after their retirement. NPS has two types of pension accounts: Tier 1 and Tier 2. Earlier, the NPS scheme was available only to government employees, but later on, this scheme’s benefit was extended to all the citizens of India. The scheme is popular among investors as it helps them create long-term retirement investments and offers reasonable returns to the investor. This article works as your guide to NPS Tier 2 Account.
NPS Tier 1
NPS Tier 1 is a primary NPS account that opens by default when opting to invest in an NPS scheme. It is mandatory to open Tier 1 for those who register under NPS. It is meant for retirement savings with a minimum contribution of ₹500 for opening the account. Under a Tier 1 account, you can withdraw 60% of the accumulated corpus tax-free at retirement. You need to buy the annuities with the remaining 40% of the corpus that ensures a secure regular monthly income through a pension. This pension is taxable as per the individual tax slabs. A minimum investment of ₹1,000 in this account is mandatory in a financial year.
NPS Tier 2
To open an NPS Tier 2 account, having an NPS Tier 1 account is mandatory. This is a voluntary account, requiring a minimum contribution of ₹1,000 at the time of opening. There is no requirement for compulsory annual contributions for Tier 2 account holders. However, any contribution to this account must be multiples of ₹250. There is no set limit for maximum contribution. It allows the investor with greater withdrawal flexibility with no exit charges. The amount contributed to this account gets invested into different funds. It benefits those who want to contribute more to their existing NPS account. The withdrawal process generally takes three days.
Pros of NPS Tier 2 Account
- Faster and Feasible: Opening an NPS Tier 2 account involves simple steps. Hence, it is quick and feasible for investors.
- Flexible: NPS Tier 2 offers investors greater flexibility in terms of withdrawal.
- Voluntary: NPS Tier 2 account is voluntary. Investors can open this account if they want to contribute further to their existing NPS account and build a huge retirement corpus.
- Convenient: You can open an NPS Tier 2 account from anywhere, and anyone can open it. Hence it offers greater convenience to investors.
- Low Investment: The Tier 2 account can be opened with an initial investment amount of ₹1,000. Moreover, you can further invest in multiples of ₹250.
- Low Cost: The expense ratio does not go beyond 0.09% and transaction charges range from a fixed fee or a percentage of the transaction amount.
Cons of NPS Tier 2 Account
- Taxation: The amount in NPS Tier 2 is taxable at withdrawal time for private employees.
- No Guaranteed Returns: The funds invested into this account get further invested into different market funds. Hence, market fluctuations can affect returns.
- Dependability: An investor can open a Tier 2 account once they have a Tier 1 account. So, the investors must depend on a Tier 1 account to open a Tier 2 one.
Investment choices in NPS Tier 2 Account
NPS Tier 2 Account offers investors two types of investment choices:
- Active Choice
- Auto Choice
Active Choice: The active choice investment option offers investors the flexibility to select between available investment options independently. Investors can decide and customise their portfolio per their risk-taking capacity and knowledge of asset classes.
Auto Choice: The auto choice investment options do not allow investors to select available investment options independently. Here, the investors choose their risk profile, and the asset classes are automatically allocated based on their risk profile and age. This suits those who want to avoid actively managing their portfolio.
Available investments for Tier 2 NPS Account
There are four available investments for Tier 2 NPS Account:
- Asset Class E: investments into equities.
- Asset Class C: investments into corporate bonds.
- Asset Class G: investments into government bonds.
- Asset class A: investments into alternate securities.
Eligibility to open an NPS Tier 2 Account
The following are the eligibility criteria to open an NPS Tier 2 Account:
- The person should be a citizen of India, resident or non-resident.
- The person should be of the age between 18 to 60 years.
- The person must have an NPS Tier 1 Account.
- The person must be allotted a Permanent Retirement Account Number (PRAN).
Documents required for opening NPS Tier 2 Account
The following are the documents needed for opening NPS Tier 2 Account:
- Duly filled registration form.
- Address proof of the applicant.
- Identity proof of the applicant.
- Date of Birth proof or Age proof of the applicant.
How to open NPS Tier 2 Account
You can open an NPS Tier 2 Account in two ways: Online and Offline.
Step 1: Visit the National Pension System (NPS) website.
Step 2: Select the ‘Tier 2 Activation’ tab.
Step 3: The next step is to fill in the details like PRAN number, date of birth, PAN number etc.
Step 4: Fill in the given captcha for further process.
Step 5: Click on ‘Verify PRAN’.
Step 6: Enter the OTP received on the registered mobile number.
Step 7: Click ‘Continue’.
Step 8: The next step is to fill in the bank details and click ‘Validate Aadhaar’.
Step 9: Note the acknowledgement number received on the screen and click ‘OK’.
Step 10: Now, the applicant must select the investment option, i.e., active or auto and then select ‘Save and Proceed’.
Step 11: Enter the nominee’s details and click ‘Proceed’.
Step 12: Upload the required documents.
Step 13: Make the payment towards the NPS Tier 2 Account. The minimum investment is ₹1,000.
Step 14: A payment receipt will be issued to the applicant.
Step 15: e-sign the application using the Aadhaar number and click ‘Submit’ after punching in the OTP.
Step 16: Once the application is e-signed successfully, the applicant can download and print the application form.
Step 1: You can open the Tier 2 NPS Account using the “Subscriber’s POP-SP (Points of Presence – Service Provider).
Step 2: Download the Annexure 1 Tier 2 information form.
Step 3: Fill out the form as required, carefully fill in the bank details, and send it to POP-SP.
Step 4: Make the necessary payments through cheque, demand draft or online banking.
Step 5: The account opens after successful verification.
Withdrawal from Tier 2 NPS Account
You can withdraw either online or offline.
Step 1: Log in to the website of NPS and locate the withdrawal option.
Step 2: Fill in the required details, such as the withdrawal percentage, annuity service provider details, bank details, nomination details, and others.
Step 3: Click on ‘Submit’.
Step 4: On successful verification, the withdrawal will be processed.
Step 1: Submit the form UOS-S12 after filling it correctly to the associated POP-SP.
Step 2: The POP-SP will verify the details.
Step 3: The POP-SP will process the withdrawal and transfer funds within the next three days.
Tax Implications on NPS Tier 2 Account
Government employees can avail tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961, provided they keep their investments locked in for three years.
For others, all the NPS Tier 2 Account deposits are taxable according to the individual slab rates.
National Payment System, or NPS, is one of the best investment tools offered by the Indian government to secure citizens financially after retirement. You can open an NPS Tier 2 account voluntarily only if the person has an active NPS Tier 1 account. It offers good investment options to select from. It does not provide a fixed return. However, the deposits made in this account get invested in various funds as per the risk profileand age of the investor.
Frequently Asked Questions (FAQs)
Are NRIs eligible to open NPS Tier 2 accounts?
Yes, NRIs are allowed to open NPS Tier 2 accounts. Indian Citizenship is mandatory irrespective of the residing country.
What is the user ID for the NPS login?
The user ID for NPS login is the PRAN or Permanent Retirement Account Number provided when opening an NPS Tier 1 account.
What is POP-SP?
POP-SP stands for Points of Presence – Service Provider. They are the first interaction point when opening an NPS account and offer various customer services to NPS investors.