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5 min read
Updated on Jan 01, 2024
Policyholders of NPS tier 1 account can open a NPS Tier 2 account, which can be availed by government employees to enjoy tax benefits under sections 80C and 10(10D) of the Income Tax Act, 1961. Under this plan, the policyholder can withdraw their corpus at any time. The NPS tier 2 account can be opened with a minimum contribution of INR 2,000. Let us learn about the NPS tier 2 account benefits and other details in this post.
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The eligibility criteria are as follows:
Also Read: NPS vs APY Scheme
What are the benefits of an NPS Tier 2 account? NPS Tier 2 accounts have several benefits. However, at the same time it has certain limitations as well, for which we mentioned all the NPS advantages and disadvantages in the table below:
| Advantages of NPS Tier 2 Account | Disadvantages of NPS Tier 2 Account |
| Good Returns – As per an individuals’ risk appetite, NPS tier 2 account holders can choose an asset allocation pattern | No Guaranteed Returns – Under this account, money is accumulated depending on the returns and the returns are created through funds such as corporate bonds, securities, equity etc. Hence, it is quite evident that market fluctuations can have an adverse effect on the returns of the plan |
| Allow Flexibility – The NPS Tier 2 account holder has the flexibility to choose from any registered Pension Funds and other options of investment. This is because the NPS tier 2 scheme allows numerous choices. Policyholders under this plan can even move from one option of investment to another | No regular Annuity – Another drawback of NPS tier 2 account is that isdoesn’t provide pension on a monthly basis when you retire. Rather, this plan helps in accumulating retirement corpus |
| Tax Benefits – NPS tier 2 accounts allow the policyholders to avail tax benefits on premiums paid towards the plan. However, the NPS tier 2 benefits under the plan can be availed by government employees and not private employees | Taxability – This is another disadvantage of the NPS tier 2 scheme. Like in bank FDs, the amount under the NPS tier 2 plan can be withdrawn easily. However, unlike FDs here the complete fund is counted as taxable amount. |
| Withdrawal from Plan – This is another benefit of the NPS tier 2 account that the money accumulated under this account can be withdrawn anytime | Single Account – The disadvantage, on the other hand, is that a person can have only one NPS account throughout life. |
| Account Management Cost is Low – The best thing about an NPS Tier 2 account is that it is a low-maintenance product allowing low management cost. Hence, the NPS Tier 2 benefit of accumulated corpus to the policyholder is large | Caters to government employees – A huge NPS disadvantage of the NPS tier 2 account is that the tax benefits under this account caters only to the people working in government jobs and not to the private employees. |
| Easily to Access – Accessing the NPS tier 2 scheme is seamless, while contributing or paying premium towards the fund is also very convenient | Must have Tier 1 to Open Tier 2 – If the policyholder wants to open a Tier 2 account, he/she must have an active Tier 1 account |
| Frequency – The policyholder under an NPS account can deposit money at any time. So, as per convenience, a policyholder can pay towards an NPS account on monthly, quarterly, half-yearly or yearly basis. | Withdrawal Restrictions – The withdrawal under this plan can’t be beyond the sum of all premiums paid by the policyholder |
| Fund Managers – The NPS tier 2 funds are managed by qualified fund managers and are invested as per the approved investment guidelines | Limited Managers – The plan allows limited options to the investors to choose fund managers to manage their funds. |
| Coverage – NPS tier 2 scheme offers wide coverage as it allows all Indian citizens as well as NRIs to open a Tier 2 account. However, for this it is required for them to have a Tier 1 account. The entry age is also more and ranges between 18 to 60 years | NPS has some risks associated with the policy like average maturity, credit risk, modified duration etc. |
| Low Investments – Another benefit is that the Tier 1 and Tier 2 accounts of NPS can be opened with a minor investment by depositing the amount via cheque, cash, or demand draft | Investment Restrictions – Policyholders cannot invest more than 50% of their total investment in the NPS account |
Also Read: Best NPS Scheme 2023
There are two ways to open an NPS Tier 2 account –
Now, the setup of the PRAN account needs to be completed. Once it is done, you would receive a login id and password, which can be used to review an NPS account online with a click.
Also Read: What is annuity in NPS
In Conclusion
An NPS Tier 2 account is a voluntary account that serves as a regular bank account from which basic transactions in the form of deposits and withdrawals from NPS tier 2 can be made. A Tier 2 account functions like an investment option and does not have mandatory withdrawal rules as a Tier 1 account. It also does not have a fixed rate of interest. The government employee can avail of NPS tier 2 tax benefits and can make a withdrawal from NPS tier 2 account.
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If you want to avail the tax benefits of NPS tier 2 scheme, you can do so under sections 10(10D) and 80C of the IT Act 1961.
No, the NPS tier 2 tax benefits can be availed by government employees only.
Once you withdraw from the NPS tier 2 account, can you still enjoy the tax benefits under NPS tier 2 scheme?
No, if a policyholder withdraws from an NPS tier 2 account, he/she cannot avail tax benefits under the NPS tier 2 scheme.
Yes, an NRI is eligible to open an NPS Tier 2 account. However, they must be a citizen of India irrespective of the country they stay in. Only when the citizenship of the policyholder is altered, their account will be closed.
The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) of India to protect the interests of policyholders.
Withdrawals from NPS tier 2 proceeds are directly credited to the bank account of the subscriber.
Several documents are needed to open an NPS account, such as;
Subscriber Registration Form
Identity Verification
Address Proof
Age/Date of Birth Proof
PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.
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