NPS Tier 2 Account: Eligibility Criteria to Open an NPS Tier 2 Account Advantages and Disadvantages

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6 min read

Updated on Jan 31, 2023

National Pension Scheme (NPS) Tier 2 account is a Central Government scheme provided to protect the interest of the policyholders by means of various regulations. Let us take a look at its pros and cons, in this post.

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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Eligibility Criteria to Open an NPS account and to avail NPS Tier 2 tax benefit

The eligibility criteria are as follows:

  • Applicant must be a resident or non-resident citizen of India
  • Must have an active Tier 1 account
  • People between the age group of 18-60 years are applicable for the plan
  • The applicant should fulfil client compliances as mentioned in the registration form
  • The applicant must be a government employee to avail NPS Tier 2 tax benefits

Also Read: NPS vs APY Scheme

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Pros and Cons of NPS Tier 2 Account

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, which are mentioned 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 – On the other hand, the NPS tier 2 account doesn’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 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 benefit of accumulated corpus to the policyholder is large Caters to government employees – A huge 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

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How to Open an NPS Tier 2 Account?

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

Online method:

  • Visit the eNPS website and go to ‘National Pension System’
  • A pop-up will indicate ‘Tier 2 Activation’. Click on it
  • Now, enter your details like PRAN number (Permanent Retirement Account Number), DOB, PAN number, along with the Captcha code
  • ‘Verify PRAN’
  • After the PRAN details are verified on your NPS tier 1, the NPS Tier 2 scheme would be activated

Offline method:

  • Use the ‘Subscriber’s POP-SP’ to create a Tier 2 account
  • Install Annexure 1 of Tier 2 information form. Fill it and send it to the PPOP-SP
  • The bank details of the policyholder would be required to open a Tier 2 account. This way, you can directly deposit the amount to the policyholder’s bank account during withdrawal

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.

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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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FAQs: NPS Tier 2 Account

How can I avail NPS tier 2 tax benefits?

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.

Is NPS tier 2 tax benefit scheme available for private employees also?

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.

Can NRIs apply for NPS Tier 2 accounts?

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.

Who regulates NPS?

The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) of India to protect the interests of policyholders. 

How is the withdrawal from NPS tier 2 proceeds offered to the policyholder, through cash or demand draft?

Withdrawals from NPS tier 2 proceeds are directly credited to the bank account of the subscriber. 

What documents are required to open an NPS account?

Several documents are needed to open an NPS account, such as;
Subscriber Registration Form
Identity Verification 
Address Proof
Age/Date of Birth Proof

 

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Jan 24, 2023
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