April 26, 2023

NPS Tier 2 - Returns, Withdrawal, Tax Benefit, & How to Open

The Pension Fund Regulatory and Development Authority oversees the central government retirement program known as NPS, or National Pension System (PFRDA). It is a program to inspire Indian individuals to save money regularly.
Additionally, it provides both tax savings and pension benefits. NPS interest rates are variable. The efficiency of the underlying securities affects the NPS Tier 2 returns. NPS offers two different account types: NPS Tier 1 accounts and NPS Tier 2 accounts. The NPS Tier 2 account is thoroughly covered in this article.

What Does NPS Tier 2 Mean?

A voluntary account is the NPS Tier 2 account. Additionally, only subscribers with Tier 1 accounts can open Tier 2 accounts. A Tier 2 account must have a minimum initial investment of INR 1,000. The investment amount for a second donation is INR 250.
There are no minimum balance criteria for Tier 2 NPS accounts, nor is a contribution needed to keep the account open. Additionally, there are no NPS Tier 2 withdrawal restrictions on the Tier 2 account. There are no limits on the number of withdrawals people can make from Tier 2 accounts. Additionally, there is no cap on the number of withdrawals. Investors can thus request numerous NPS tier 2 withdrawals.
The Tier 2 accounts have no lock-in period. A Tier II account is open to all Indian citizens. Moreover, neither the private sector nor independent contractors receive any NPS Tier 2 tax benefit under the program. Moreover, with a 3-year lock-in period, a government employee is eligible for tax advantages of INR 1.5 lakhs under Section 80C.
A retirement account is NRS-1. It serves as the main NPS account, and you can only open a Tier 2 account when a Tier 1 account has been established.
  • Under the NPS (Central Govt), NPS (State Govt), NPS (Corporate), and NPS programs, NPS Tier 1 accounts can be opened (All Citizens Models). Each NPS Tier 2 subscriber can choose any fund manager from the NPS.
  • There are now 8 fund managers in the NPS, comprising Aditya Birla Sun Life Pension Fund, SBI, UTI, LIC, HDFC, ICICI, Kotak, and UTI.
  • An NPS Tier 2 account does not necessitate a specific balance or annual commitment.
  • The PFRDA eliminated the minimum balance limit of Rs 2,000 after each financial year in 2016. The minimum you can contribute, if you choose to, is INR 250.

What Are the NPS Tier 2 Account Features?

The NPS Tier 2 includes the following features:

Voluntary

NPS Tier 2 accounts are voluntary, meaning you can adjust your savings goals each year and make contributions at any time during a financial year.

Simple and Easy

Opening an account with any of the Points of Presence is quite simple.

Versatility

You have a choice over the pension fund you decide to utilize and your investing possibilities. If you are unhappy with the fund manager's performance, you can also switch pension plans.

Mobile

Through extensive networks of Points of Presence, it is also portable, allowing users to manage their accounts from any location, even if they move to a different city or change jobs.

Transparency

It has clear investment guidelines, and NPS Trust consistently oversees it. PFRDA governs it, and the effectiveness of fund managers is routinely assessed.

Taxation

Investments made in Tier 2 NPS accounts are not tax deductible. The NPS Tier 2 withdrawal is also included in the user's total taxable income. According to the individual's income NPS Tier 2 calculator bracket, they are taxed.

Eligibility Into an NPS Tier 2 Account

The prerequisites for NPS Tier 2 accounts are as follows:
  • Tier 2 NPS accounts are open to investments from all Indian nationals, including NRIs.
  • Subscribers must be between the ages of 18 and 65.
  • Additionally, customers cannot open a Tier II account without an active Tier I account.

How to Create an NPS Tier 2 Account?

Any investor with an open NPS Tier I account is eligible to open a Tier II account, both online and offline.

Offline

One must finish the registration process to access NPS Tier 2 in offline mode. They must adhere to the subsequent actions:
  • Find the closest Point of Presence - Service Provider (POP-SP) first.
  • The Tier II information form must then be filled out. The same is accessible through any POP-SP or by going here; one may get it online.
  • One must include the nominee's information when filling out the form. Additionally, they must decide on a fund manager and an investment strategy (active vs auto).
  • The form must then be submitted along with all required documents, such as an Aadhar card and a PAN card.
  • Make sure you supply the right bank information when opening an NPS Tier II account because this bank account will be used to handle all future withdrawals.

Online

The actions listed below must be followed to open a National Pension Scheme Tier II account online.
  • Go to the eNPS website and select "Tier II activation" first.
  • The subscriber is taken to a screen that requests information such as the PRAN (Permanent Retirement Account Number), birth date, and PAN Card number after selecting the "Tier II activation" link. To validate the PRAN, this is done.
  • The Tier II account will then be opened after the Permanent Retirement Account Number information has been matched with the subscriber's Tier I account information.
  • Lastly, the investor must activate their Tier II account and make an initial contribution to the plan of INR 1,000.

NPS Tier 2 Advantages and Disadvantages

NPS Tier 2 includes several benefits, but it also has some restrictions. The advantages and disadvantages of an NPS Tier 2 account are listed below:

Pros

  • Flexibility: Because this plan offers a wide range of options, the account holder can select any of the registered Pension Funds and Investment Options. Even subscribers can switch between other investing options.
  • Withdrawal: Without limitations, money put in the NPS Tier 2 account may be withdrawn at any time.
  • Better Returns: Account holders can choose an appropriate asset allocation strategy based on their level of risk tolerance.
  • Tax Benefits: Only government employees are eligible for NPS Tier 2 tax benefits on all contributions paid to Tier 2.
  • Low Management Cost - NPS Tier 2 is the least expensive pension option because of its low management cost. The advantage of accrued pension wealth to the subscriber increases because account upkeep is inexpensive.
  • Simple and seamless process - It is highly accessible. Tier 2 contributions are simple and practical.
  • Fund Managers - Skilled professionals and specialists invest all of the funds. They are knowledgeable, skilled investment managers. The investments made with these funds follow the approved investment policies.
  • Money can be deposited regularly, whether it is annually, biannually, quarterly, or monthly. You can change the amount contributed, but ensure it is at least the minimum.
  • Only a little initial investment is required to start a Tier 1 or Tier 2 account. Demand drafts, cash deposits, or checks can all be used to deposit the money.
  • Any Indian citizen or NRI can open a Tier 2 account, however, only if they already hold a Tier 1 account. It has a wide age range, ranging from 18 to 60 years old. Self-employed individuals, freelancers, and others can invest in this plan.

Cons

  • When you retire, this account won't give you a pension. You will only be able to build your retirement fund as a result.
  • A person is only permitted to keep one NPS account throughout their lifetime. You don't require a new account even if your career changes or you relocate to a different place.
  • The account corpus is built based on the returns produced by corporate bonds, government securities, and equity. The rewards may suffer from market swings.
  • Taxability - The sum is withdrawable in the same way that bank FDs are. However, unlike bank FDs, where only interest is taxed, the entire amount taken is subject to taxation in this case.
  • To create a Tier 2 account, you must have a current Tier 1 account.
  • Only Indian nationals between the ages of 18 and 60 may open a Tier 2 account.
  • Limited Managers: Thearen'tn't many fund managers from which investors can choose. They are unable to use the same fund manager for debt and equity.
  • Restrictions on Withdrawals - The NPS Tier 2 withdrawal cannot exceed the total of all subscription payments paid by the subscriber.
  • Investment Limitations: When it comes to investing, several rules are indicated. More than 50% of your investment cannot be placed in the NPS account.
  • NPS carries some risks, including credit risk, variable duration, average maturity, etc.

Procedure for Withdrawing from an NPS Tier 2 Account

There is no lock-in period for the Tier 2 account of the National Pension Scheme. As a result, customers have unlimited access to their deposits. For central government and state government employees, there is a three-year lock-in period if they seek to get NPS Tier 2 tax benefits.
The NPS Tier 2 withdrawal procedure is as follows:
  • Submit the UOS-S12 withdrawal form in its entirety.
  • Only the POP-SP with which the subscriber is currently registered with the CRA for Tier 2 shall receive the application from the subscriber.
  • As they are based on the applicable NAV at the moment of redemption, the redemption sums may change.
  • The money is moved from the trustee's bank account to the subscriber's bank account in three days or less.

NPS Tier-2 Account Taxation

The Income Act'sct's Section 80C does not apply to investments made in Tier II accounts. Nevertheless, if government workers lock in their investments for three years, they can receive an NPS Tier 2 tax benefit of up to INR 1.5 lakhs under Section 80C investor's income tax rate is applied to any withdrawals from the Tier II account.
A short-term capital gain tax is applied to withdrawals made within one year. The STCG tax for equity funds is 15%. Profits for debt funds are added to income and taxed at their respective income tax bracket rates.

How Do You Log in for the First Time to Your NPS Account?

Step 1: You require a 12-digit Permanent Retirement Account Number to access your NPS account (PRAN). To use PRAN, submit the required paperwork at a Point of Presence (POP) service provider or on the NSDL website.
Step 2: Go to https://enps.kfintech.com/login/login/ to access the eNPS login page.
Step 3: At the bottom of the page, under the heading "Click here to produce or reset the password if you are a first-time "ser," select that choice if you are a new visitor.
Step 4: To acquire an OTP, enter your PRAN, date of birth, and captcha. Then click "the Submit" button.
Step 5: Your registered mobile number will receive an OTP. Your password will be verified when you input this OTP on the screen.
Step 6: Return to the login screen and fill out the captcha, password, and PRAN. To log in, click the Login button.
Step 7: You will be taken to account Sunt's home page.

Difference Between NPS Tier 2 and Mutual Funds

Investment

NPS Tier 2:

Opening a Tier 2 Account requires a minimum investment of INR 1,000.

Mutual Funds:

Starting mutual fund SIP investments is possible with just INR 500.

Kinds

NPS Tier 2:

Active and auto selection.

Mutual Funds:

Index, Gold, Hybrid, Debt, and Equity.

Asset Management

NPS Tier 2:Active Option: You can put money into business debt, government bonds, or other assets. The maximum equity allocation of up to 50 is 75% of the total portfolio value.

After that, the maximum permitted equity proportion reduces by 2.5% annually until it reaches 50% at age 60.
Auto Option: It is a good solution for people without sufficient experience in controlling their investment allocation. Three fund types are available under auto choice: conservative, aggressive, and intermediate life cycle funds.
Until you are 35, each of them has a maximum equity cap of 75%, 50%, and 25%, respectively. After that, the equity in the asset allocation declines with age.

Mutual Funds:Equity: Mutual funds that focus on equities make at least 65% of their investment in equity and related securities.

Debt: The assets of debt mutual funds are spread among fixed-income securities.
Hybrid: Hybrid mutual funds modify the fund's portfolio in response to market trends. They aggressively handled the money across debt and equity instruments.

Lock-In Time

NPS Tier 2:

Zero-day lock-in period For employees of the central and state governments, there is a three-year lock-in period if they want to get tax advantages.

Mutual Funds:

Except for ELSS mutual funds, there is no lock-in period for mutual funds. Mutual funds, meanwhile, impose an exit load on withdrawals made prior to one year.

Returns

NPS Tier 2:

The historical range of average NPS Tier 2 returns is between 9% and 12%.

Mutual Funds:

Over time, equity mutual funds may do better than the NPS. In the past, the equities asset class has provided a return that has been significantly higher than any other asset type.

Exemption from Tax on Investments

NPS Tier 2:

Investments in NPS Tier 1 are deductible from income under Section 80C. But, because it is a voluntary account, investments in Tier 2 accounts are not qualified for tax deductions.

Mutual Funds:

Under Section 80C of the Income Tax Act of 1961, only Equity Linked Savings Schemes (ELSS) funds are eligible for tax exemption. There are no tax exemptions for any other mutual funds.

Liquidity

NPS Tier 2:

Transferring money from an NPS Tier 2 account to an NPS Tier 1 account is simple. You can immediately redeem your investments because NPS Tier 2 accounts Don't have a lock-in period.

Mutual Funds:

Investments in mutual funds are quite liquid. Your fund units are redeemable at any tIt's

It’s a Wrap

An NPS Tier 2 account is a voluntarily held account that functions as a standard bank account and allows for making simple deposits and withdrawals. The compulsory withdrawal restrictions that apply to Tier 1 accounts do not apply to Tier 2 accounts, which operate like investment options. Additionally, it lacks a fixed interest rate.

Frequently Asked Questions

Is It Possible For NRIs To Open An NPS Tier 2 Account?

You can open an NPS Tier 2 account as an NRI, yes doesn't matter where you live in the world. All you need to do is be an Indian citizen. The account of the subscriber will be terminated if their citizenship changes.

Which NPS Tier 1 Or Tier 2 Is Superior?

Tier 2 of the NPS offers additional flexibility for withdrawals, if necessary, whereas Tier 1 of the NPS is a strict retirement plan. One could determine which plan best suited them based on their requirements.

What Is A POP-SP, And Who Are They?

The primary points of contact for the NPS subscriber that offer various customer services are called points of presence. They serve as locations of collection and offer their services for NPS withdrawal.

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