NPS Tier 2: Benefits, Eligibility Criteria and Tax Benefits

• NPS Tier 2 is a voluntary savings account available to subscribers who already have a Tier 1 account.
• Key benefits of NPS Tier 2 include no lock-in period, the ability to withdraw funds anytime, and an option to transfer money to the Tier 1 pension account.
• To open an NPS Tier 2 account, you must be an Indian citizen aged 18-60 with an active Tier 1 account and make a minimum deposit of ₹1,000.
• NPS Tier 2 provides two investment strategies - Active Choice allowing asset class allocation and Auto Choice with lifecycle-based equity exposure.

The National Pension System (NPS) has emerged as a popular retirement savings tool in India. It enables subscribers to build a retirement corpus through systematic investments during their working years. While the NPS Tier 1 account is the primary pension account, the NPS Tier 2 account offers additional flexibility and liquidity to meet short-term financial goals.Understanding the features, benefits and eligibility of NPS Tier 2 can help you make informed decisions about your retirement planning. Let's dive into the details of this voluntary savings option.

The NPS Tier 2 is a voluntary savings account that can be opened by subscribers who already have a Tier 1 account. Unlike Tier 1, which has a minimum annual contribution requirement of ₹1,000, there is no such mandate for Tier 2. However, a minimum deposit of ₹1,000 is required to open the account.Some key features of NPS tier 2 accounts include:

• Contributions can be made in multiples of ₹250, with no upper limit .
• No exit load is charged on withdrawals from Tier 2.
• A separate nomination facility is available.
• Option to choose a different investment pattern from Tier 1.

The NPS Tier 2 account offers several advantages to subscribers, such as:

• Flexibility: There is no lock-in period for Tier 2 accounts, allowing you to withdraw funds whenever needed. This provides greater liquidity compared to Tier 1.
• No Annual Maintenance Charges : Unlike some other investment options, there are no additional annual maintenance charges for maintaining a Tier 2 account.
• Transfer to Tier 1: You have the option to move funds from your Tier 2 account to your primary pension account (Tier 1) at any point in time.
• No Minimum Balance: Once you open a Tier 2 account with ₹1,000, there is no requirement to maintain a minimum balance.
• Short-Term Savings: The NPS tier 2 account serves as an excellent way to save for your short-term needs and financial goals.

Read More: What are the Benefits of an NPS (National Pension System) Account?

To open an NPS Tier 2 account, you must fulfil the following eligibility criteria:

• Indian Citizen (resident or NRI) aged between 18 and 60 years.
• Active NPS Tier 1 account with a Permanent Retirement Account Number (PRAN) allotted.
• Minimum deposit of ₹1,000 at the time of account opening.

You can open a Tier 2 account either online through your eNPS login or offline by visiting a Point of Presence (PoP) service provider.

NPS Tier 2 offers two investment strategies for subscribers:

• Active Choice: This option allows you to decide the allocation of your contribution across asset classes like equity, corporate debt, government securities, and alternative investment funds. The allocation is subject to the scheme's guidelines.
• Auto Choice (Lifecycle Fund): In this option, your investments are automatically reallocated based on your age. As you grow older, the equity exposure is gradually reduced, and debt exposure is increased. This helps manage risk as you approach retirement. There are three lifecycle funds - LC25 (25% equity), LC50 (50% equity), and LC75 (75% equity).

It's important to note that unlike Tier 1, contributions to NPS Tier 2 do not qualify for tax benefits under Section 80C or 80CCD. However, the Pension Fund Regulatory and Development Authority (PFRDA) has recently allowed tax benefits to Central Government employees for Tier 2 deposits with a lock-in period of 3 years.Before opening an NPS Tier 2 account, consider your financial goals, risk appetite, and liquidity requirements. While Tier 2 offers greater flexibility, Tier 1 remains the core retirement savings account with tax benefits.Many subscribers maintain both accounts to balance their long-term and short-term needs.

One of the key advantages of the NPS tier 2 account is the flexibility it offers for withdrawals. You can withdraw your funds from Tier 2 anytime without any restrictions.However, premature closure of the Tier 2 account is not allowed if your Tier 1 account is active. If you close your Tier 1 account, the Tier 2 account will also be closed, and you will receive the balance in a lump sum.

The NPS Tier 2 account is a valuable addition to your retirement savings toolkit. It complements the core Tier 1 account by providing liquidity and flexibility for short-term financial needs.
As you plan your NPS investments, consider your goals, risk tolerance, and time horizon. By leveraging both Tier 1 and Tier 2 accounts, you can build a robust retirement corpus while maintaining financial flexibility along the way.Seek professional advice if needed to optimise your asset allocation and investment strategy. Explore NPS account opening services with Aditya Birla Capital. Experience a seamless digital onboarding process and expert guidance to make informed decisions about NPS investments. Also Read: Post Office Senior Citizen Savings Scheme (SCSS)