Advantages and Disadvantages of NPS Tier-2 Account

The Buyt Desk

‘NPS or the National Pension Scheme’ is an investment scheme that helps you to save for your retirement. People have the choice of investing in two types of the NPS account.

NPS Tier 2, a voluntary savings account facility, can be activated only after you have an NPS tier 1 account. The biggest difference between the 2 accounts is that you can withdraw your investment from NPS Tier 2 at any point in time. There is no lock-in on your investment in NPS Tier 2.

NPS Tier 2 Account Features

1. Voluntary

As mentioned above, NPS Tier 2 is a voluntary savings account. This means you can contribute at any specific point in a financial year. You can also change the saving amount every year.

2. Great Flexibility

You can enjoy the flexibility to select pension funds and investment options accordingly and see the outcomes. You are free to change the fund manager or the pension scheme if not satisfied.

3. Easiness

Opening an account with any Points of Presence is very simple. It can be done in just some steps.

4. Transparency

NPS Tier 2 account holders enjoy extreme transparency as it features transparent investment rules. NPS trust does regular monitoring even the fund managers’ performance is also reviewed.

5. Portability 

Subscribers can run their accounts from anywhere via a huge network of Points of Presence.

Advantages of NPS Tier 2 Account

1. Withdrawal at Any Time

Holders can easily withdraw the amount deposited in their NPS Tier 2 account anytime without any problem.

2. Flexibility

You are free to select any of the Investment Options and registered Pension Fund options. Moreover, you can easily shift from one investment option to another. This scheme provides numerous options.

3. Tax Benefits

Just government employees avail of tax benefits on all contributions made to Tier 2.

4. Fund Managers

The entire fund are invested by experienced and qualified fund managers according to the approved investment guidelines.

5. Good Returns

You can decide on an appropriate asset allocation pattern based on the subscriber’s risk appetite.

6. Huge Coverage

All NRIs and Indian citizens having a Tier 1 account are eligible to open NPS Tier 2 account. The age of the applicants must lie between 18-60 years. Self-employed people and freelancers can also invest in this account.

7. Easier Access

Contributing to Tier 2 scheme is a convenient and simple process.

8. Low Investments

You don’t need to have a big amount to open NPS Tier 1 and Tier 2 account. These can be opened with less investment. You can use a demand draft, cheque, or crash to deposit the amount.

9. Low Management Cost

The low management cost makes NPS Tier 2 scheme the lowest-cost pension product. Low account maintenance and management cost increase the benefits of the collected pension amount to the subscriber.

10. Frequency 

You don’t necessarily require to pay the funds at a certain time. You can deposit the amount yearly, half-yearly, quarterly, or even monthly. You can rise or reduce the contribution as per your need while ensuring that you make the minimum contribution.

Disadvantages of NPS Tier-2 Account

1. No Pension

The account holder can’t receive any pension after retirement. This scheme will only help in collecting the retirement corpus.

2. Limited Eligibility

Just Indian citizens and NRIs who age between 18-60 years can open the account. Other people don’t fall under the category of eligible candidates.

3. Limited Managers

Investors have just a few restricted options to select from for fund managers. They don’t have a right to select a single fund manager for debt as well as equity.

4. Single Account

A single person can keep only one NPS Tier account in his/her lifetime. You can’t open another account when you move to another location or switch your career path.

5. Risks

Opening and maintaining an NPS Tier-2 account comes with some risks. For example, modified duration, credit risk, average maturity, and more.

6. Taxability

The account holders can withdraw the amount as they do in bank FDs (fixed deposits). But, unlike bank FDs, the entire NPS Tier 2 withdrawn amount is taxable instead of taxing only interest.

7. Withdrawal Limitations

The withdrawal amount can’t be higher than the total sum of the whole contributions made by the subscriber.

8. No Assured Returns

The account amount is calculated based on the returns, which are created under corporate bonds, and securities by the equity and the government. The returns can also be affected badly by market fluctuations.

9. Investment Restrictions

Investment options also have some guidelines. The applicant is not allowed to invest more than 50% of his or her total investment in Tier 1 or Tier 2 account.

Eligibility Criteria for NPS Tier 2 Account

To become eligible for opening an NPS Tier 2 account, you have to meet certain criteria.

• You must be an Indian citizen (resident or non-resident).

• You must have an actively running NPS Tier 1 account.

• The subscriber must comply with KYC (Know Your Client) compliances as mentioned in the subscriber registration form.

• You must age between 18-60 years on the submission date of application to the POP-SP. People over 60 years of age are not allowed to make further contributions to their NPS account.

How Can You Open NPS Tier 2 Account?

You can apply for opening an NPS Tier 2 account online or offline. Let’s discover these methods in detail.

Online Approach

• Visit the eNPS website and click on National Pension System.

• Click on ‘Tier 2 Activation’ in an appearing pop-up.

• Enter your PRAN (Permanent Retirement Account Number), DoB (Date of Birth), PAN number (Permanent Account Number), and the Captcha on the next page.

• Now, hit on Verify PRAN.

• A Tier 2 account will be opened after the complete verification of PRAN details with the existing Tier 1 account.

Offline Approach

• Use the POP-SP of the subscriber to open a Tier 2 account.

• Install the Annexure 1 Tier 2 information form, fill it out, and then send this form to the PPOP-SP.

• Submit your bank details to open a Tier 2 account. It will help in directly sending the withdrawal amount to your bank account.

After completing the PRAN account setup, the subscriber is allotted a login ID and a password to review their NPS account online.

Rounding Up

An NPS Tier 2 is a voluntary account in which basic transactions can be made as deposits and withdrawals. It works as an investment option. Unlike NPS Tier 1 account, Tier 2 account doesn’t have the necessary rules for withdrawal. Also, it doesn’t have a fixed interest rate.