NPS Tier II Account: How Does It Work And How Can You Make The Most Out Of It?

The National Pension System (NPS) is open to all Indian citizens, including government and private sector employees and self-employed under its all-citizen model. Many people are attracted to Tier I accounts due to tax benefits, but they often overlook Tier II, which is optional.

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One can open a Tier II account if they have a Tier I account. Unlike Tier I, Tier II has no restrictions on withdrawals. A subscriber can open a Tier II account with a minimum of Rs 1,000 and multiples of Rs 250 thereafter. There is no upper limit on investments. Those eligible for a Tier I account can open a Tier II account, except for non-resident Indians (NRIs) and Overseas Citizens of India (OCI). All investment options and pension funds are available in both accounts.

What Does NPS Tier II Offer?

There is no penalty for withdrawals from a Tier II account; one can withdraw funds anytime. All the investment asset classes available in Tier II, which are equity, corporate bonds, government securities, and alternative investment funds, are the same as Tier I. Subscribers can choose between two investment strategies, auto or active, to manage the asset allocation, wherein active choice allows customisation benefits as per one’s preference and auto choice invests based on predetermined asset allocation rules.

How To Open An NPS Tier II Account:

To open a Tier II account, one must already have a Tier I account. The Tier II account can be opened online via the eNPS portal by providing the permanent retirement account number (PRAN), date of birth, and PAN number and verifying via a one-time password. For offline registration, subscribers must send the Tier II information form and the required documents to a Point of Presence–Service Provider (PoP-SP), which will verify the details and set up the account.

How To Make The Most Of Tier II Account:

One of the key benefits of NPS Tier II is the absence of withdrawal restrictions and low charges. The funds are managed by pension fund managers (PFMs) with a fee of as low as 0.09 per cent of the fund value. Further, no penalty or exit charge is applicable in NPS like in fixed deposits or mutual funds if withdrawn before a minimum period. Compared to NPS Tier I, withdrawal from Tier II is not restricted to specific purposes, and thus, subscribers can use NPS II for any purpose.

If we look at the returns, NPS Tier II’s equity scheme generated around 40 per cent in the last one year, while the return from the government securities scheme in one year was around 10 per cent. The corporate bond category yielded around 8.00 per cent during the same period, as of August 31, 2024, as per NPS Trust data.

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Although Tier II is a voluntary investment option with no tax benefit, and PFMs’ investment choice for stocks is restricted to managing a limited basket of around 200 stocks, it still provides a flexible investment avenue. It offers the option to keep the money that can be withdrawn whenever needed and thus can serve as a feeder account for Tier I or as an emergency fund due to its easy access to funds.