The National Pension System or NPS is increasingly becoming one of India’s favourite retirement fund and savings schemes with over 1.5 crore subscribers as of November 2021, according to data by the National Pension System Trust. The benefits and simplicity that NPS offers are considered to be one of the prime reasons for this growth.

While a tier 1 NPS account is popular, a lot of investors are still not completely aware of the NPS Tier 2 account and its benefits.  Let’s take a deeper look at the benefits of the NPS tier 2 account, including the NPS tier 2 tax benefits.

What are the NPS tier 1 and tier 2 accounts?

NPS has two types of accounts – tier 1 and tier 2. The tier 1 account is mandatory for an NPS subscription and it is a non-withdrawable permanent retirement account. A tier 2 NPS account, on the other hand, is voluntary, and it is aimed at helping investors use the NPS infrastructure to invest and grow more of their money. NPS provides you with an investing infrastructure similar to a mutual fund with fund management by experts at low fees.

Are NPS tier 1 and NPS tier 2 the same?

The NPS tier 1 account comes with tax benefits under several sections of the Income Tax Act, 1961. You can claim the section 80C deduction of up to Rs. 1.5 lakh for your NPS tier 1 investment as well as an additional deduction of Rs. 50,000 under section 80CCD(1B). At maturity, 60% of your NPS tier 1 corpus is tax-free, while the remaining needs to be invested in an annuity scheme if your corpus is over Rs. 5 lakh.

The NPS tier 2 tax benefits are available for central government employees only. For non-government employees, there are no tax benefits for the tier 2 account. However, unlike the tier 1 account, the tier 2 NPS account does not have a lock-in period. It functions similar to a savings account where you are free to withdraw whenever you would like. Additionally, you don’t have to mandatorily invest a chunk of your tier 2 NPS corpus in an annuity scheme.

Another difference between the NPS tier 1 and tier 2 accounts is the minimum contribution required to open and maintain the accounts.  

NPS Tier 2 account benefits

Even without the tax benefits, tier 2 NPS investments can be fruitful. Below are some of the main benefits that will help you make the choice.

• Flexible – Tier 2 NPS accounts have no lock-in period and hence, you have the liberty to invest and divest whenever you want. Moreover, you can choose from a number of pension funds for your money. Managed by investment experts or Pension Fund Managers (PFM), your NPS tier 2 account can help you appreciate your capital at a comparatively lower cost. Currently, there are about eight PFMs registered under the national pension system, and NPS tier 2 subscribers have the option to shift from one PFM to another. This choice can be exercised once every financial year.
• Better returns – NPS is known for giving its subscribers better returns than its peers. Since its market-linked, you can capitalise on the growth of markets and the economy. With a tier 2 NPS account, you can enjoy the same benefits but with greater flexibility. The market linkage also makes sure NPS tier 2 returns are comparable with that of mutual funds. Another plus here is that tier 2 NPS investors can choose the asset allocation between different asset classes such as equity, corporate debt, government securities, and alternate investments according to their investment horizon and risk tolerance.
• Lower expense ratio – Tier 2 NPS accounts can be compared with mutual funds. They are market-linked and there is a high return potential. Here, NPS tier 2 accounts have the advantage of having a low management fee. You can directly benefit from this as there is no large fee to offset your NPS tier 2 returns. This is possible for NPS since it is a government-sponsored social security scheme.
• Easy to begin – Another NPS tier 2 benefit is its ease of signing up. You can do this online through the official eNPS platform, many online platforms that offer this service, or you can do it offline by visiting an NPS Point of Presence (POP). You need to keep your documentation, including identity and address proofs handy, and the process will be hassle-free.

Conclusion

The benefits of NPS tier 2 accounts are innumerable and it is a potential alternative for investment options like mutual funds. But the important thing is to see whether opening an NPS tier 2 account is in line with your financial goals. For that, you can take the help of a financial expert.