What is Tier 2 NPS?

Tier 2 NPS is a voluntary savings account that offers flexibility in withdrawals, unlike the Tier 1 account. It is an additional investment option for NPS subscribers who want liquidity while still benefiting from market-linked returns.

Like what you're reading?

Get our latest, straight to your inbox.

Subscribe to our newsletter

Features of Tier 2 NPS

1. Voluntary Contribution: Unlike Tier 1, there is no mandatory contribution requirement.
2. No Lock-in Period: Investors can withdraw funds anytime without restrictions.
3. Taxation:
   • No tax benefits under Section 80C (except for government employees who get tax benefits under Section 80C with a 3-year lock-in).
   • Gains are taxed as per capital gains rules, similar to mutual funds.
4. Low-cost Investment Option: Lower fund management fees compared to mutual funds.
5. No Mandatory Annuity Purchase: Unlike Tier 1, investors are not required to convert a portion of the corpus into an annuity.

Investment Allocation in Tier 2

• Equity (E): Can invest up to 75% (growth potential but riskier).
• Corporate Bonds (C): Moderate risk and returns.
• Government Bonds (G): Low risk, stable returns.
• Alternative Assets (A): Limited exposure (less than 5%).

Who Should Invest in Tier 2 NPS?

• Investors looking for flexibility in withdrawals.
• Those seeking an alternative to mutual funds with lower fees.
• Individuals who want to supplement their retirement savings without restrictions.

Advantages of Tier 2 NPS

1. High Liquidity: Withdraw anytime, unlike Tier 1.
2. Lower Fund Management Charges: Cost-effective compared to mutual funds.
3. Market-Linked Growth: Offers higher returns compared to fixed-income products.

Disadvantages of Tier 2 NPS

1. No Tax Benefits: Except for government employees with a lock-in.
2. Market Volatility: Returns are not fixed or guaranteed.
3. Not an Ideal Retirement Corpus: As withdrawals are flexible, disciplined retirement savings may be difficult.

Conclusion

Tier 2 NPS is an excellent flexible investment option for those who want market-linked returns with liquidity. However, it does not offer tax benefits like Tier 1, making it more suitable for those looking for a low-cost alternative to mutual funds rather than a dedicated retirement savings tool.