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All You Need To Know About NPS Tier 2 And Its 5-Year Returns

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Though NPS is steadily gaining prominence due to its higher returns and tax gains, the types of accounts available in NPS can be daunting when it comes to opening an account for investment. The PFRDA-regulated National Pension System is a pension scheme backed by the government of India. On a voluntary basis, this scheme is open to all Indian residents. By default, everyone who registers with NPS will be assigned a Tier 1 account. Whereas on a voluntary basis one can open an NPS Tier-2 account. Tier I and Tier II NPS accounts are almost identical. Both charge comparable fees and have a similar selection of fund managers and schemes. Similarly, the asset groups in which fund managers invest are also the same. You can withdraw capital from your NPS Tier 2 account whenever you want, with no restrictions. Furthermore, there is no exit load when you withdraw funds from the Tier 2 NPS account. Here you will know all about NPS Tier 2 account and its returns over 5 years.

Key benefits of NPS Tier 2 account

Key benefits of NPS Tier 2 account

Because of the advantages that the account provides, many investors choose to open a Tier 2 NPS Account. Some of the benefits of NPS Tier 2 account are as follows:

  • There are no additional annual maintenance fees to cover.
  • Since the account provides for quick and efficient withdrawals with no exit load, you can use it to cover your immediate crisis and regular expenses.
  • You can transfer funds from your NPS Tier 2 account to your NPS Tier 1 account at any time.
  • In the NPS Tier 2 Account, there is no provision to hold a minimum balance.
  • In the event of your death, you can nominate someone to receive the account proceeds.
  • Tier 2 NPS accounts can be managed in the same way as Tier 1 NPS accounts.
Eligibility required to open an NPS Tier 2 account
 

Eligibility required to open an NPS Tier 2 account

The following eligibility requirements must be met in order to open a Tier 2 NPS account:

  • You must be a resident Indian between the age group of 18 and 65.
  • You must be assigned a Tier I Account and a PRAN number to open a Tier 2 account.
  • For central government employees, the NPS Tier 2 account has a three-year lock-in period. Whereas no lock-in period for private-sector employees.
NPS Tier 2 investment choice

NPS Tier 2 investment choice

When you open a Tier II NPS Account, you have two investment options to choose from:

Active Choice allows you to invest in one of the available investment funds. Auto Choice is a mechanism in which you simply pick your risk tolerance and the scheme allocates your investment to various funds depending on your age and risk attitude. When you get older, your holdings are reallocated so that your equity allocation gradually decreases and your debt exposure gradually increases. This helps you to shield your gain from market fluctuations. Below are the four funds that are eligible for investment:

  • Asset Class A is a kind of asset that invests in alternative instruments.
  • Except for government securities, Asset Class C invests in fixed income instruments.
  • Asset Class E invests in equity
  • Asset Class G invests in government securities.
Taxation on NPS Tier 2

Taxation on NPS Tier 2

For central government employees, NPS Tier 2 qualifies for a tax deduction under Section 80C. The Tier 2 account will also have a three-year lock-in period. For private-sector employees, there is no tax exemption for NPS Tier 2, and earnings in NPS Tier 2 are still taxable as per the tax slab limit. That being said, central government employees will be able to deduct their contribution in NPS Tier 2 under Section 80C.

NPS Tier 2 contribution and withdrawal rules

There is no minimum or maximum annual contribution to the NPS Tier 2 scheme. The initial contribution must be at least Rs 1,000. You can withdraw funds from your NPS Tier 2 account at any time. However, central government employees who participate in NPS Tier 2 to get a tax exemption must contribute for three years. You have the option of selecting your own pension fund manager. After the lock-in period has expired, though, you will be able to choose between the preferred fund managers. The money put into the tax-saving Tier 2 Account will be split between equity limits between 10% to 25%, debt between up to 90%, and cash/money market/liquid MFs up to 5%.

Exit from NPS Tier 2

Exit from NPS Tier 2

Further, deposits into a Tier 2 account would be prohibited if a Tier I account was closed within the lock-in period of a Tier 2 account. Following the end of the lock-in duration, the Tier 2 account will be closed as well. By signing in to your NPS account online at enps.nsdl.org, you can apply to close your Tier 2 account. You can also close your NPS Tier 2 account by completing an account closing form and submitting it to your closest NPS Point-of-Presence.

How to make withdrawal from NPS Tier 2 account?

How to make withdrawal from NPS Tier 2 account?

Exiting/withdrawing from the NPS account entails closing the account and getting the account balance. According to the PFRDA, an exit must be for one of the below-listed reasons:

Standard superannuation: Under this, 40% of the corpus must be used to buy an annuity that offers the subscriber pension benefits and the remaining balance as a lump sum is paid to the subscriber. The subscriber can make a full withdrawal if the account's cumulative amount is less than or equal to Rs.2 lakh on the date of retirement.

In case of death of the subscriber- A limit of 80% of the account balance must be used to buy an annuity that delivers a monthly pension to the spouse, with the remainder paid to the nominee/legal successor as a lump sum. If the account's total amount is less than or equivalent to Rs.2 lakh on the date of the subscriber's demise (i.e. a government sector employee, the nominee/legal successor has the option of making a full withdrawal respectively.

In case of premature withdrawal- A limit of 80% of the corpus must be used to purchase an annuity that pays the subscriber a monthly pension, and the remaining balance must be provided to the subscriber as a lump sum. The subscriber would be able to make a full withdrawal if the cumulative balance in the account is less than or equal to Rs.1 lakh on the date of resignation.

How to open an NPS Tier 2 account online?

How to open an NPS Tier 2 account online?

Follow the below-covered steps to open an NPS Tier 2 account online:

  • Visit National Pension system (eNPS) and click on "Tier II activation"
  • After selecting Tier II activation, a new window will appear, prompting you to enter required specifics such as PRAN, date of birth, and PAN. To receive an OTP on your registered mobile number, click on the 'Verify PRAN' button.
  • Click on 'Continue' after entering the received OTP in the required space.
  • Click on 'Validate Aadhaar' upon entering your bank account details.
  • On the screen, an acknowledgment number will appear. Make a note of the number and then click 'OK.'
  • Select a Pension Fund Manager (PFM) and an investment option, such as Auto or Active, from the drop-down menu and select 'Save and Proceed'.
  • Click on 'Save and Proceed' after entering the nominee's specifics.
  • A scanned copy of the PAN card and a cancelled cheque must be uploaded. Click 'Upload' once the documents are ready.
  • Make a contribution to the NPS Tier-II account. It's worth noting that the account's minimum investment balance is Rs.1,000.
  • The payment will be confirmed with a receipt. Now use your Aadhaar number to e-sign the application upon which you will receive an OTP your Aadhaar-linked mobile number.
  • Authenticate the received OTP by entering it in the required space and click on 'Submit'
  • After successfully e-signing the application, download it, print it, sign it, and send it to NSDL's head office in Mumbai via certified post.
NPS Tier 2 Returns

NPS Tier 2 Returns

The rate of return on NPS Tier 2 is not set. It generates return by investing in equities, corporate bonds, government bonds, and alternative investments, among other asset groups offered by the NPS. The following return rates are as of March 2021, (source: NPS Trust).

Scheme E Tier 2
Pension Fund 1 Year Returns 3 Year returns 5 year returns
Aditya Birla Sun Life Pension Management Ltd. 32.32% 12.61% NA
HDFC Pension Management Co. Ltd. 33.12% 13.66% 16.52%
ICICI Pru. Pension Fund Mgmt Co. Ltd. 33.52% 12.71% 15.16%
Kotak Mahindra Pension Fund Ltd. 31.73% 11.79% 15.02%
LIC Pension Fund Ltd. 33.86% 10.93% 13.70%
SBI Pension Funds Pvt. Ltd 32.54% 12.19% 14.92%
UTI Retirement Solutions Ltd. 35.23% 12.58% 15.32%
Benchmark Return as on 05/03/2021 34.92% 13.63% 15.96%
Scheme C Tier 2
Pension Fund 1 Year Returns 3 Year returns 5 year returns
Aditya Birla Sun Life Pension Management Ltd. 8.13% 9.68% NA
HDFC Pension Management Co. Ltd. 8.61% 10.20% 9.86%
ICICI Pru. Pension Fund Mgmt Co. Ltd. 10.03% 9.81% 9.55%
Kotak Mahindra Pension Fund Ltd. 7.70% 9.51% 9.29%
LIC Pension Fund Ltd. 11.97% 10.71% 9.83%
SBI Pension Funds Pvt. Ltd 8.65% 9.82% 9.42%
UTI Retirement Solutions Ltd. 8.23% 9.59% 9.20%
Benchmark Return as on 05/03/2021 10.89% 10.84% 9.97%
Scheme G Tier 2
Pension Fund 1 Year Returns 3 Year returns 5 year returns
Aditya Birla Sun Life Pension Management Ltd. 5.97% 11.07% NA
HDFC Pension Management Co. Ltd. 6.06% 11.21% 10.04%
ICICI Pru. Pension Fund Mgmt Co. Ltd. 5.78% 10.87% 9.94%
Kotak Mahindra Pension Fund Ltd. 5.83% 10.73% 9.76%
LIC Pension Fund Ltd. 5.40% 13.01% 11.22%
SBI Pension Funds Pvt. Ltd 5.98% 10.90% 9.98%
UTI Retirement Solutions Ltd. 5.76% 10.89% 9.72%
Benchmark Return as on 05/03/2021 4.46% 10.55% 9.08%
Read more about: nps
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