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What is an NPS Tier 2 Account?

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Synopsis:

Anyone who has a Tier I account with the National Pension Scheme (NPS) can also open a Tier II account, which has many benefits. Read more..For example, you can withdraw money anytime from your Tier II account without paying any exit load. Besides, you can choose a different investment pattern for a Tier II account than a Tier I account. That said, withdrawals from a Tier II account are taxable based on your income tax slab. Still, if you want the benefits of NPS with the flexibility of withdrawing your money anytime, you can consider opening an NPS Tier II account. Read less


When you open a National Pension Scheme account, Tier I is the default account you open. However, you can also open a Tier II account, which is voluntary, along with a Tier I account. In other words, it is up to you to open a Tier II account or not.

The best thing about a NPS Tier 2 account is that it does not have a lock-in period. Hence, you can withdraw your money whenever you want. Besides, you do not have to pay an exit load when you withdraw money from your Tier II account.

To open a Tier II account, you have to make a minimum contribution of ₹ 1,000. But, you do not have to make mandatory annual contributions to this account. By contributing to a Tier 2 account, you can make additional contributions to your NPS account, which can help you create a sizeable corpus for your retirement. Having explained what is a Tier 2 account in NPS, let us discuss this topic further.

Key Benefits of an NPS Tier 2 Account

The main benefits of an NPS Tier 2 account are as follows:

  • This account allows you to withdraw money whenever you wish. Hence, it is a great way to save your funds for your daily needs.

  • No exit load is payable on withdrawals from this account.

  • You do not have to maintain a minimum balance in an NPS Tier 2 account.

  • You do not have to pay extra annual maintenance charges.

  • You have the flexibility to move funds anytime from your Tier 2 account to your Tier 1 account, which is your primary account with NPS.

  • For your Tier 2 account, NPS allows you to choose a different investment pattern than your Tier 1 account.

Now that you have learnt what is a Tier 2 account in NPS and its benefits, let us discuss its eligibility.

 Additional Read: National Pension Scheme Tier I Account

Who is eligible to open an NPS Tier II account?

To open a Tier II NPS account, you need to meet the following criteria:

  • You must be a resident Indian between 18 and 70 years of age
  • You should already have a Tier I account and a valid PRAN number
  • A minimum deposit of ₹1,000 is required to open the account
  • After opening, you must deposit at least ₹250 every financial year to keep the account active

Without meeting these conditions, a Tier II account cannot be opened or maintained.

How to Open an NPS Tier 2 Account?

A Tier 2 account can be opened easily by using the offline or the online route. If you want to open it offline, you have to visit your bank’s branch and make an application. However, if you want to open it online, you need to follow the process outlined below:

a) Go to electronic National Pension system (eNPS). Select the “Tier II activation” tab.

b) A window will open. It will ask you for details like your PRAN, PAN, and Date of Birth. You need to click on “Verify PRAN.” Once you do that, you will get a one-time-password (OTP) on your registered mobile number.

c) Then, you should enter the OTP and click on “Continue.”

d) Provide your bank account details and then click on “Validate Aadhaar.”

e) Your computer’s screen will show you an acknowledgment number. Make a note of it and click on “Ok.”

f) Now, you have to select a Pension Fund Manager (PFM) and mention your preferred investment option, like, Auto or Active.

g) Then, you need to provide the nominee’s details.

h) Scan a copy of your PAN card and cancelled cheque and upload them.

i) Now, you have to make a minimum contribution of ₹ 1,000 towards your Tier II account.

j) You will get a receipt for your contribution.

k) You need to e-sign the application with the help of your Aadhar number. After that, you will get an OTP on your registered mobile number, which you should enter and submit.

l) After you e-sign the application, you should download and print it. You need to sign the printed form and send it to the head office of the NSDL in Mumbai through a registered post.

Investment into NPS Tier II Account

Investments into a Tier II NPS account works like a regular Tier I account. You get to choose how your money is managed in the Tier II account. There are two available strategies you can choose from:

  1. In Active Choice, you can decide how much to invest in each fund. You can select from different asset classes depending on your preference.
  2. In Auto Choice, you pick a risk level. Based on your age, the scheme automatically adjusts your investment across asset classes. As you grow older, the exposure to equity goes down, and debt allocation increases to manage risk more conservatively.

There are four asset classes you can invest in:

  • Asset Class A – for alternate instruments
  • Asset Class C – for fixed income instruments (excluding government securities)
  • Asset Class E – for equity investments
  • Asset Class G – for government securities

Withdrawals and Closure of Tier 2 NPS Account

Tier II NPS accounts allow you to withdraw funds freely, without any lock-in period. However, there are some conditions.

If your Tier I account is still active, the Tier II account cannot be closed prematurely. Once the Tier I account is closed, your Tier II account will also be closed. The remaining balance will be paid to you in a lump sum.

Tax implications on NPS Tier 2 Account

Deposits made into a Tier II account are not eligible for tax deductions. They are treated as part of your taxable income and taxed according to your income tax slab.

However, if you're a Central Government employee, recent changes now allow a tax deduction for deposits made into a specific Tier II account. Here's how it works:

  • You can claim a deduction of up to ₹1.5 lakh under Section 80C
  • This benefit is available only to Central Government employees
  • The account must have a lock-in period of 3 years; no withdrawals are allowed during this time

This tax-saving Tier II account (open to Central Government employees) has a fixed asset allocation:

  • 10%–25% in equity
  • Up to 90% in debt instruments
  • Up to 5% in money market instruments

Moreover, you cannot choose how funds are allocated in this account. Also, if your Tier I account is closed during the 3-year lock-in period, you cannot make any new investments into this Tier II account. After the lock-in ends, the Tier II account will also close.

Final Takeaway

If you already have a Tier I account with NPS, it makes sense to open a Tier II account as well, provided you genuinely need it. The biggest benefit of a Tier 2 account is that it lets you withdraw money whenever you want. That said, bear in mind that withdrawals are taxable based on your slab. Hence, you should carefully analyse the pros and cons of a Tier 2 account before opening it.

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Frequently Asked Questions

Is NPS Tier 2 a good investment option?

Answer Field

It depends upon your objective. If you want an option that provides you with the benefits of NPS but also allows you to withdraw your funds anytime, then NPS Tier II is a good investment option.

Is NPS Tier 2 better than FD?

Answer Field

NPS Tier 2 offers more flexibility than a fixed deposit (FD), as you can withdraw your money anytime from the former which is not possible from the latter. NPS Tier 2 allows you to invest in assets like equities, which are high-risk but can also offer high returns. However, investments in FD fetch you a fixed rate of interest. So, FDs are relatively less risky than an NPS Tier 2 investment.

Is NPS Tier 2 withdrawal taxable?

Answer Field

Yes, NPS Tier 2 withdrawals are taxable based on your income tax slab. So, you should be careful of your tax obligation while withdrawing money.

Is NPS Tier 2 better than PPF?

Answer Field

It depends upon your investment objective and risk tolerance level. An NPS Tier 2 account allows you to invest in equities, government bonds, and corporate bonds. However, PPF is a fixed interest investment. So, PPF is less risky than NPS. But, NPS Tier 2 allows you to withdraw your money anytime. However, PPF comes with a lock-in period of 15 years.

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The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.

Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.

Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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