The National Pension Scheme, for ease of implementation and differentiation, has been divided into two distinct tiers, 1 and 2. While Tier 1 is the most basic form of NPS Account, Tier 2 is an account that offers greater flexibility in terms of withdrawal rules. Subscribers of NPS Tier 2 Account are free to withdraw their money as and when they want and without paying any penalty fee. The Tier 2 Account is a voluntary contribution scheme and hence the flexibility that is attached to it. The Tier 2 variation of the NPS scheme came to be launched in December 2009 and is a pure retirement savings product like its counterpart - NPS
Features of Tier 2 NPS Account
Here are few significant features of Tier 2 NPS Account which differentiate it from the Tier 1 NPS account.
- Tier 2 NPS Account can be looked at as a liquid version of the NPS Tier 1 Account since there is flexibility to withdraw with the subscriber
- No penalty fee is charged from the subscriber in case he/she withdraws from the NPS account prematurely
- Contributions towards the Tier 2 NPS Account can be made using your permanent retirement account number, PRAN
- Choice of three funds to invest your money in. However, money is partially put in two or more of these funds
- Customers can choose between Equity Funds, Government Securities and Fixed Income Instruments other than Government Securities
- Fund option can be chosen by you else it goes into the auto-mode which invests in funds based on your job profile and age
- Since, Tier 2 NPS Account does not have a locking period for funds invested in the same, there is no tax rebate also that applies. Hence, money invested in NPS Tier 2 Account is not tax deductible under section 80C of the Income Tax Act
- Tier 2 NPS Account is a good savings and investment option for customers who are looking for an instrument which is a medium-term investment tool
- Only 50% of the fund can be invested in equity-fund. This feature dilutes the cost effectiveness of this financial tool as against other means of investment
- There is no limit on the number of times you can withdraw money from the NPS Tier 2 Account
- Nomination facility is available with this account
- Facility of one-way money transfer from Tier 2 to Tier 1 NPS Account
Eligibility Criteria for NPS Tier 2 Account
In order to obtain an NPS Tier 2 Account, following is the eligibility criteria that needs to be fulfilled.
- Any citizen of India, resident or non-resident can join the National Pension System and can obtain the NPS Tier 2 Account
- An active Tier 1 NPS Account is a prerequisite of obtaining a Tier 2 Account
- Individual needs to be 28-60 years of age on the date of submission of NPS form
- Non Resident Indians are also eligible to register for the NPS scheme
Documents required for opening NPS Tier 2 Account
The only criteria required for obtaining NPS Tier 2 Account is an existing Tier 1 Account. Hence, the KYC documents are already submitted. These are -
- Duly filled registration form
- Identity Proof of applicant
- Address Proof of applicant
- Age or Date of Birth proof of the applicant
PRAN Card is the only valid document required for opening an NPS Tier 2 Account.
Taxation process of funds in the NPS Tier 2 Account
Unlike the Tier 1 NPS Account, Tier 2 NPS Account does not qualify for tax rebate under section 80C of the Income Tax Act. This is because NPS Tier 2 Account does not have a locking period for funds which Tier 1 Account has. However, withdrawals are taxed according to the time at which withdrawal is made. So withdrawals within a year of investment attract short-term capital tax while those after a year of depositing earn long-term capital tax. For debt funds it is 10% while for equity funds the tax applicable is nil.
Withdrawal process of the NPS Tier 2 Account
In order to redeem funds from your NPS Tier 2 Account, following is the process that needs to be followed.:
- Duly filled UOS-S12 form for withdrawal
- Redemption amount may vary depending upon the applicable NAV at the time of redemption
- Funds get transferred from trustee’s bank account to subscriber’s account in a matter of maximum 3 working days
- You can use NPS Calculator to know how much pension amount will you get.
Changes in NPS in 2016
The Financial bill for 2016-2017 caused quite a stir with regard to saving schemes. For those holding EPF accounts, the announcement that it will not be completely tax-free caused quite a furore amongst employees, but for those enrolled in the NPS (National Pension scheme), the bill came as a boost. Investors were now in a fix, with the NPS now seeming a better means of saving than the EPF.
Listed below are the changes made to the NPS in the Financial bill of 2016-2017.
- For those wanting to make a lump sum withdrawal from their NPS account, a 40% NPS corpus tax exemption was granted.
- Service tax for the purchase of annuity was waived on the NPS corpus.
- The amount received following a transfer from the account holder to the nominee in case of death is made tax-free as well.
- For those wanting to shift from recognized provident fund to the NPS, a one time tax-free portability is granted.
- For those shifting from a superannuation fund to NPS, again, a one time portability without tax implications is granted.
- The NPS which was taxable on maturity now enjoys being partially tax-exempt at the time of maturity. 40% of the maturity proceeds which has to be annuitized is tax exempted.
- Rs.50,000 deduction under section 80CCD (1b) of the income tax act.
In NPS what are the options available to the investor?
With the Financial bill of 2016-2017 boosting the prospects of the NPS (National Pension Scheme), granting a Rs.50,000 deduction under section 80CCD (1b) of the income-tax Act, investors are now lured into making investments in the NPS. For those looking to invest in the NPS, here are some options and the way to get on with the process.
- An application form for the NPS can be acquired from any Point of Presence-Service Provider (POPSP) or can be downloaded from the NSDL website.
- Applicants require the regular KYC documents for identity and address proof - Aadhar card, PAN card, voter ID, driving license, etc.
- To apply online, applicants need to log on to the NSDL website (enps.nsdl.com) and enter their Aadhaar card number and registered mobile number.
- Once you have done that, an OTP will be generated and sent to your mobile number. Once you have entered the OTP on the website, upload a scanned copy of your signature and your photograph.
- An initial contribution of Rs.500 has to be made either by debit/credit card or online banking.
- After make the initial contribution, a PRAN (Permanent Retirement Account Number) will be allotted to you.
- Next you will receive a welcome kit - PRAN card with IPIN, TPIN, and the details of the NPS scheme.
- For those doing the process offline, the form needs to be filled with one’s photograph and signature. The form should be then posted to the Central Recordkeeping Agency at: Central Recordkeeping Agency (eNPS) NSDL e-Governance Infrastructure Limited, 1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
- Linking Aadhaar card to your registered mobile number will increase the pace of the process.
Asset Classes & Asset Allocation:
In the application for the NPS, one has to mention which pension fund he/she wants to opt for. There are seven pension funds falling under the NPS. Before choosing, one needs to check which fund does well on a consistent basis as a subscriber can shift between funds only once a year. There are two investment options - Active Choice and Auto Choice:
Active choice- Here an investor has the flexibility of choosing to invest either in corporate bonds, equity or gilt funds (government securities). While the investment in Equity is restricted to 50% of the corpus, investments in Corporate bonds and government securities can be 100% of the corpus. The asset mix is divided as follows.
Under the asset mix, there are three classes of funds:
- C Class- C class funds are corporate debt funds that are issued by companies belonging to the corporate circle for the investment in bonds.
- E Class- E Class funds are equity funds that invest in stocks in the F&O segment. Investors in this fund can invest actively, investing at times more than 50% in these funds.
- G Class- G Class funds are typically gilt funds that invest in government securities. Sensitive to interest rate shifts, these funds are typically for long-term investments.
Auto choice- For those investors unsure of which fund to invest in - in the asset mix, the auto choice gives them the diversity they require. The allocated asset fund is relative to the age of the subscriber. For subscribers 35-years of age or below, 50% of the total fund is invested in equities while the rest is invested in gilt and corporate funds. The allocation of such funds though changes with the age of the subscriber. For example, by the time the subscriber is 55-years-old, 80% of his/her corpus is invested in gilt funds are the other 20% in corporate and equity funds.
Can a Non-Government employee also invest in National Pension Scheme (NPS)?
Yes, a non-government employee aged between 18 years-60 years can also subscribe to the National Pension Scheme. The employee can either join with his company or as an individual investor.
- Axis Bank National Pension System
- Bank of Baroda National Pension System
- Bank of Maharashtra New Pension Scheme
- Of India New Pension Scheme
- South Indian Bank New Pension Scheme
- Canara Bank New Pension System
- Corporation Bank New Pension Scheme
- Federal Bank New Pension Scheme
- IDBI New Pension Scheme
- Kotak Mahindra Bank New Pension System
- OBC New Pension System
- NPS Lite Aggregators List
- SBP New Pension Scheme
- Tamilnad Mercantile Bank New Pension System
- Union Bank of India New Pension Scheme
- SBH New Pension Scheme
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