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  • All about Tier 2 National Pension Scheme Account

    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.
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