What Is Tier 2 in NPS? Meaning, Features, and Who Should Use It

The National Pension Scheme is highly beneficial for post-retirement savings. You can get started with Tier 1, which is mandatory for retirement savings, but you should also know about Tier 2. 

So, what is Tier 2 in NPS? Let’s explore the features and conditions of this tier to decide which one you should start with.

What Is Tier 2 in NPS?

In essence, Tier 2 in NPS is a voluntary investment account linked to your Tier 1 account, which is mandatory for retirement savings. You can think of it as a flexible savings and investment account that allows you to invest and withdraw money freely.

Who Should Consider Tier 2 in NPS?

Tier 2 may be ideal for you if you:

• Want a flexible investment option
• Already have a Tier 1 account
• Are interested in market-linked returns
• Need easy access to funds

Who Should Avoid Tier 2 in NPS?

Tier 2 may not be suitable for:

• Investors looking for tax deductions
• Short-term savers who want guaranteed returns
• Those without an active Tier 1 account

Key Features of Tier 2 in NPS

Here are some of the key features of having a Tier 2 account in NPS:

1. Optional and Voluntary

A Tier 2 account in NPS is an optional and voluntary investment option. The prerequisite for this is having an active Tier 1 account.

2. Easy Withdrawal

With a Tier 2 account, you can withdraw your funds at any time for any purpose. There is no lock-in period for this account. This liquidity is not offered in a Tier 1 account.

3. Market-Linked Returns

The money you invest in a Tier 2 account in NPS goes into equity (shares), debt (bonds), and government securities. This means that the returns you receive depend on market performance and ups and downs. The longer you keep your investment for, the better the chances of seeing compounding of your investment. 

4. No Tax Benefits

Tier 2 investments aren’t typically eligible for tax benefits or deductions, making it less tax-efficient than a Tier 1 account. The withdrawals you make are also taxable.

5. Same Fund Management as Tier 1

Tier 2 in NPS is managed by the same fund manager who manages your Tier 1 account. This ensures transparency in investments and low costs.

Difference Between Tier 1 and Tier 2 in NPS

Here’s a quick overview of the major differences:

Takeaways

Now that you have the answer to the question, “What is Tier 2 in NPS?” you can confidently decide if this investment option is ideal for you.