NPS Tier 2 Advantages and Disadvantages

NPS Tier 2 advantages and disadvantages

What is NPS Tier2 Advantages and Disadvantages?

The National Pension Scheme also called as NPS, is the initiative of the Central Government, and protects the interest of the holders via regulations, while offering them higher interest and returns.
NPS is a defined contribution, & voluntary retirement saving plan.
NPS Tier 2 is a voluntary savings facility.
The subscriber will be free to withdraw his/her savings from Tier 2 a/c at any time he/she wishes.
This is a not a kind of retirement account and non government employee can not claim any tax benefits against contributions to this account. Therefore, If you are planning to invest,
here are few of the most important NPS tier2 advantages and disadvantages of the scheme you should know about:

Also Read National Pension System : A Complete Guide for Retirement Plan

NPS Tier2 Advantages

  • Flexibility
    An NPS Tier 2 account holder is free to select any of the registered Pension Fund and Investment Options as like in Tier 1 a/c to get the advantage of professional fund management (PFM) to generate superior returns.
  • Withdrawal
    Funds deposited towards Tier 2 a/c can be withdrawn at any time with no any limitation. However, NPS tier 1 account comes with a cap on withdrawal of up to 60% of the accumulated corpus and also the money can further be withdrawn only on the attainment of retirement.
  • Better Returns
    Pension System is a market-linked product and depending on risk appetite of the subscriber,
    Account holder can decide a appropriate asset allocation pattern (between Equity(E), Corporate Bonds(C), Government Securities(G) and Alternate Investments(A)) within the prescribed limits to derive optimal returns.
  • Tax benefits
    Tax benefits on contributions made to Tier 2 are available for Government employee only,
    subject to lock-in of three years, up-to Rs 1.5 lakhs u/s 80C of the IT Act, 1961.

Also Read Tax Benefits of NPS: Enjoy 1.5L + 50K Extra Benefit | New & Old Regime

  • Low Management cost
    The NPS Tier 2 carries the benefit of being the lowest cost pension product.
    This product commands a low FMC (Forward Markets Commission) of just 0.01%.
  • Ease of access
    Contributing to Tier 2 account is a very easy and seamless process.
    For convenience and ease of access, Account holder can contribute to this accounts using the following options:
    Mobile App
    Nodal Office

Also Read NPS Tier 2 Activation Procedure Online and Offline | Is NPS Tier 2 Taxable?

NPS Tier 2 Disadvantages

  • Taxability
    You can withdraw your amount just like in bank FDs. However, there is a catch.
    Unalike the Bank’s FD, where only the interest is taxed, here the complete fund withdrawn is taxable.
    Tax benefits
    A major reason why people ignore Tier 2 is the tax benefits.
    Non government employees can’t enjoy the tax benefit under section 80C.
    Mutual funds ELSS (Equity Linked Saving Scheme) helps any investors to save taxes u/s 80C of the IT Act 1961.
    ELSS investments are subject to a lock-in period of 3 years & qualify for a tax deduction of up to Rs 1.5 lakh per annum.

Also Read Atal Pension Yojana SBI : Eligibility | Features | Online & Offline | Chart

  • Limitations
    One more reason for limited interest in Tier 2 is because it is bound by some of the other limitations applicable to NPS Tier 1 accounts.
    For example, limited number of fund managers to select from.
    Investors can not choose one fund manager for debt and another for equity.

Also Read NPS Tier 2 vs Tier 1