Mutual Funds

Is NPS Tier-II account a good option?

Satya Sontanam BL Research Bureau | Updated on August 14, 2021

Here’s taking a look at the features of this oft overlooked low-cost savings option

If you are looking for a no-frills and easy-to-operate savings option under the NPS umbrella, consider the Tier-II account. Mind you, the Tier-II account is not a retirement savings scheme. It is, in fact, a savings facility that can be opened once you have a Tier-I account. There are no withdrawal restrictions in this optional investment account. Unlike the Tier-I account that requires a minimum contribution per annum, there is no such requirement for the Tier- II account. However, the subscriber has to make a minimum initial contribution of ₹1,000 for Tier-II (₹500 for Tier-I) at the time of registration. There is no limitation on the maximum amount you can invest in both the accounts.

The Tier-II account works just like the NPS Tier-I account in terms of investment options and can be opened by all citizens in the age group of 18 to 65 years.

Separate investment account

Subscribers have four fund options to choose from —Scheme E (primarily equities), Scheme G (government securities), Scheme C (corporate debentures), and Scheme A (alternative investment securities). You can either go for ‘active choice’ where you can fix the investment allocation between the asset classes subject to certain limits, or ‘auto choice’ where the exposure to equity and corporate debt decreases as the subscriber’s age increases.

The subscriber may change the NPS investment option from auto to active or vice-versa twice a year. One can also change the asset allocation among Schemes E, C, G and A, twice a year.

There are currently seven pension fund managers — HDFC, ICICI, Kotak, LIC, SBI, UTI and Aditya Birla Sun Life - that one can choose from. There’s also an option to switch from one fund manager to another, once a year. The subscriber can select different pension fund and investment option for NPS Tier-II account. This need not be the same as Tier-I account. One can also provide a separate nomination for the balance in the Tier- II account.

As mentioned earlier, the Tier-II account does not have any withdrawal restrictions and one can also transfer the funds from this account to the Tier-I account (only one-way). In case of closure of NPS Tier-I (pension account), the balance outstanding in NPS Tier-II account will also get transferred to the bank account.

Low-cost, sans tax benefit

One of the major benefits of the NPS Tier-II account is that this doesn’t have separate annual maintenance charges, since it is just an add-on account to the Tier-I account. Further, there is no exit load applicable on withdrawing the amount from the Tier- II account.

The only charges applicable are fund management (up to 0.09 per cent) and transaction charges, which would be a minimum of ₹4 to ₹20 per transaction depending on the POP (point of presence) or the CRA (Central Record Keeping Agency) selected.

With the investor-friendly features of no lock-in and the flexibility to withdraw anytime, the product is not eligible for the tax benefits that the Tier-I account enjoys — deduction of ₹1.5 lakh under section 80 C of IT Act and additional ₹50,000 per annum (section 80 CCD 1(B)) on contributions and the exemption available on earnings and withdrawal.

However, a government employee alone can claim tax benefits of ₹1.5 lakh under Section 80C with a lock-in period of three years for a Tier-II account.

The taxability of appreciation in the investment is a grey area. Archit Gupta, Founder and CEO, Clear, says appreciation in the value of an investment will be taxable under the head ‘Capital Gains’. “The gains on all the NPS schemes including Scheme E, C and G will be taxable as long-term capital gains at 20 per cent after indexation if the holding period is more than 36 months whereas, if the redemption is within 36 months, the gains will be added to other income and taxable as short-term capital gains at applicable slab rates,” explains Gupta.

Published on August 14, 2021

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