Personal Finance

The ABC of NPS Tier-II accounts

Dhuraivel Gunasekaran | Updated on June 02, 2019 Published on June 02, 2019

Subscribers can invest and redeem Tier-II accounts at any time

The all-citizen model under the National Pension System (NPS) has now completed 10 years.

Thanks to reforms in product structure and taxation norms, NPS has become an attractive retirement savings vehicle for investors.

The total assets managed under Tier-I accounts in NPS has now reached ₹20,000 crore. However, the Tier-II account — an optional account for NPS subscribers — has not yet caught the fancy of investors.

As per the latest data, only around ₹900 crore is available in the Tier-II accounts.

The then Finance Minister made the Tier-II account more attractive in December 2018 by announcing that it would be eligible for tax deduction under Section 80C of the I-T Act up to ₹1.5 lakh in a financial year.

He also mentioned that the account would have a lock-in of three years.

These changes have not yet been officially notified and the Tier-II NPS account continues to be a flexible investment with no lock-in.

Type of accounts

Subscribers registered under NPS will, by default, have a Tier-I account where they can park their regular contribution and save for retirement. The Tier-II accounts are optional and offered by the NPS pension managers.

Tier-II accounts are more or less similar to mutual fund accounts and savings bank accounts, wherein the subscribers are allowed to invest and redeem at any time.


Any citizen of India, between 18 and 65 years of age, having active NPS Tier-I account can open the Tier-II account.

With the Tier I account being open for government employees since April this year, they also have the option to open the Tier-II account.

According to an industry source, currently ₹250 is required to open the Tier-II account. Once opened, the minimum contribution is ₹1,000. There is no minimum balance requirement.

The Tier-II account can be opened online through the portals of the central record keeping agencies ‘’ (of NDSL) and ‘’ (of Karvy). It can also be opened offline by visiting the NPS Point-of-Presence (PoP) at banks and post-offices across the country.

Currently there are eight pension fund managers in the NPS — ICICI Pru, UTI, SBI, Reliance, LIC, HDFC and Aditya Birla Sun Life. The subscriber can hold the Tier-I and Tier-II accounts either with the same pension fund manager or with different managers.

Investment options

Both the Tier I and Tier II accounts today offer three fund options —Scheme E (primarily equities), Scheme G (government securities) and Scheme C (corporate debentures). For Tier-I account holders, there is also Scheme A (alternate investments). Pension fund managers have a separate portfolio for each fund option for Tier-I and Tier-II accounts. Subscribers are allowed to allocate up to 75 per cent of their investment amounts in Scheme E; in Schemes C and G, one can allocate up to 100 per cent of the contribution.

Allocation strategy

Subscribers can choose between active and auto choices based on their preferred asset-allocation pattern. Under the active choice, allocation to equity funds is restricted to 75 per cent till the age of 50 and reduced by 2.5 percentage points every year. Subscribers aged 60 and above can allocate up to 50 per cent to equity funds.

Investors without sufficient knowledge or time to actively monitor their portfolios can take the auto choice and opt for any one of the three pre-defined life cycle funds — Aggressive fund, Moderate fund and Conservative fund.


Investors with a medium to high-risk profile and wanting to hold for at least three years can consider allocating higher portion to equities. Conservative investors with a two to three-year time-frame can invest in Schemes C and G. However, Tier-II accounts may not be suitable for parking short-term money, as there are no short-term fund options.

As per the current regulations , subscribers can change the existing pension fund once in a financial year. A change in the investment option (active or auto choice) as well as the asset-allocation ratio (allocation among Schemes E, C, G and A) is allowed twice in a financial year. However, unlimited switches are allowed to transfer from Tier-I to Tier-II fund options.

The proceeds under Tier-II accounts are taxed as per the investor’s tax slab.

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Published on June 02, 2019
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