NPS Tier II Account — Benefits, Withdrawal Rules, Taxation & Strategy
Updated 2025 — Learn everything about the National Pension Scheme (NPS) Tier II account: features, who should use it, comparison with Tier I, taxation rules, and investment strategy.
The National Pension Scheme (NPS) is one of India’s flagship retirement-oriented investment schemes regulated by the Pension Fund Regulatory and Development Authority (PFRDA). While most investors are familiar with the Tier I account (the mandatory pension account with tax benefits), fewer are aware of the Tier II account. This article explains in detail how NPS Tier II works, its pros and cons, and whether it makes sense for your financial plan.
What is NPS Tier II?
An NPS Tier II account is a voluntary savings account linked to your existing NPS Tier I account. You cannot open a Tier II account without an active Tier I account. Unlike Tier I, Tier II has:
- No mandatory lock-in period (except for government employees who avail tax benefits).
- Withdrawals allowed anytime, like a mutual fund.
- Low-cost investment structure (fund management charges are among the lowest globally).
Key features of NPS Tier II
- Eligibility: Any Indian citizen with an active Tier I account can open Tier II.
- Minimum contribution: ₹1,000 initial contribution; ₹250 per transaction thereafter.
- Flexibility: No restriction on number of contributions or withdrawals.
- Investment choices: Equity (E), Corporate Bonds (C), Government Securities (G), or Auto choice.
- Withdrawal: Full withdrawal allowed at any time — credited to bank account.
Tax benefits on NPS Tier II
Here’s where Tier II differs sharply from Tier I:
- General investors: No tax deduction is available under Section 80C or 80CCD(1B) for Tier II contributions.
- Central Government employees: Contributions to Tier II (with a 3-year lock-in) qualify for 80C deduction up to ₹1.5 lakh.
- Returns from Tier II are taxable just like debt/equity mutual funds depending on allocation.
Comparison — Tier I vs Tier II
| Aspect | Tier I | Tier II |
|---|---|---|
| Purpose | Pension/retirement account (mandatory) | Optional voluntary savings |
| Lock-in | Till age 60 (partial withdrawal rules apply) | No lock-in (except govt employees tax benefit case) |
| Tax deduction | Available under 80CCD(1), 80CCD(1B), 80CCD(2) | Not available (except govt employees with 3-year lock) |
| Withdrawal | Restricted, annuity purchase required | Anytime withdrawal allowed |
| Who should use | Everyone planning retirement | Investors wanting liquidity + low-cost exposure |
When should you consider Tier II?
Tier II may be suitable if:
- You already max out your Section 80C and NPS Tier I contributions, but want additional low-cost investment.
- You want liquidity (unlike Tier I which locks till retirement).
- You are comfortable with the limited tax advantage but value low charges and transparent structure.
Pros of Tier II
- Ultra-low cost compared to mutual funds.
- Diversification across equity, corporate bonds, and government securities.
- Flexibility of withdrawal.
Cons of Tier II
- No general tax benefit.
- Returns are taxable like mutual funds.
- Liquidity may tempt investors to withdraw prematurely.
Frequently Asked Questions (FAQs)
1. Can I open Tier II without Tier I?
No, Tier I is mandatory. Only after having a PRAN (Permanent Retirement Account Number) from Tier I can you open Tier II.
2. Is there a maximum contribution limit in Tier II?
No, there is no maximum cap. You can invest as much as you want.
3. Are Tier II returns market-linked?
Yes, just like Tier I, returns depend on fund allocation to equity, debt, and government securities. NAVs fluctuate daily.
4. Should I use Tier II instead of mutual funds?
Not necessarily. While Tier II has lower costs, mutual funds offer greater tax efficiency (LTCG rules) and broader fund choices. Consider Tier II if you value the NPS ecosystem and lower costs, but for many retail investors, equity mutual funds may still be more practical.
5. How do I withdraw from Tier II?
Login to your CRA (Central Recordkeeping Agency) portal (eNPS/NSDL/KFintech). Withdrawals are processed and credited to your registered bank account, usually within 2–3 working days.
Final thoughts
NPS Tier II is best seen as a supplementary, flexible investment option within the NPS framework. It works well for those who already use NPS Tier I and want a low-cost extension for voluntary savings. However, since it lacks broad tax benefits, it may not replace mutual funds or other tax-saving schemes for most investors. Use it if you prefer the NPS platform’s simplicity and low charges, but always balance with other instruments to optimize taxes and returns.