NPS Tier II Plan: How it can help you accumulate a sizeable pension wealth

]When we think about planning for our retirement, we often look for financial products that offer security, flexibility, and tax benefits, if any. Among these options, the National Pension System (NPS) Tier II account is worth considering. This voluntary savings scheme could be helpful in building a higher retirement corpus as it offers diversification of portfolio, flexibility, and is cost-effective.

What is the NPS Tier II plan?

The NPS Tier II account is an extension of the Tier I NPS account. Using the NPS Tier II account, one can invest in both stocks and bonds. Investors have the flexibility to withdraw funds at any time without having to pay exit penalties. These benefits set it apart from other investment options and the NPS Tier I plan.

Advantages of NPS Tier II plan

Diversification of investment portfolio: One of the primary advantages of NPS Tier II is the diversification of the investment portfolio. One can choose to invest in a range of options, such as stocks, government bonds, and corporate debt. They can also invest in a combination of these assets according to their risk tolerance and financial goals.

Attractive returns: The NPS Tier II plan generally offers more competitive returns compared to traditional savings accounts or fixed deposits. This means your money will grow at a faster rate and you will be able to build a higher retirement corpus over time.

Low account maintenance costs: The costs for maintaining an NPS Tier II account are significantly low, making it a cost-effective pension product. Therefore, a considerable part of your investments would be used in building a sufficient retirement corpus and wouldn't be wasted due to high charges.

Tax benefits of NPS Tier II plan

While NPS Tier II offers numerous other advantages, it's important to consider the tax implications. While the Tier I account provides tax benefits under Sections 80C and 80CCD (1B) of the Income Tax Act, 1961, NPS Tier II account doesn't offer any tax benefits for private sector employees. Tax exemptions can only be availed by central and state government employees that too after a three-year lock-in period. In the case of a Tier I account, 60 percent of the corpus can be withdrawn tax-free at maturity. The remaining 40 percent is taxable under the tax slab the investor falls into.

Flexibility and building a retirement corpus

One of the standout features of NPS Tier II is its flexibility. Investors can transfer funds from Tier II to Tier I at their convenience. If you decide to close your Tier I NPS account, the outstanding balance in Tier II must be withdrawn simultaneously. You cannot prematurely close Tier II when the Tier I account is active.

If your goal is to construct a significant retirement corpus through consistent investments over the long term while also making withdrawals when necessary, the NPS Tier II account can be your go-to investment option in retirement planning. Its diverse investment options, potential for higher returns, and low fees would enable you to have a substantial retirement corpus.