Individuals looking for higher returns than fixed deposits can park money in National Pension System (NPS) Tier 2 account as it is linked to market instruments. Unlike Tier 1, it has no lock-in period, which makes it a flexible option for short- and medium-term needs.
The NPS Tier 2 account is a voluntary savings account under NPS, where one can invest and withdraw anytime without restrictions. One needs to have a Tier 1 account to have a Tier 2 account.
Over a three-year period, the equity returns of 10 pension funds in NPS Tier 2 range between 14.6% to 18%. For government securities the returns are 6.2% to 6.6%. And for corporate debt, between 8.3% to 8.8%, higher than SBI’s fixed deposit rate of 6.45% for two to less than three-year tenures.
Parking surplus funds
Combined with some of the lowest fund management charges in the industry, Tier 2 serves as an efficient, cost-effective vehicle to park surplus funds, providing better return prospects than traditional savings avenues while keeping money accessible whenever required.
Rahul Bhagat, CEO, DSP Pension Fund, says parking money in an NPS Tier 2 account can be highly beneficial for investors seeking both liquidity and better return potential. “It offers access to the same professionally managed, market-linked portfolios as Tier 1, with the ability to allocate more towards equities for higher growth,” he adds.
Flexibility in asset allocation
Investors can choose between active choice or auto choice, where the allocation shifts with age. Investors have the option to allocate up to 100% in any of the three asset classes — equity, corporate bonds, or government securities, allowing them to create a mix that balances growth potential, stability, and safety. The flexibility in asset allocation helps investors build a portfolio that matches their financial goals and risk profile, which can be highly rewarding in the long run.
Kurian Jose, CEO, Tata Pension Fund, says this flexibility allows alignment with one’s risk appetite and financial goals—for example, a higher equity allocation for growth in early years and safer debt allocation as retirement nears. “It helps manage volatility and risk-adjusted returns better than a rigid savings product,” he says.
No tax benefits in Tier2
Unlike Tier 1, there is no tax benefit for private sector employees investing in Tier 2. Withdrawals are also fully taxable as per the individual’s income tax slab. However, only Central government employees can claim a deduction (up to Rs 1.5 lakh under Section 80C), but with a three-year lock-in in the old tax regime.