Tier II account
The voluntary NPS investment account open only to holders of an active Tier I account, with no withdrawal restrictions, no mandatory annuity and, except for NPS-TTS, no tax benefit.
In plain language
Every NPS subscriber has a Tier I account: the retirement account, locked until exit and partly converted into an annuity. The Tier II account is its unlocked sibling — a voluntary investment account using the same pension funds and schemes, from which money can be withdrawn at any time for any use.
The trade is straightforward. Tier I gets the tax deductions and the restrictions. Tier II gets neither: full liquidity, and (with one exception for Central Government employees) no tax benefit.
You cannot have a Tier II account without an active Tier I account.
How it works
Opening. No separate KYC if KYC was done for Tier I and a PRAN card issued. No charge to open. It may be opened with Tier I or later. All Citizen subscribers must activate it through the same PoP as Tier I; Government-model subscribers may use any PoP.
Choices. A different pension fund and investment option from Tier I is allowed. Nominations are separate — Tier I nominations do not carry over. Tier II schemes can invest up to 100 per cent in equity, whereas Tier I equity is capped at 75 per cent.
Tier I versus Tier II (Chapter 4, section 4.1.3):
| Tier I | Tier II | |
|---|---|---|
| Account | Mandatory | Optional |
| Withdrawal | Conditional and restricted | Yes |
| Minimum at opening | Rs 500 | Rs 1,000 |
| Minimum subsequent contribution | Rs 500 | Rs 250 |
| Minimum per year | Rs 1,000, at least one contribution | — |
| Tax benefits | Yes | No (except NPS-TTS) |
| Contributions from | Subscriber and employer | Subscriber only |
Transfers are one-way. Tier II to Tier I is allowed (form UOS-S13, through the PoP to the CRA). Tier I to Tier II is not. Third-party contributions are barred for both tiers; a declaration of own funds is taken on every Tier II contribution.
A worked example
Arjun, 38, an All Citizen subscriber, receives a Rs 3,00,000 bonus. He already contributes to Tier I.
He opens Tier II through the same PoP — no opening charge, no fresh KYC — and invests the bonus with 100 per cent in equity, something Tier I would not allow above 75 per cent.
Year 2. His daughter's college admission needs Rs 1,20,000. He withdraws it from Tier II. No exit rules, no annuity, no reason required.
Year 4. He decides the remaining Rs 2,00,000 (illustrative value) should become retirement money:
| Move | Allowed? |
|---|---|
| Tier II → Tier I, Rs 2,00,000 | Yes |
| Later, Tier I → Tier II to get it back | No |
Once in Tier I the money is bound by the exit regulations, including the mandatory annuity. The transfer is a one-way door.
Tax. None of Arjun's Rs 3 lakh earned a deduction. Had he been a Central Government employee investing in the NPS Tier-II Tax Saver Scheme, it would have — subject to a three-year lock-in.
Why NISM asks about it
Chapter 4, section 4.1.3 (Types of NPS Account), defines both tiers, gives the comparison table and the Tier II rules on KYC, PoP, pension fund choice and nominations. Section 4.1.2 notes who bears Tier II charges under each model, section 4.2.2 excludes the Alternative Investments asset class from Tier II, and section 4.4.2 describes the Tier II to Tier I transfer. Expect questions on the Rs 1,000 / Rs 250 minimums, one-way transfers, separate nominations and the absence of a tax benefit.
Common exam traps
- Transfers run Tier II → Tier I only. Tier I → Tier II is not permitted.
- Nominations do not carry over from Tier I.
- Rs 1,000 to open, Rs 250 thereafter for Tier II; Rs 500 and Rs 500 for Tier I.
- No tax benefit — except the NPS-TTS for Central Government subscribers.
- Same PoP rule is for All Citizen subscribers; Government-model subscribers may use any PoP.
- The workbook is internally inconsistent on investment options. Section 4.1.3 says Tier II has "the same schemes and fund manager options" as Tier I and can go up to 100 per cent equity; section 4.2.2 says Asset Class A (Alternative Investments) is not available for Tier II contributions. Tier II differs from Tier I on both points.
- "No charges for opening" is not "no charges at all": Chapter 4 says Tier II charges are borne by the subscriber.
Check yourself
1.Kavita, an All Citizen model subscriber registered through PoP 'A', wants to activate a Tier II account. Which statement is CORRECT?
- a)She may activate Tier II through any PoP of her choice, and must complete fresh KYC for it
- b)She must pay an account-opening charge for Tier II, and her Tier I nominations will automatically apply to it
- c)She must activate Tier II through PoP 'A'; no separate KYC is needed as she already holds a PRAN card, there is no opening charge, and she must make fresh nominations because Tier I nominations do not apply to Tier II
- d)She cannot open Tier II until her Tier I account has completed three years
Show the answer
Answer: (c) She must activate Tier II through PoP 'A'; no separate KYC is needed as she already holds a PRAN card, there is no opening charge, and she must make fresh nominations because Tier I nominations do not apply to Tier II
Four Tier II rules apply to Kavita:
- Which PoP: for NPS subscribers under the All Citizens Model, the PoP through which the Tier II account is activated should be the same as the one through which the Tier I account was registered.
- KYC: no separate KYC formalities need to be complied with for the Tier II account for subscribers who have already complied with the same at the time of opening the Tier I account and have been issued a PRAN card.
- Cost: there are no charges for opening a Tier II account.
- Nominations: the nominations made in the Tier I account of the subscriber will not be applicable to the Tier II account.
So option C is correct.
Why the others are wrong:
- Option A describes the Government-model rule. Subscribers who have registered on the NPS under the government model may activate the Tier II account through any PoP. It also wrongly requires fresh KYC.
- Option B gets both the charge and the nominations wrong.
- Option D invents a waiting period. Tier II may be opened along with the Tier I account or subsequently at any time provided the subscriber has an active Tier I account. The three-year period belongs to partial withdrawal from Tier I.
2.Which statement about transfers between Tier I and Tier II accounts is correct?
- a)Funds may be transferred freely in both directions
- b)Funds may be transferred from Tier II to Tier I, but transfer from Tier I to Tier II is not permitted
- c)Funds may be transferred from Tier I to Tier II, but not the other way
- d)No transfer is permitted between the two accounts
Show the answer
Answer: (b) Funds may be transferred from Tier II to Tier I, but transfer from Tier I to Tier II is not permitted
"The subscriber can even TRANSFER FUNDS FROM THE TIER II TO TIER I ACCOUNT. TRANSFER FROM THE TIER I ACCOUNT TO THE TIER II ACCOUNT IS, HOWEVER, NOT PERMITTED." The request is made in form UOS-S13 through the PoP/PoP-SP.
The reason follows from what each account is. Tier I is the retirement account with restricted withdrawal and a compulsory annuity on exit; Tier II is a voluntary investment account withdrawable any time for any purpose. Allowing Tier I → Tier II would let a subscriber wash away every retirement restriction in one transfer.
So money may walk into the disciplined account, never back out. A related rule works the same way: where a subscriber exiting Tier I also has a Tier II account, the TIER II BALANCE IS ALSO REDEEMED along with Tier I.
3.Anil did not contribute the minimum amount to his NPS Tier I account during the financial year. What are the consequences?
- a)His account can be frozen and becomes dormant; if Tier I is frozen his Tier II is frozen too; he must make a minimum contribution of Rs 500 to unfreeze it, and a dormant account is closed when its value falls to zero
- b)Only his Tier II account is frozen; Tier I continues normally
- c)His entire corpus is paid out to him and the PRAN is cancelled
- d)Nothing happens, because the NPS has no minimum annual contribution
Show the answer
Answer: (a) His account can be frozen and becomes dormant; if Tier I is frozen his Tier II is frozen too; he must make a minimum contribution of Rs 500 to unfreeze it, and a dormant account is closed when its value falls to zero
Tier I requires at least one contribution made to the Tier I account in a financial year. If the subscriber does not contribute at least Rs.1000 per year to the NPS account, then the account would become dormant. A dormant account will be closed when the account value falls to zero.
On freezing: the subscribers account can be frozen if the minimum contribution requirement in the year is not met. If the Tier I account of a PRAN is frozen, the Tier II account will also be frozen. To unfreeze the account, the subscriber is required to make a minimum contribution of Rs.500.
So option A is correct.
Why the others are wrong:
- Option B reverses the link. Freezing starts with Tier I and carries over to Tier II. Tier II has no annual minimum of its own.
- Option C: a frozen or dormant account is not paid out. The corpus stays invested, and a dormant account closes only when the account value falls to zero.
- Option D: there is a minimum. While there is a minimum limit on the contribution (Rs.1000 per annum), there is no upper limit.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Active ChoiceThe NPS investment option under which the subscriber sets the split across the E, C, G and A asset classes personally, subject to a 75 percent cap on equity and 5 percent on alternatives.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Permanent Retirement Account NumberThe unique account number issued when an NPS account is opened; it stays with the subscriber for life and across employers, which is what makes NPS portable in a way EPF historically was not.
- NPS Tier-II Tax Saver SchemeA Tier II NPS option for Central Government subscribers with an active Tier I account whose contributions qualify for the old-regime deduction, subject to a three-year lock-in per contribution.
- Tier I accountThe mandatory NPS retirement account: restricted withdrawals, a 75% equity cap, tax benefits and compulsory annuity purchase with part of the corpus on exit.
- Auto ChoiceThe NPS investment option in which your contributions go into a lifecycle fund that automatically cuts equity and raises corporate bonds and government securities as you grow older.
- All Citizen ModelThe voluntary NPS model for Indian citizens, resident or non-resident, and OCI cardholders, in which the subscriber alone contributes, makes the choices and bears the Tier I and Tier II charges.
- Corporate modelThe NPS model that lets companies and other registered entities offer their employees a pension benefit through the NPS architecture, funded by the employer, the employee, or both.
- D-RemitA facility that lets NPS subscribers make voluntary contributions straight from their bank account into their NPS account, via a dedicated virtual ID, with same-day investment if received before the cut-off.
- Dormant accountAn NPS account that goes dormant when the subscriber fails to contribute at least Rs 1,000 in a year, and is closed outright once its value falls to zero.
- Protection from attachmentThe rule that no accumulated pension wealth in an NPS Tier-I account can be seized, attached or sequestered by any court at a creditor's instance, and that any pledge or assignment of it is null and void.
- Normal exitExit from the NPS on reaching the scheme's qualifying event — 60, or 15 years of subscription under the All Citizen Model — with a larger lump-sum share than a premature exit and a smaller compulsory annuity.
- Premature exitExit from the NPS before the qualifying event — resignation, or before 60 — where only up to 20 percent comes out as a lump sum and at least 80 percent must buy an annuity.