NPS: This facility will reduce investment risk in Tier-2 account and provide more profit opportunities. Other investment options like equity, corporate debt and government debt will also be available in Tier-2 account as before.
Pension fund regulator PFRDA has made important changes in the rules of National Pension Scheme (NPS) for government employees. Now the option of default scheme will be available in the NPS Tier-2 accounts of employees. With this, employees will be able to choose the Pension Fund Manager (PFM) and the range of returns in percentage for their investments. This will reduce investment risk in Tier-2 account and provide more profit opportunities.
The Pension Fund Regulator has recently issued a circular in this regard. According to this, the pension fund manager will invest their funds as per the options chosen by the account holders. The management of the default scheme fund has been entrusted to three pension fund managers. Other investment options like equity, corporate debt and government debt will also be available in Tier-2 account as before.
This will be the benefit: According to market experts, till now the option of default plan was available in NPS Tier-1 account. In this, the employee’s funds are managed by PFRDA on behalf of PFM. This facility was not available in Tier-2. The employee had to manage it himself, which created investment risk.
In the new system, investors who do not have much understanding of financial investments will be able to invest in Tier-2 accounts with the help of the default plan. As their understanding increases over time, they can make changes to their portfolio as per their financial goals and risk appetite.
What is NPS: NPS was started in January 2004 for government employees. In the year 2009, it was also opened to the private sector and common citizens. The responsibility of investing the amount deposited in the scheme is given to the registered pension fund managers by PFRDA. They invest the money in equities, government bonds, bonds and non-government and fixed income schemes.
Difference between Tier-1 and Tier-2 accounts
Two types of accounts can be opened under the NPS scheme. Tier-1 account is for pension, while Tier-2 account is like a voluntary savings account. Tier-2 account can be opened only if there is already a Tier-1 account. In the former account, the contribution of a government employee is on the lines of EPF. But in other accounts there is no limit. Tax exemption is available on Tier-1 account, but this exemption is not available on Tier-2 account. However, government employees can avail tax exemption in Tier-2 account subject to certain conditions.
You can withdraw money anytime: There are many restrictions on withdrawal from Tier-1 account. You can withdraw up to 25% of your contribution after 10 years of account opening for children’s education, marriage, treatment of serious illnesses and construction of first house, but there is no restriction on withdrawal in Tier-2 account. The member can withdraw the entire amount in lump sum at any time.
