What's the case against NPS tier 2?

[raulcraven]

Many people don't like NPS tier 1 due to the long lockin but I've hardly seen anyone recommend NPS tier 2, despite its numerous benefits

• It has all equity, corporate debt and govt bonds in one fund
• Lowest expense ratio 0.01%
• Same day nav feature
• Auto adjustment with time, the portion of debt and equity changes overtime
• you can pay via Upi, netbanking, debit and credit card
• Easy to choose and change % allocation of debt and equity

The app is decent, Ive just stopped my other MF and just used this

Apart from this I've put some % in nasdaq 100 ETF

what are your thoughts on this?

 

[gitanjali786]

@raulcraven I am heavily invested in NPS Tier 1 and also have started investments in NPS T2 in the last one year. I agree with all the positives the OP mentions for NPS T2.

Apart from the lack of general public awareness about NPS T2; the main concern people have with NPS T2 is regarding it's taxability. The rules of LTCG applicability for NPS T2 is ambiguous. It is high time PFRDA works with IT dept and get clarity on tax aspects of NPS T2. Go through this informative article from Prime Investor on NPS T2 - https://primeinvestor.in/nps-tier-ii-account-how-to-use-it/

Somebody mentioned they could keep the funds in NPS Tier-2 for a long duration (say 30 years) and the taxation issue could be sorted out by then. But actually this defeats the very purpose of investing into NPS Tier 2 - which is liquidity. If liquidity is not a concern one can directly invest the funds into NPS Tier-1 account itself; which provides good tax benefits both for contribution (50k for 80ccd(1) and 7.5L for 80ccd(2) ) and withdrawals. The 60% lumpsome withdrawals from NPS Tier-1 are completely tax free for any kind of capital appreciation. Even the 40% annuity withdrawals could go away soon and be replaced with Mutual Fund SWP style withdrawals.

However please note; NPS T2 has one undisclosed benefit. It can be used as a routing scheme to the NPS T1 account. Your regular investments like SIP can be done to NPS T2 and enjoy the psychological benefits of liquidity offered by T2 account. And from NPS T2 the funds can be moved to your linked NPS T1 account at a later stage. Once they move to NPS T1 account; they enjoy the full tax benefits of NPS T1. However note; the reverse is not possible - i.e one cannot move funds back from NPS T1 to NPS T2. Since NPS T1 is essentially locked in till age 60 years; the funds are pretty much illiquid. So try to time this move from T2 to T1 closer to your retirement age or when you are pretty sure you will not need those funds till your age 60.

Please refer to my earlier posts on the NPS it's benefits and taxability -

https://www.reddit.com/r/FIREIndia/comments/nmpge0/_/gzqdtet

 

[gitanjali786]

Just a article just today in mint on NPS Tier-2 taxability. It is a good read. The author argues the case where NPS T2 withdrawals after 3 years; can be considered as LTCG with indexation (just like the debt mutual funds). Pls note there is no official clarity on this matter - it is just the interpretation from a tax expert

https://www.livemint.com/money/pers...withdrawals-are-taxed/amp-11625976662730.html

 

[fingertips]

@raulcraven I think the only reason people shun Tier-2 is because of the uncertainty in tax implications on the withdrawal of money.

Also, just because expense ratio is low doesn't mean it's better than actively managed funds. They might give you better returns than Tier-2 (with high expense ratio obviously)

Plus I've heard that there might be some additional charges at the time of withdrawal. I'm not too sure on this.

 

[jacob1234]

@raulcraven Can you please confirm the exit charges?

 

[raulcraven]

@jacob1234 Couldn't find much on it

I'm assuming it would be nominal or nothing

Just withdrew some amount, will update on charges in a few days

 

[mrsminx]

@jacob1234 No exit charges. The taxation is not clear though.

 

[jacob1234]

@mrsminx Is that? I recently withdrawn around 3l from Tier 2. There was some 500-600 rs difference in withdrawal amount and credited amount. Not sure why such difference?

 

[mrsminx]

@jacob1234 Hmm interesting. Have you checked logging a NPS grievance?

https://npscra.nsdl.co.in/faq-grievance.php

 

[mennosota]

@raulcraven

1. I tried to find this. Can you direct me to a source.

I also think this is a pure copy of 401(k) of usa. I think it's a very good investment vehicle. Then agaain what do I know I am a smooth brained retard.

 

[wexcellent]

@mennosota Wsb expert?

 

[mennosota]

@wexcellent Yes you are correct,, it's being removed. Probably it will evolve into 401k. govt and employers are suffering from the burden called CPF and gpf. NPS will be the same wine in new bottle.
Plus now when they gamble and loose our retirement dough, they can easily blame it on the markets

 

[gigimo]

@mennosota Reverse is also true, now they have to ensure that market is up always.

LIC has left the chat

 

[mennosota]

@wexcellent I am no autist.

 

[unquirer]

@raulcraven I mainly use NPS Tier 2 as part of my debt portfolio, and you can increase the equity percentage when you think that the equity is cheap (like in March 2020).
Main concern here is whether NPS Tier 2 qualifies for LTCG or not. But I don't plan to withdraw my money for next 30 years so I am hoping this aspect will become clearer by then.
As for rebalancing it, I don't account that in my tax calculation, same as that for NPS Tier 1. One can argue on this, but since there are only limited number of rebalancing operations possible in a year, I have assumed that they don't attract taxation.
Btw you can use D Remit feature to transfer funds seamlessly, it takes me just 2 clicks from my bank's mobile application (same as NEFT/IMPS).

 

[pinkrain]

@unquirer Then why would you not invest in tier 1 if you dont withdraw it for next 30 years. Atleast you will get tax benefits

 

[unquirer]

@pinkrain When did I say that I don't invest in Tier 1, I exhaust the entire limit of Tier 1.

 

[pinkrain]

@unquirer Ah clear now

 

[a_bit_of_reason]

@unquirer Is there an upper limit to Tier I NPS investment? I think individual can contribute additionally without any limits.

 

[unquirer]

@a_bit_of_reason 50k limit per financial year. Additional contribution is possible through employer contribution (upto 10% of basic)