PFRDA Bans Credit Card usage for Investments in Tier-2 Account

In a recent announcement made by Pension Fund Regulatory and Development Authority (PFRDA), the Tier-2 account holders of the National Pension Scheme (NPS) will not be able to make further subscriptions or new contributions to their investment account using a credit card as a mode of payment. Until now, investors could only use credit cards as a mode of payment for making investments to their NPS Tier-1 and Tier-2 accounts, the authority with its recent move, has banned the usage of credit cards for Tier-2 contributions. Therefore, if you were using your credit card as a mode of payment to make contributions to your Tier-2 account in NPS or if you were about to make a subscription to the account, then this article will provide you with all the necessary information.

PFRDA’s New Guideline

In a recent circular posted on the website of the Pension Fund Regulatory and Development Authority (PFRDA), on 3rd August 2022, the authority has decided of putting a ban on the usage of credit cards as a mode of payment for making contributions or subscriptions to the Tier-2 account of National Pension Scheme (NPS). With the decision, all the Point of Presence (POPs) have been advised by the authority to put a stop on accepting credit card transactions from making any more contributions or new subscriptions to the Tier-2 accounts. Though the account holders will not be able to make transactions using a credit card in their Tier-2 accounts, however, the usage of credit cards as a mode of payment is still permissible for further contributions and subscriptions in Tier-1 accounts. Also, the payment gateway charge of 0.6% is still applicable on the transactions made in Tier-1 accounts with credit cards.

The Authority claims to issue the circular by exercising its powers as per Section 14 of the Pension Fund Regulatory and Development Authority Act, 2013 to protect the interests of the subscribers and to ensure the growth of the overall Pension System. Currently, the usage of credit cards is prohibited for investments in funds like equities and mutual funds, as credit cards are categorized as debt instruments, whereas, these investments are available for the savings of an individual. Also, credit cards carry very high-interest rates which hold the ability to make a person fall into a debt trap. However, until now the investors were able to use a credit card as a mode of payment for making investments in their NPS accounts. This was the only option available for investors to use a credit card for investment opportunities. However, with its recent move, the PFRDA has stopped the usage of credit cards for NPS Tier-2 investments too.

What are Tier-1 and Tier-2 accounts in NPS?

The National Pension Scheme (NPS) offers two kinds of accounts for investors where they can enjoy the benefits of pension and investments. A person can use the facility of any of these accounts for investment purposes or may use both accounts together. However, it should be noted that a person should hold a Tier-1 account in order to open a Tier-2 account in NPS.

Tier-1 Account

The Tier-1 accounts are opened for the purpose of retirement savings. Any person above the age of 18 years can open a Tier-1 account. The funds added to such accounts can be utilized by a person at the time of retirement, resignation, and death of a person. Also, if a person wants to withdraw funds from the account before such events, he/she can withdraw 25% of their funds only after the 10 years of investment. Moreover, the investments made in Tier-1 accounts help you to save taxes at the time of investment and at maturity as well. On top of that, an additional deduction of Rs. 50,000 is available to the taxpayer for investments made in NPS u/s 80CCD of Income tax Act.

Minimum Contribution/Subscription for Tier-1 accounts

An Account holder under the Tier-1 needs to make at least one contribution in a year. Also, there is no maximum limit of contribution but one must be aware of the minimum contribution requirements as mentioned above.

Tier-2 Account

The Tier-2 accounts are opened for general investments and do not deal with retirement saving plans. The Tier-2 accounts can only be opened if a person is having a Tier-1 account in NPS. Unlike the Tier-1 accounts, the Tier-2 accounts do not have any lock-in period or barriers on withdrawals. However, these accounts do not offer any tax benefits to the person and the gains arising from these investments will be taxed as per the slabs.

Minimum Contribution/Subscription for Tier-1 accounts

Bottom Line

The decision to ban the usage of credit cards from contributions and subscriptions to the Tier-2 investment plans of NPS has been issued to protect the investors themselves. Other investment plans like mutual funds or equities never accepted credit card usage for investments. Likewise, the PFRDA also decided not to accept credit cards for investments. It should be noted that the authority has only decided to stop the usage of credit cards for Tier-2 accounts only. The Tier-1 accounts of NPS would still accept the subscriptions and contributions made with credit cards. Let us know your views on the decision by the authority in the comment section below. Was the decision to stop the usage of credit cards for NPS investments right or wrong?