Pension Funds In India: Benefits, Taxation & Types Of Pension Funds
With the absence of a regular source of income or salary, you need to rely on your investments and savings during your post-retirement life. Apart from financing your day-to-day needs, you need to deal with medical emergencies and other expenses. Pension Funds can be an excellent investment option to guarantee a steady flow of income to take care of all your expenses after retirement. The following sections provide a detailed guide on pension funds and their types.
What are Pension Funds?
Pension funds, also popularly known as retirement funds, are schemes in which you have to invest a particular portion of your salary or monthly income. The corpus that is created throughout your working life will help you to fund your post-retirement expenses.
A pension fund has two different stages:
- Accumulation stage: You invest a specific portion of your income in designated pension schemes regularly till you retire.
- Vesting stage: When you retire, you start to get a steady flow of income from the corpus.
Also Read: Income Funds: Overview, Features And Benefits
Avenues Where Pension Funds Invest the Money
Given below are the avenues where pension funds invest money:
- Safe government securities
- Debt and equity investments
- Private equity
- Investment bonds
- Infrastructure
- Real estate
Top Pension Funds Available in India
The list below shows the top pension funds available in India:
| Pension Plan | Minimum Age | Policy Term |
| LIC Jeevan Akshay 6 Pension Plan | 30 years | NA |
| LIC Jeevan Nidhi Pension Plan | 5 – 35 years | |
| SBI Life Saral Pension Plan | 18 years | Regular Premium: 10-40 yearsSingle Premium: 5 – 30 years |
| HDFC Life Assured Pension Plan | 18 years | NA |
| HDFC Life Click to Retire | 18 years | 10-35 years |
| Bajaj Allianz Pension Plan Guarantee | 37 years | NA |
| Bajaj Allianz Retire Rich Pension Plan | 30 years | 7 – 30 years |
| Aditya Birla Sun Life Empower Pension Plan | 25 years | 5 – 30 years |
| ICICI Pru Easy Retirement | 18 years | 10 – 30 years |
| Reliance Smart Pension Plan | 18 years | Regular Premium: 15 – 30 yearsSingle Premium: 10 – 30 years |
| Reliance Immediate Annuity Pension Plan | 20 years | NA |
Types of Pension Funds in India
You will find a wide range of pension plans in the market today. Each of these plans comes with a specific structure and benefits. Here are the different types of pension plans that you can choose from as per your requirements:
Public Provident Fund
PPF or Public Provident Fund is a long-term retirement savings scheme that comes with a maturity period of 15 years. You can invest a maximum amount of Rs. 1.5 lakh each year in your PPF account. The investment in this scheme can be made either upfront or through 12 installments stretched over a financial year.
With such a long tenure, the impact of compounding is quite significant on your PPF investments. The government will fix the interest rate for PPF each financial quarter.
Employee Provident Fund
Employee Provident Fund or EPF is a savings platform meant for salaried individuals. You and your employer will make equal contributions every month to the EPF account. A portion of your contribution will be taken out from your salary.
The EPFO or Employees’ Provident Fund Organisation is responsible for setting the interest rate on EPF contributions. You will receive the total accumulated fund after your retirement with interest accrued.
Annuity plan that comes with life cover
This is a special pension fund that will offer a life cover in addition to a regular source of income. In the event of an unfortunate incident, while the plan is still active, your dependents will get a lump sum amount. This will ensure the financial security of your family in your absence.
There are two types of annuity plans:
- Deferred annuity
In this pension plan, you have to make either a single lump-sum payment or regular payment to build a corpus. If you opt for regular payment, you have to make the payments throughout a set time frame.
Your pension will start as soon as the policy period is over.
- Immediate annuity
With immediate annuity pension plans, your pension will start right after you pay a lump-sum amount to your pension plan provider. You can choose from various annuity options. Moreover, your nominee will receive the money in your absence.
NPS
The National Pension Scheme is a government scheme that provides financial security to retired individuals. You have to invest at least Rs. 1,000 each month in this scheme for up to 60 years. There is, however, no upper limit.
As per the scheme, the government will invest your money in debt or equity funds as per your preference. Returns will generally vary on the performance of the funds that you have chosen. You are eligible to withdraw 60% of your savings after you retire. However, you will need to use the rest 40% of the fund for purchasing a retirement plan that would provide regular post-retirement income.
Also Read: 5 Things To Keep In Mind Before Investing In Mutual Funds
Defined Benefit Pension Plan
Under this pension scheme, your employer will pay a regular pension amount, a lump-sum or a combination of both after your retirement. The amount that you receive will depend on various factors such as your age, tenure of service, earnings, and more. This is entirely an employer-sponsored post-retirement scheme.
Taxability of Pension Funds in India
Section 80CCC of Income Tax Act enables taxpayers to seek deductions for contributions upto Rs. 1.5 lakh. This includes the amount utilized for purchasing or renewing a pension plan.
Importantly, both resident and non-resident Indians can seek deductions under section 80CCC.
Benefits of Investing in Pension Funds
Given below are the benefits of a pension plan:
- Accumulation duration
People can choose to contribute the investment amount periodically or at once as a lump sum.
- Payment period
This is the period when the investor receives the pension. Many pension funds allow investors to withdraw funds during the accumulation period. But most plans keep the payment period separate from the accumulation period.
- Guaranteed income
The investor can lead a financially independent life post retirement.
- Liquidity
Pension funds come with low liquidity. However, there are many plans that allow partial withdrawal before the completion of the term, based on emergencies.
- Tax benefits
Income Tax Act provides tax exemptions for purchasing and maintaining a pension plan.
Limitations of Pension Funds in India
Given below are the disadvantages of pension funds:
- Tax deduction is limited
IT department allows a maximum deduction of Rs. 1,50,000.
- Taxation on annuity
IT department poses taxes on the annuity that one receives post retirement.
- Best for young investors
Pension funds are most suitable for people who start investing early.
Things You Must Consider Before Investing in Pension Funds
Given below is the list of the points that you must consider before purchasing a pension plan:
- Accumulation period
One needs to check the accumulation period. The policy should mature before one retires, so it must be chosen accordingly.
- Payment period
The payment period of the pension fund should be aligned with an individual’s financial goals.
- Sum assured
One needs to check whether there is the provision of sum assured or not because it varies from one company to another. One needs to calculate the sum assured to see whether it’s meeting his/her goals.
- Surrender value
One needs to check the conditions associated with surrender value which is the amount that the company is liable to pay if one surrenders the plan before maturity.
- Inflation
One needs to take into account the rate of inflation and decide hope much would be sufficient to maintain a financially secure life post retirement.
- Medical expenses
Pension plans should help you meet medical expenses and emergencies during old-age.
- Monthly expenses
One must take into account the monthly expenses post retirement, i.e., the corpus should be big enough to help one meet their daily expenses in the absence of a fixed source of income.
- Terms and conditions
One needs to check the terms and conditions associated with the annuity period. One can choose between immediate or deferred annuity.
What is the Minimum Guarantee Clause in Pension Funds?
Insurance Regulatory and Development Authority of India has stated that every pension plan must have a minimum guarantee. It is a guaranteed amount which the policyholder will receive after maturity.
The premium amount for the insurance and maturity benefits needs to have ‘on zero returns’. This particular amount shouldn’t be less than 1% of the premiums paid across the years.
The minimum guarantee clause is applicable to every plan. However, many companies provide pension plans that offer better returns than the minimum guarantee clause.
Also Read: The New & Standardized Guidelines For Health Insurance By IRDA
Final Word
Different pension funds in India come with specific benefits and investment requirements. Investing in an appropriate pension fund is crucial to fulfilling all your financial objectives of post-retirement life. So, you should be careful enough to choose a suitable pension fund in India that would adequately secure your retirement life from a financial standpoint.
FAQs on Pension Funds
Ans: Withdrawal of money is dependent on various terms and conditions. So it is advisable to check them thoroughly before proceeding.
Given below are the steps to withdraw money from EPS with an Aadhaar card:
Step 1: Activate the Universal Account Number (UAN)
Step 2: Provide the bank account details and Aadhaar number on the UAN portal
Step 3: Fill up Form 11 and submit it at your office
Step 5: Fill up a composite claim form and a cancelled cheque at the EPFO office
Ans: Given below are the steps to check EPS (Employee Pension Scheme) balance:
Step 1: Visit the official website of EPFO: https://epfindia.gov.in/site_en/index.php
Step 2: Navigate to ‘Our Services’ and choose ‘For Employees’
Step 3: Click ‘Member Passbook’ on the redirected page
Step 4: Provide your username4, password and other required details to login
Step 5: Click on the ‘Member ID’ on the redirected page
Step 6: ‘Pension Contribution’ column will show your pension fund balance
Ans: Given below are the steps to change/transfer one’s pension fund online:
Step1: Login to your account at Nation Pension System Trust with your credentials
Step 2: You must provide the password given to you by CRA with the PRAN (Permanent Retirement Account Number) kit
Step 3: You need to click on your respective CRA for final login and transfer
Ans: Some of the best pension funds in India are as follows:
LIC Jeevan Akshay 6 Pension Plan
HDFC Life Assured Pension Plan
Aditya Birla Sun Life Empower Pension Plan
ICICI Pru Easy Retirement
Ans: Here are some of the advantages that you can receive by investing in a pension fund:
They can serve as long-term saving schemes.
Some pension funds act as life insurance cover.
You can choose how you want to get paid on the basis of financial objectives and plans.
Ans: Although pension funds are highly beneficial for every individual, there are some disadvantages that you should be aware of:
To obtain higher returns, you have to opt for high-risk options.
These are best suited for young investors. If you invest in a pension scheme a little later in your life, your returns will be comparatively lower.
Annuity received after retirement will be liable to taxation.
Ans: Some of the prominent features of pension plans in India include the following:
Guaranteed monthly income
Tax benefits under Section 80C
Minimum and maximum vesting age (You can choose the vesting age)
Surrender value (an amount that you get before a pension scheme matures when you surrender a scheme due to some emergency)
Ans: Yes, you can claim tax deductions of up to Rs. 1.5 lakh for making contributions towards a pension fund. This will include an amount you spend to either buy a pension plan or renew one. HUFs are not eligible for this deduction.
Ans: Withdrawals from pension funds are not entirely tax-free. The 60% of the corpus that you receive is tax-free. However, the rest 40% that you will use for the annuity will attract a tax deduction as per your tax slab rate.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
