All about pension schemes in India and their benefits

Retirement spells several uncertainties, the major concern being financial stability. While we spend most of our life earning a good lifestyle, what about when it's time to retire? The government pension schemes in India are only available to those who have a regular income stream, so knowing options that aid in retirement planning is imperative. 

We are fortunate to have a variety of pension schemes available in India. Let’s explore them in detail.

Also read: Planning for retirement? Here's what you are most likely to spend on

The best pension schemes in India

Here are some of the most popular pension schemes in India. 

· National Pension Scheme (NPS)
 

The National Pension Scheme (NPS) ensures financial independence after retirement.

In India, NPSs are regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which is part of the finance ministry.

The NPS was launched in 2004 as a government pension scheme in India, with coverage only for government employees. However, it was expanded to cover all Indian citizens between the ages of 18 and 70 in 2009. 

In addition to public sector employees, NPS is available to the private and unorganized sectors, but not to the armed forces.

NPS requires individuals to save systematically throughout their working lives, that is, until they reach the age of 60. 

As per PFRDA guidelines, these savings are invested into government bonds, treasury bills, corporate debentures, and equity shares by professional fund managers. 

However, once an individual reaches 60 years old, he or she cannot withdraw the entire investment from the scheme; at least 40% of the corpus has to be retained. 

From this account, a PFRDA-registered insurance company will release the monthly pension. Individuals can withdraw the remaining 60% tax-free.

You can read more about NPS here. Additionally, there is also a pension scheme in India for non-salaried people, i.e., self-employed people. Find out more here.

· Public Provident Fund (PPF)

A popular pension scheme in India is the Public Provident Fund (PPF). As a government pension scheme in India, it is safe, guarantees a return, and enables seniors to save for old age. 

How does it work? PPF accounts can be opened by any Indian citizen who is at least 18 years old. They are locked in for 15 years.

The PPF pension scheme in India is popular because the minimum deposit for keeping the account active is ₹500 in a financial year. It helps build a saving mindset. However, if you wish to invest more, depending on your investment capacity, you can deposit up to ₹1.5 lakhs every financial year. It will help build a better corpus for retirement. 

You can deposit a lump sum in the PPF pension scheme in India or opt for instalments. There is no restriction on the number of instalments in one financial year. 

PPF deposits have to be made every financial year. One of the biggest factors incentivising people to follow this rule is that the deposits are tax-exempt under Section 80C of the Income Tax Act.

In other words, PPF is a great pension scheme in India that doubles up as a tax-saving investment tool during your earning years.

PPF allows partial and premature withdrawals subject to conditions. You can extend the account with or without additional deposits or close it. 

Apart from the tax saving benefit on deposits, the PPF scheme also offers tax exemptions on returns. 

Additionally, PPF offers attractive interest rates. For the last quarter of 2022-23 (i.e. January-March 2023), the government has fixed an interest rate of 7.1% per annum, compounded annually. 

It was also the rate for the previous quarter, while that for the next – the first quarter of the FY 2023-24 – has not been announced yet. Remember these points while investing in PPF. 

Another attraction of the PPF is that you are offered a loan facility against the balance. If you want to know more about the PPF pension scheme in India, check here.

· Atal Pension Yojana (APY)

Of all the pension schemes in India, the one specifically designed for the pension-less section in the country is the Atal Pension Yojana or APY. 

As the brochure of the scheme notes, APY promises a "guaranteed pension" for the pension-less section of society. The government stated in the introduction that 'old age income security of the working poor continues to be a concern, and it is to address this that APY was introduced.'

Given that the government has launched it, APY is a safe pension scheme in India. The PFRDA administers it through NPS architecture.

Suppose you know anyone from the targeted section of society. In that case, you could advise them to go for the APY pension scheme in India, which is focused on encouraging and enabling the working poor to save for retirement. 

The following are the broad features of the APY pension scheme in India:

· It is open to any Indian citizen between 18 to 40 years.

· It requires the individual to have a bank savings account.

· It is a deferred pension plan, i.e., a pension one delays accessing until later in retirement; the more the delay, the higher the potential retirement income.

· There are five plans or options to choose from. These guarantee monthly pensions of ₹1,000, ₹2,000, ₹3,000, ₹4,000, and ₹5,000 respectively, after the individual turns 60 

· Premium is fixed based on the amount of pension chosen.

· The government will also contribute 50% of the subscriber's contribution or ₹1,000 a year, whichever is lower.

· The primary KYC is the Aadhaar card, though an applicant can also be asked for a cell phone number.

· Employees Provident Fund (EPF)

The Employees Provident Fund (EPF) is another pension scheme in India to ensure financial stability for people after retirement. 

However, the EPF is designed for employees of companies with 20 workers or more.

Launched per the rules in the Employees' Provident Funds and Miscellaneous Provisions Act 1952, the EPF pension scheme in India is overseen by the Employees' Provident Fund Organisation (EPFO), a non-constitutional body under India's Labour Ministry to encourage employees of companies to save for retirement. 

The EPF requires participants to pay a certain amount towards their retirement fund, and the employer pays an equal contribution. The current interest rate on EPF is 8.10%.

On retirement, the employee receives a lump sum. If you want to know more about EPF, check here. For additional information about this pension scheme in India, check it out here.

· Annuity Plans

Another pension scheme in India is the annuity plans offered by public and private sector entities. 

An annuity plan is an agreement between an insurance company and the person who wants to buy that plan. This agreement promises a series of payments by the insurer at regular intervals to the buyer based on the purchase amount.

An annuity plan is a popular option for people looking to build a financial support system for their old age and live their retirement years without financial worries.

One attraction of annuity pension schemes in India is that the invested amount is tax exempted. The investor can withdraw 25% - 33% of the corpus at the annuity, exempted from tax. However, the income that flows to the subscriber is taxed as per the income tax slab. 

Tax is not applicable if the person is a senior citizen and the income is below the taxable slabs. On the other hand, advance tax provisions come into play if the income is taxable.

Some insurance products help build up a corpus with which an annuity plan can be bought later, but if someone has ready funds available, these plans can also be used immediately. 

1. The "immediate annuity" plan:
 

It is a guaranteed pension scheme in India whereby you make a one-time lump sum investment. In exchange, you begin receiving an income immediately. The income is fixed, usually lifelong and comes to you in a steady flow monthly. 

2. The deferred annuity:

Here, the payment is deferred until the policyholder chooses to begin receiving it. There are two phases in a deferred annuity plan – the accumulation phase and the income phase.

In the accumulation phase, you must pay the premium regularly to the plan provider. You may begin withdrawal only in the income phase when you can withdraw a third of the money saved.

The remaining amount goes into buying an annuity product so that you are assured of a regular income for the rest of your life.

In deferred annuity plans, you are exempt from paying taxes on the money collected in the accumulation phase when the premium is paid regularly.

· IDFC FIRST Bank annuity plans

If annuity plans excite you, note that IDFC FIRST Bank is a dependable provider of this pension scheme in India, offering three annuity solutions in collaboration with three trusted names in insurance: HDFC Life, Bajaj Alliance and ICICI Prudential.

The annuity plan offerings from IDFC FIRST bank are:

· The Pension Guaranteed Plan (with HDFC Life)

· The Guaranteed Pension Goal (with Bajaj Alliance)

· The Guaranteed Pension Plan (with ICICI Prudential) 

If you are looking for the best retirement plan early on, you will find IDFC FIRST Bank's product scheme perfect for your needs. Check out more about the plans here. 

Advantages of pension schemes in India

You have read about the different pension schemes in India and how they can help build your retirement corpus. Whether you are salaried or self-employed, there are ways to start building your retirement fund.

Let us take a closer look at the advantages of pension schemes in India and how they will help you build a savings mindset.

a) Investing habit

Investing in a pension scheme in India is for longer-term  requiring you to deposit small amounts as premiums regularly. You can be penalised for not paying the premium if you do not maintain the minimum amount specified in the plan. Hence, people are usually careful about budgeting for their premiums. It helps teach fiscal discipline and leads to forced savings. 

It is one of the best features of pension schemes in India. If someone begins investing when still in their 20s and continues for the next 35+ years, they will end up with a sizeable corpus when it is time to retire at 60.

b) Compounding gains

Another attractive aspect of the best pension plans, it offers the investor the chance to give you the option to invest regularly and build a huge retirement corpus.

This corpus, or wealth, is created because pension schemes in India work on the principle of compounding. The interest earned in one year gets reinvested and accrues interest the following year.

Suppose you have invested in a provident fund, and your balance at the end of a year is ₹50,000, with an interest-earning being ₹2,000. In the following year, interest accrued will be on the compounded amount of ₹52,000, not on ₹50,000. 

Such a pension scheme in India can significantly increase your capital in the long term. In other words, the longer you stay invested, the more likely you gain. 

c) Flexi plans and insurance

Annuity plans are flexible pension schemes in India, allowing investors to choose a plan with an investment theme that is aggressive, balanced or conservative, depending on risk appetites. 

Moreover, investors can switch between funds. Flexibility is critical, as risk appetite can change over time. 

Your personal, financial and economic circumstances can also change or evolve, especially as pension schemes in India are long-term investments. 

However, the core benefits of insurance and liquidity remain. It ensures financial stability and security for the policyholder's dependents during their unfortunate demise.

d) Safeguards loved ones

Pension schemes in India create wealth for the policyholder/investor. At the same time, they secure their loved ones' futures. 

An insurance-led pension plan can also provide a safety net to the family in the event of untimely death.

Factors to consider while investing in pension schemes in India

We all have to retire one day. But to safeguard our interests and those of our loved ones, we must start investing in pension schemes while we are in our earning years to enjoy financial security when we retire. 

When searching for the right pension scheme in India, consider factors that will guide your choice in tune with your investment pattern. 

a) Retirement benefits
 

What is the purpose of pension schemes in India? It encourages people in their earning years to save more to have financial security in their golden years. 

That is exactly why pension schemes have tax benefits. It encourages more investment in such retirement schemes.

However, we must remember this when investing in pension schemes in India. It would help if you explored schemes offering the maximum tax benefits. At the same time, tax saving as the sole focus defeats a pension scheme's purpose. Instead, we should concentrate on the benefits the plan will bring us upon retirement. 

A few of the overlooked benefits of pension schemes in India include liquidity, guaranteed income or pension, tax benefits for the retiree under Section 80C of the Income Tax Act, and death benefits. 

b) Focus on returns

What should be your criteria when choosing from the plethora of investment options centered on retirement? You must focus on the amount of corpus available upon maturity and then compare the various pension schemes in India.

You must gauge the risk of investing in a particular plan. The focus should be on returns and conditions that a particular pension scheme in India may ask of you; choose a plan that meets all their expectations. 

c) Retiree's monthly expenses

You will continue to incur expenses even during retirement. Your pension scheme must have enough liquidity to preserve your financial security in your retirement years. 

Assuming you want the same lifestyle after retirement, you can calculate your likely monthly expenses approximately 15-20 years from when you start investing, in tandem with your current monthly budget and add a minimum inflation cost. 

Some financial advisors advise saving at least 80% to 90% of your annual income before retirement to maintain seamless financial security and lifestyle post-retirement. 

A sound pension scheme in India would be one that not only covers routine expenses after retirement but also takes care of financial emergencies. 

d) Inflation 

A sound pension scheme should account for inflation. What you spend today on necessities and luxuries will change when you retire. 

Most experts suggest a thumb rule mentioned earlier: save at least 80% of your current annual income as a retirement corpus. 

Alternatively, an inflation calculator can estimate your monthly financial needs after retirement. 

The current inflation rate (when writing this) is 6.44%. Assuming an inflation rate of 7% over the next 20 years in India, you can calculate your financial status with this calculator.

By accounting for inflation, you can target a realistic corpus to meet your financial requirement in retirement, including healthcare costs, as discussed below. Accordingly, you can choose a pension scheme in India that works for you.

e) Healthcare costs 

Old age brings a set of healthcare problems that will need regular treatment, medication, and in some cases, hospitalisation. Thus, you must factor in rising medical costs during your retirement.

Investing in the best pension schemes in India will help you build a sustainable retirement corpus to deal with medical difficulties. A steady income stream will help you budget your expenses, including your healthcare costs.

Also read: Types of health insurance plans – which one is right for you?

f) Pending obligations 

A newly-retired person may have a loan to pay off. Your pension scheme must account for this expenditure. It will reduce your financial obligations, leaving you better positioned to plan your retirement.

Investing maturity amount of pension schemes in India

What can a retiree do with their corpus on maturity? One way is to reinvest the amount in further pension schemes that ensure a regular monthly income. A few options that senior citizens and pensioners can consider include the following-

a) Fixed deposits
 

Fixed Deposit (FD) is a common investment preferred by retirees as an add-on to pension schemes in India. This is because banks offer higher interest rates to senior citizens. Interest income up to ₹50,000 per year is exempt from tax for senior citizens under Section 80TTB of the Income Tax Act.

If a lump sum has to be invested, as in a maturity amount, you can watch your money grow in FD investments with IDFC FIRST Bank.

In this case, you get attractive interest rates and enjoy tax savings of up to ₹1.5 lakhs each year by investing in tax-saving fixed deposits.

Also read: Fixed Deposits: The safe investment option even during market volatility

b) Pradhan Mantri Vaya Vandana Yojana

Another pension scheme in India to invest in a lump sum is the Pradhan Mantri Vaya Vandana Yojana. Operated by LIC, this is a low-risk investment pension scheme in India with a tenure of 10 years. It offers an interest rate of 7.4% in 2022-23, comparable with the Senior Citizen Savings Scheme (SCSS).

The minimum investment required is ₹1.56 lakh, while the maximum is ₹15 lakh. The pension received will range from ₹1,000 to ₹10,000 per month, depending on the investment amount.

Applications for the scheme close on 31 March 2023.
 

c) Senior Citizen Savings Scheme (SCSS)

This pension scheme in India is ideal for senior citizens looking to invest lump sums in long-term saving plans. Post offices and recognized banks offer it. It provides security in addition to extra benefits. Compared to regular savings accounts and FDs, it offers a higher interest rate of 8%. 

Investors also enjoy exemptions for investments up to ₹1.5 lakhs per year under Section 80C of the Income Tax Act, 1961. The maximum investment amount permissible is ₹15 lakhs.

The scheme's tenure is five years but can be extended by three years. 

Frequently Asked Questions (FAQs)

When should I retire?
 

Early retirement is up to the individual, but the standard retirement age in India is 60 years. 

How much should I save per month for my retirement?

Financial experts say 15% of one's monthly income should ideally be kept aside for retirement. You can increase the percentage depending on your financial stability and investment capacity.

What does vesting age mean?

The vesting age is when a participant in a pension plan starts receiving monthly pension benefits.

Can I change my nominee in my pension plan? 

You can change nominees at your convenience.

Conclusion

Pension schemes in India have long-term benefits that spell financial security in your golden years. IDFC FIRST Bank has annuity plans, as discussed earlier. You can ensure peace of mind by seamlessly integrating your retirement plans with IDFC FIRST Bank's products in investment and insurance, mutual fund investments, or health insurance.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.