Pension Scheme- Types of Pension Plans and their Tax Benefits

A 2018 survey indicated that only around 33% of employed Indians actively plan their retirement or save money for this purpose. Nonetheless, planning for life after retirement is crucial. What’s needed is a fixed, regular income. It also prepares individuals for emergencies like medical issues and other issues.

This is why knowing and investing in a pension scheme from an early age is crucial. There are several pension plans available in India, which one can consider to start their retirement planning. Some of them have been mentioned below –

• Employee provident fund ( EPF) – 

This is a pension plan for salaried employees in the private sector. Employee and employer both contribute 12% towards this scheme. Any organisation with 20 or more employees is required mandatorily to register with EPFO or employees provident fund organisation.

One can also make an additional contribution to their EPF account over the compulsory 12%. This provision has been made under the voluntary provident fund. The accumulated amount in this fund can be partially withdrawn to meet expenses in some instances such as a wedding, medical treatment, down payment for a home, and the likes.

The account holder can avail the full amount in the employee provident fund account if they are unemployed or retired. In case of account holder’s demise, the amount will be paid out to the nominee. The whole amount is exempted from tax. There are several meaningful ways to use your EPF money, ensuring maximum profitability.

• Public provident fund (PPF) – 

It is another savings scheme initiated by the government of India. All Indian citizens except non-resident Indians and Hindu undivided family can open an account under PPF. A PPF account can be opened at a financial institution or post office. 

In a PPF account, a deposit has to be made once a year for a period of fifteen years. The minimum amount that can be deposited is Rs.500, and the maximum amount can be up to Rs.1.5 lakh. Since this is a government initiative, the investments made in this scheme is free of risk. Aside from that, one can also avail loans against their PPF account between the third and fifth year from the day of opening the PPF account. However, the loan amount will be 25% of the total investment made in the account at the end of the second year.

The maturity amount after a period of 15 years is exempt from tax. Similar to an EPF account, premature closure of PPF account is only allowed in some instances.

1. National pension scheme (NPS) –

This long term pension plan was initially launched for government employees. But since 2009, all Indian citizens except Defence employees can invest in it. Contribution can be made to this savings scheme throughout the course of an individual’s employment. 

On maturity, account holders are only allowed to withdraw forty per cent of the total amount. The rest sixty per cent will remain as it is and account holders will receive the interest on it as pension throughout their life. 

One can carry out the online or offline application procedure to open an account under this scheme. In an NPS tier-I account, individuals can avail tax exemption up to Rs.2 lakh under section 80C and 80D. However, in an NPS Tier-II account, only government employees are given tax exemptions up to Rs. 1.5 lakh.

Under the above mentioned schemes, one receives a lump sum amount at the end of the maturity period.  Consequently, one can put the entire earnings from such instruments in a fixed deposit account to earn further substantial income on it. There are two types of fixed deposit – cumulative and non-cumulative fixed deposits. 

• Cumulative fixed deposits – if you wish to wish to increase your retirement savings, you can opt for cumulative fixed deposits. Since the accumulated interest is paid along with the principal amount at the end of the maturity period; one can earn a substantial amount.
• Non-cumulative fixed deposits – if you want to earn a regular income on your retirement savings, go for non-cumulative fixed deposits. The interest is compounded and paid out periodically. You can choose to receive the interest as per your convenience.

Aside from the pension plan mentioned above, one can also consider investments that will enhance their retirement portfolio. Senior citizens can earn more using FDs than their non-senior citizen counterparts. Refer to Fixed Deposits offered by leading financial organisations like Bajaj Finance who offer interest rates of up to 7.85% along with CRISIL FAAA rated guarantee. Park your funds for either periodic or lump sum payouts as per your financial plans and needs.