The retired life of a person may be as long as the earning life or even longer. So, it is very important for a person to save for the retirement from the first day of joining the service. However, most people think that the retirement is too far to start saving as they join their jobs and remain reluctant to save and invest. As a result, the government has made some schemes compulsory in which the investment is made automatically by cutting a part of the salary, which an employee in normal course may withdraw only at the time of retirement. Apart from making the contribution compulsory, tax incentives are also provided to make such pension products attractive.
A pension plan may be divided into two phases – accumulation phase and distribution phase. While, GPF and PPF are pure accumulation products, NPS and EPF also have distribution phase apart from the accumulation phase.
Employees’ Provident Fund (EPF)
Apart from accumulation phase, EPF also has distribution phase, in which, pension is given under the sub option Employees’ Pension Scheme (EPS). Implementation of EPF is compulsory for private sector organisations having 20 or more employees and the scheme is compulsory for the employees having monthly basic salary of Rs 15,000 (the figure is revised periodically) or less and optional for employees earning more. The amount of basic salary includes basic wages, retaining allowance and dearness allowance (DA), including the cash value of any food concession.
As the part of the scheme, 12 per cent of the basic salary is deducted every month as PF contribution from the salary. Apart from this, the employer makes a matching contribution of 12 per cent and the Central government also contributes 1.16 per cent of eligible basic salary. Employee’s contribution, even if it is more than 12 per cent, and employer’s contribution up to 12 per cent of the basic salary or Rs 15,000 per month, whichever is less, are eligible for tax deductions u/s 80C.
The accumulated PF may be withdrawn tax free at the time of retirement or at the time of changing jobs after five continuous years. The employee will get pension after rendering eligible service of 10 years or more and on retiring at the age of 58. An employee may also opt for early reduced pension if he/she retires at an age of 50 after rendering eligible service of 10 years or more, in which case, the amount of pension will be reduced by 4 per cent for each year if taken in advance before 58 years of age.
The current interest rate on PF is 8.55 per cent.
General Provident Fund (GPF)
The GPF is earmarked for government sector employees, under which re-employed pensioners and permanent government servants appointed before 01 January 2004 shall compulsorily subscribe to the fund, minimum 6 per cent of the emoluments and maximum up to basic pay (pay in pay band plus grade pay). It is a pure accumulation scheme to get lump sum amount at the time of retirement along with the government pension. Some part of lump sum GPF amount may be withdrawn before retirement for some specified purpose like marriage of son or daughter, purchasing a house etc.
The current interest rate on GPF is 8 per cent.
Public Provident Fund (PPF)
Any earning person may open an PPF account voluntarily in his or her name or in the name of his/her minor children and make total contribute up to Rs 1,50,000 a year (which is revised periodically). It is a pure accumulation scheme with a tenure of 15 years. However, partial withdrawals may be made once a year after seven years from the date of opening of the account. The compulsory minimum contribution per year in a PPF account is Rs 500. The limit on number of deposits in a PPF account is 12 in a financial year. The investment made in PPF is tax deductible u/s 80C as well as the interest earned and the maturity amounts are also tax free. Moreover, the amount invested and interest earned bear Sovereign guarantee from the Government of India. The only fluctuating factor is interest rate, which, like other schemes are fixed by the government quarterly. The current rate of interest on PPF is 8 per cent.
National Pension System (NPS)
Earlier named as New Pension Scheme, NPS was introduced to cater the pension need of government sector employee, who joined the service after December 31, 2003. It has been made available to general citizens with effect from 2009. There are two types of accounts under NPS, out of which Tier-I pension account is a mandatory account for an employee and an individual, the contribution and savings to which is eligible for tax deductions u/s 80C. Government employees have to contribute 10 per cent of their basic+DA+DP compulsorily into this account every month and the government also make matching contribution. Withdrawal up to 40 per cent of the accumulated fund value may be withdrawn tax free at the age of 60. At least 40 per cent of the total fund value accumulated at the age of 60 have to be invested in life annuity plans of a insurance company governed by the IRDAI to get pension. In case withdrawal is made before retirement, at least 80 per cent of the withdrawn amount must be used to purchase life annuity. To attract more investors, additional deduction of Rs 50,000 u/s 80CCD is allowed for contribution to NPS. Tire-II savings account is a voluntary account, which may be opened if a person has an active tier-I account. There is no limit on number of withdrawals from Tire-II account, but contribution to this account is not exempt u/s 80C. One-way transfer of savings from tier-II to tier-I account may be done.
Unlike EPF, GPF and PPF, returns of NPS are market linked as part of investments are made in equity and debt schemes. However, a person investing in NPS has the flexibility to opt for active choice or auto choice for their asset allocation. There are three options under active choice for an investor: asset class E, in which investment is made predominantly in equity market instrument; asset class C, where investment is made in fixed income instruments other than government securities and asset class G, involving investment in government securities. Under auto choice, the investments are made in a life-cycle fund, where investments across three asset classes are determined by a pre-defined portfolio, in which allocations are changed progressively from asset class E to C and G according to age of the subscriber.