Saving for retirement is very important to have a steady source of income to replace monthly salary. It is more important to plan and invest the money saved to get a decent earning post retirement to maintain the standard of living.
There are many products available to accumulate the retirement corpus during your service life and to get regular income after retirement as mentioned below.
National Pension System (NPS)
It is compulsory for government employees to contribute 10 per cent of their basic+DA+DP into NPS account every month, while other people may take advantage of the scheme voluntarily.
Taxation: Contribution by government employees are tax free up to Rs 1,50,000 in a financial year, while voluntary contributions in Tier-I accounts are tax free up to Rs 50,000 in a financial year under different sub-sections of the section 80CCD of the Income Tax Act. Lump sum withdrawal up to 60 per cent of the retirement corpus are allowed, out of which 40 per cent is tax free and 20 per cent is taxable. The remaining 40 per cent has to be used to buy pension plan from any insurance company governed by IRDAI.
Benefits: Returns on 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 chose the exposure in equity, debt and government securities through different options available. NPS is monitored by PFRDA and the expense ration is low, which along with equity exposure may generate higher return than the fixed-return investment options.
Returns: The average returns in last 5 years were 12.57 per cent under equity plans, 9.66 per cent under corporate debt plans and 10.06 per cent under government securities plans. So, Rs 50,000 invested at the beginning of every year for 30 years would generate a corpus of Rs 1,51,74,254 under equity plans, Rs 84,58,457 under corporate debt plans and Rs 91,55,552 under government securities plans, provided the average returns of the last 5 years continue for the 30-year period.
Public Provident Fund (PPF)
While government employees get the benefit of GPF, the PPF is meant for common people to generate a decent corpus for the retired life.
Taxation: PPF investments are eligible for tax deductions u/s 80C as well as the interest and the maturity amount are also tax free.
Benefits: Any earning individual may open a PPF account in a Post Office or a bank for self and minor children and altogether invest up to Rs 1,50,000 in a financial year.
Return: The rate of interest on PPF is declared by the government, which is currently 8 per cent. So, Rs 50,000 invested at the beginning of every year for 30 years would generate a corpus of Rs 61,17,293 provided the 8 per cent rate continues for the investment period.
Provident Fund (PF)
It is compulsory for private sector organisations employing 20 or more people and compulsory for employees having monthly basic salary of Rs 15,000 (the figure is revised periodically) or less and optional for employees earning more.
Taxation: Employee’s contribution to the fund, even if it is more than the prescribed limit of 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. Lump sum PF withdrawal is tax free at the time of retirement or at the time of changing jobs after five continuous years.
Benefits: The contributions are divided into three schemes, Employees’ Provident Fund (EPF), Employees’ Pension Scheme (EPS) and Employees’ Deposit Linked Insurance (EDLI). So, the scheme, apart from generating lump sum corpus, also provides pension and insurance cover to the employees.
Return: Currently the rate of interest on EPF contributions are 8.55 per cent. Although, contributions to EPF depends upon the basic salary of a person, but for comparison purpose, Rs 50,000 invested at the beginning of every year for 30 years would generate a corpus of Rs 68,04,444, provided the interest rate remains same for the investment period.
Pension Plans of Insurance companies
Insurance companies usually provide accumulation as well as annuity plans. Along with general contributors, the retirement corpus generated through NPS are also invested in the annuity plans of insurance companies governed by IRDAI.
Taxation: The contributions to pension plans are eligible for tax deductions u/s 80C, but the annuity or pension received are taxable.
Benefits: Under immediate annuity plans, pension starts at the beginning of next period. For example, from next month in case of monthly pension or from next year for yearly pension and so on. There are several options like annuity for life or annuity for life with return of purchase price, annuity for self and spouse etc.
Return: The rate of return varies from insurer to insurer and plans to plans. The prevailing interest rate regime also affects the rate from time to time. The rate also varies with the options, for example the return on annuity for life will be higher than the return on annuity for life with return of purchase price. The return on most options also increases with entry age of the annuitant.
Pension Plans of Mutual Funds
Some Asset Management Companies (AMCs) also provide pension funds, which generally have long lock-in periods and higher exit loads for longer durations to discourage investors from redeeming the funds before retirement age.
Taxation: The government has allowed tax deductions u/s 80C on contributions made in these funds. Taxation at the time of withdrawal will depend upon nature of the fund. Capital gains over Rs 1 lakh will be taxable on withdrawals in a financial year on equity-oriented funds, while in case of debt-oriented funds, 20 per cent capital gain tax will be charged after indexation. Payout in the form of dividend, however, will be tax free in the hands of the investors in both the cases.
Benefits: As the funds have equity and debt exposures, they generally give higher return than fixed-interest instruments over a long period. The investors also enjoy the benefits of diversification and services of well-trained and experienced fund managers.
Return: The average return of retirement funds for last 5 years was 13.92 per cent. So, Rs 50,000 invested at the beginning of every year for 30 years would generate a corpus of Rs 2,00,04,895, provided the funds continue to generate such return over the investment period.