Pension plans are retirement plans in which you devote part of your savings, and these savings build up during the period before retirement and provide you with regular income during your sunset period. These plans are set up by employers, insurance companies, government or trade unions. Due to increase in cost of living and modernization it has become necessary for one to have a good pension plan and opting good plan means a comfortable retired life.

Necessity of pension plans:

We earn, we spend, we do savings and we spend that too. Due to emergencies or our habit of spending, our saving is never safe. But pension plans are such schemes where your amount grows due to the compounding effect, making your final saving huge, which provide you with steady income necessary for meeting your daily basic needs after your retirement.

Type of Pension Plans:

Deferred Annuity Plans: In this plan, a pool of saving is accumulated through regular or single premium over a policy term, which is decided by the policyholder and he receives pension after the end of this term. Most of the pension plans in India, sold by LIC and all the private companies are deferred pension plans.

Immediate Annuity Plans: In this plan, pension begins immediately after making a lump-sum payment, which is a one-time premium, often referred to as the purchase price. So if a person wants a monthly pension and has huge lump-sum money, he can buy an immediate annuity plan and start getting pension. Some of the examples of this plan are LIC Jeevan Akshay, ICICI Pru Immediate Annuity, HDFC Immediate Annuity.

“With cover” and “without cover” plans: The “with cover” pension plans have life cover component. In this plan, on death of policy holder, a sum-assured is paid to the family members. The “without cover” pension plan does not have life cover and pays corpus built till date in case of death of policyholder. Presently, deferred annuity plans are “with cover” and immediate annuity plans are “without cover”.

Annuity Certain: In this plan, annuity is received for specific number of years, where we can choose the tenure, and in case of death of policy holder before the tenure, the amount will be paid to beneficiary.

Life Annuity: This type of pension plan provides pension till life.

National Pension Scheme (NPS): National Pension System (NPS) is a pension cum investment scheme professionally managed by experienced pension funds and regulated by PFRDA, a regulator set up through an act of Parliament .Any individual citizen of India (both resident and Non-resident) in the age group of 18-60 years (as on the date of submission of NPS application) can join NPS. NPS account can be opened only in individual capacity and cannot be opened or operated jointly or for and on behalf of HUF. This is the pension plan introduced by government, where your savings will be invested in equity and debt market according to your preference. Under NPS account, two type of accounts – Tier I & II are provided. Tier I account is mandatory and Tier II account is voluntary saving account. The return under NPS is market driven. Hence, there is no guaranteed/defined amount of return. The returns generated through investments are accumulated for the pension corpus and is not distributed by way of dividend or bonus. Though the investment is deductible under section 80CCD and the interest/ appreciation is tax free, maturity corpus was made partially tax-free by giving tax-exempt status to 40 per cent of the corpus amount. Once NPS matures at age 60, payouts happen in two ways: One, a lump sum withdrawal of up to 60 per cent of the corpus can be made, and second, annuity begins on the balance till lifetime.
No Tax benefit is available for Tier 2 account.

Pension Fund: It is a fund established by a company, governmental institution or labour union to facilitate and organize employees’ retirement funds contributed by employer and employee. The pool of fund so collected is invested in wide range of assets (real estate, mutual funds etc.) meant to generate stable growth in long term, and provide pensions to employees when they reach at the end of their working days and commence retirement.

Benefits:

  • Benefit to employee:

    1. Tax Benefits:

      Assessee who has contributed to pension plans, avail certain deductions as listed below:

      Section

      Contribution made

      Deduction Amount

      80C

      		 Contribution by an individual to any pension fund set up by any Mutual Fund. Up to Rs.1,50,000

      80 CCC

      		 Amount paid for any pension plan of Life Insurance Corporation of India or any other approved insurer for receiving pension from the fund. Up to Rs.1,50,000

      80CCD(1)

      		 Amount paid / deposited by an assessee in an approved Pension Scheme of Central Government. Not exceeding Rs. 1.5 lakh or 10% of Salary(Basic Pay + DA but excludes all other allowances)

      80CCD(2)

      		 Employer contribution to the Employee’s NPS Account (this does not form part of Section 80C) 10% of Salary (Basic Pay + DA but excludes all other allowances).

      But the aggregate of deduction u/s 80C, 80CCC and 80CCD(1) shall not exceed Rs.1,50,000.

    2. After Life benefit: There are pension schemes providing pension to spouse after the death of policy holder. So that the dependent family members don’t have to go through economic crisis.

    3. Income from plans: There are some pension plans providing certain interest on investments made in pension funds, helping the policy holder to earn more.

Employees’ Provident Fund vs. National Pension Scheme

EPF and NPS are considered to be some of the most preferred and useful schemes for saving money. However, for making a right choice one needs to consider difference between the two from legal and financial point of views. Below is the general comparison, which shall help you to clear your doubts regarding savings option.

Basis

Employees’ Provident Fund

National Pension Scheme

Applicability

It is compulsory for some specified establishments and employer’s employing more than 20 employees. Others may also invest voluntarily

It is compulsory for Govt. Employees. But Corporate Employees, Employees in unorganised sector and other Individuals may invest voluntarily

Type of Pension Plan

It is a Defined Benefit Pension Plan, which is based on last drawn salary of employee

It is a Defined Contribution Pension Plan, in which a fixed sum of money is deposited every month

Eligibility

Only a salaried Employee, however, it is compulsory for employees working in specified establishment and drawing salary less than or equal to Rs.15,000

Every person, whether salaried or not, is eligible for this scheme

Employee’s Contribution

Minimum 12% of Salary and D.A. upto Rs.15,000. Higher contributions are also accepted at joint request of employee and employer

10% of Salary is deducted from salary of Govt. employees.

For others, Contributions up to 20% of the Gross Income.

Employer’s Contribution

12% of Salary and D.A. Out of which only 3.67% if invested in PF and rest in Pension Scheme

Govt. invests 10% of Basic Salary in respect of Govt. Employees.

Corporate Employers contribute as per their choice

Interest

EPF provides interest rates ranging from 7%-8% (8.65% declared for 2018-19)

Interest are market based, thus bear high risk. However, returns for 2018-19 ranged from 8%-12%

Investment Cost

There is no Investment cost

Subscribers need to pay some charges like POP Charges

Tax Benefits

EPF have EEE status i.e. investment, interest and withdrawal are all exempt.

NPS has EET status, i.e. investment and interest are tax-free but withdrawal shall be subject to income tax

Limits for Tax exemption

· Employer’s Contribution upto 12% is exempt

· Employee’s Contribution Deductible u/s 80C i.e. upto 1,50,000

· Interest exempt

· Withdrawal is exempt subject to certain conditions

· Subscriber’s contribution and Employer’s contribution, if any shall be deductible upto 10% of salary/ Gross income, as the case may be, u/s 80CCD

· Interest income is also exempt u/s10

Thus, from analysis of the above comparison, it can be concluded that EPF gives you more tax benefits whereas NPS gives you higher return. Also, Employer’s contribution in EPF is only exempt while Employer’s Contribution in NPS gives you additional deduction u/s 80CCD(2). The choice of investment (if not mandatory) should be made after taking into consideration the level of income and other factors influencing tax burden.

You can further read about Tax Implications- Securities: Visit Tax Implication- Securities