Pension Plans in India

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Traditionally all employees in Government sector in India were covered under “Defined benefit Pension” (DBP) plan. Under this plan, the Employer subscribes to a pension plan and contributes funds so that the employees on retirement get a defined amount till he or she survives. Every year the pension benefits of the future that have to be paid from this plan are calculated and the amount that needs to be contributed to the policy to fund the projected pension amount.

It is a secured pension plan for an employee as he or she can calculate beforehand the eligible amount based on salary structure and number of years in service. Such pension payments are immune from market volatility. Department of Pension and Pensioner’s Welfare under the Ministry of Personnel, Public Grievances, and Pensions manage this affair.

Happy retired pensioner
A pension plan is must for a happy retirement

However, it’s a drag for government as it has to keep contributing to make the promised payment to the employee.

With the increasing resource crunch of the Government and considering market dynamics, Government wanted to replace this scheme. As a consequence the National Pension Scheme (NPS) came into force from January 1, 2004. All employees who joined service on January 1, 2004 and after in Government sector will not be eligible for DBP but NPS only.

Apart from pension palns in India , there were three other options for creating retirement/longterm funds – General Provident Fund (GPF), Employee’s provident Fund (EPF) and Public provident Fund (PPF).

a) GPF is a savings scheme available to only government employees.

b) EPF is a savings scheme available to employees in companies with more than 20 workers.

c) PPF is available to everyone – whether employed, self-employed or unemployed. ​

National Pension System (NPS) is a voluntary retirement savings scheme. It is market linked, defined contribution product i.e. a fixed amount has to be contributed till exit/retirement/superannuation. It is administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA)

NPS offers two types of accounts, viz. Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. Tier-II account is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulated over a period of time till retirement grows with market linked returns.

On exit/retirement/superannuation, a minimum of 40% of the corpus is mandatorily utilized to procure an annuity from a life insurance company to give pension for life and the balance corpus is paid as lumpsum. You may read

NPS is mandatorily applicable for Central Government employees (except Armed Forces) recruited on or after 01.01.2004. Subsequently, all State Governments excluding West Bengal have also adopted NPS for their employees. Government employees make a monthly contribution at the rate of 10% of their salary and a matching contribution is paid by the Government. For central Government employees, the employer’s contribution rate has been enhanced to 14% w.e.f. 01.04.2019.

Companies can adopt NPS for their employees with contribution rates as per the employment terms.

All citizens of India aged between 18 – 65 years can join NPS on voluntary basis.

Enrolments and contributions under NPS are made through nodal officers for Government employees, employer or Point of Presence (PoPs) such as Bank for corporate employees and PoPs or eNPS for other individuals.

​ Important features of NPS:

Access and Portability is ensured through online access of the pension account to the NPS subscribers through web portal and mobile app, across all geographical locations and portability of employments.

• Partial withdrawal- Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.

• Tax Benefits available under NPS :

a) Employee’s own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B ).

b) Employer’s contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.

c) Interim/ Partial withdrawal up to 25% of the contributions made by the subscriber from NPS Tier-I is tax free.

d) With effect from 1.4.2019, lump sum withdrawal up to 60% of total pension wealth from NPS Tier-I at the time of superannuation is tax exempt.

e) Minimum 40% of the amount utilized for purchasing an annuity from the Annuity Service Provider, registered and regulated by the Insurance Regulatory and Development Authority (IRDA) and empanelled by PFRDA is also tax exempt.

Apart from these there are host of pension plans in India provided by life insurance companies. Few of they are HDFC Life™ Pension Guaranteed – With Flexible Annuity Option, Bajaj Allianz Life – Superstar After Retirement – -, Retirement & Pension Plans | Max Life Insurance etc.


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