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Pension Funds In India - Types of Pension funds

IndianMoney.com Research Team | Posted On Wednesday, October 03,2018, 01:29 PM

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Pension Funds In India - Types of Pension funds

 

 

Simply put, a retirement portfolio is a collection of investments made for retirement purposes. You may invest in various retirement plans, FD, RD, POMIS, Mutual Funds and so on. A retirement portfolio varies based on the amount you set aside, retirement goals and risk appetite.

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Types of Pension funds in India

Employees Provident Fund Scheme

Employees’ Provident Fund Scheme (EPF) was introduced to promote retirement savings. EPF is only applicable to salaried people. Both, the employee and employer contribute to an EPF account.

EPF is governed by the Employees' Provident Fund & Misc Provisions Act, 1952. There are three schemes under this Act:

1. EPF (Employees’ Provident Fund): Aims at promoting retirement savings.

2. EPS (Employee Pension Scheme): Aims at providing a post-retirement pension.

3. EDLI (Employee Deposit Linked Insurance Scheme): Aims at providing relief to family members in case of a subscriber’s untimely death.

EPF is applicable to salaried employees whose remuneration (Basic + DA) is less than or equal to Rs 15,000. Once covered under EPF, you’re covered for a lifetime.

EPF Contribution rules:

Contributions to an EPF account are made by you and your employer. Every month, you (employee) contribute 12% of your basic salary and your employer contributes a matching amount to your EPF account. The corpus so formed can be used to fund your retirement.

Employee’s deposit in EPF = Employer’s deposit in EPF+EPS+EDLI

1. Employees contribute: 12%

2. Employers: 13.15% - 3.67% in EPF, 8.33% in EPS, 0.5% in EDLI and 0.65% as EPF administrative charges.

Universal Account Number:

The employees covered under the EPF are called EPFO members. EPFO allots each member a Universal Account Number (UAN), which is unique to each member. UAN is linked to the EPF account. This number facilitates easy transfer of funds, claims, checking passbook and so on.

EPF Interest Rate:

  • EPF interest is higher than most bank deposits. Currently, it is 8.55% yearly.
  • Returns are above inflation.

EPF Claim: Maturity Period

  • EPF account matures when a member turns 58 years old.
  • EPFO pays interest on EPF accounts till you attain 58 years.
  • After you turn 58 years, EPF account will be considered as ‘imperative’, which means inoperative. As such, the EPF balance doesn’t earn interest.

EPF Withdrawal rules:

EPF has a lock-in period of 5 years. Withdrawals before completion of 5 years will be taxed at 10% TDS if PAN is registered. If PAN is not registered, withdrawals are taxed at 30%.

2. Withdrawals after 5 years will not be taxed.

3. You can withdraw 75% of the corpus if you’re unemployed for 1 month.

4. You can withdraw 100% of the corpus if you’re unemployed for 2 months.

EPF Withdrawals permitted under different situations:

1. Marriage:

  • The loan amount can be a maximum of 50% of your (employee) share + interest at the time of presenting your application.
  • You can take such loan for the marriage expenses of self, brother, sister, daughter or son.
  • Maximum of 3 withdrawals in your whole life.
  • You must have been a member for at least 7 years.
  • You have to show marriage invitation card as proof.

2. Education:

  • The loan amount can be a maximum of 50% of your (employee) share + interest at the time of presenting your application.
  • You can avail this loan for the education expenses of self, brother, sister, daughter or son.
  • Maximum of 3 withdrawals in your whole life.
  • You must have been a member for at least 7 years.
  • You have to show a certificate regarding the course of study and estimated course fees.

3. Medical expenses:

  • You can avail this loan for treatment of a serious illness.
  • The loan amount can be a maximum of

i. 6 months basic salary + dearness allowance or

ii. Your (employee) share with interest

whichever is less.

  • This loan can be availed for the medical treatment of self, spouse, son, daughter, dependent father or dependent mother.
  • Only 1 withdrawal in your whole life is allowed.
  • You have to submit a doctor’s certificate.

4. Repayment of home loan:

  • The home loan must have been availed from a nationalized bank or a registered co-operative society.
  • The loan amount can be a maximum of:

i. 36 month’s basic salary + dearness allowance or

ii. Total of your share and employer’s contribution to EPF with interest or

ii. Total outstanding principal + interest

whichever is least.

  • Only 1 withdrawal in your whole life is allowed.
  • You must have been a member for 10 years.
  • You need to submit a certificate from the bank/lender showing outstanding principal + interest.

5. Purchase of a home or plot of land:

  • The loan amount can be a maximum of:

i. 36 months basic salary + dearness allowance or

ii. Total of your share and employer’s contribution to EPF with interest

iii. Total cost of purchase of the house/plot

whichever is least.

  • Only 1 withdrawal in your whole life is allowed.
  • You must have been a member for 5 years.

Loan against EPF:

Emergencies are unavoidable and come unannounced. In such times you naturally think of selling assets or realizing investments or availing a personal loan. You might also think of withdrawing your EPF account. It’s wise not to do so. EPFO allows its members to apply for a loan against EPF. Remember, a loan against EPF is not necessarily a loan, but an advance given to you. So save/retain your assets, let your investment grow without hindrance and don’t dip into your EPF account before retirement.

A loan against EPF can be availed only in specific situations. The loan amount depends on the number of years of completion of service. To avail a loan against EPF, you’ve to submit Form 31 (EPF advance form) through your employer to the EPFO along with relevant documents. Your claim is then processed and the funds are directly credited to your bank account.     

Where is EPF invested?

  • EPF is a debt-dominant saving scheme. Most of your EPF contributions are invested in fixed income securities like treasury bills, government bonds, corporate bonds and so on.
  • Only a small % of incremental EPF corpus is invested in equities via ETF (Exchange Traded Funds), which replicates the BSE SENSEX 30 and NIFTY 50.

Though equities yield higher returns, the equity portion is too less. Relying only on EPF is not good for retirement planning. Consider investing in other tax-efficient options which yield decent inflation-adjusted returns to build a retirement corpus.

Considering the benefits of EPF, you might want to increase the quantum of investment in it. Is it possible?

Yes, though the contribution rate is fixed at 12% and 13.5% of your salary from you and employer, you can opt to increase the quantum of your contribution. You have to opt for Voluntary Provident Fund (VPF).

Voluntary Provident Fund

Voluntary Provident Fund (VPF) is a voluntary contribution that you make towards your Employee Provident Fund (EPF) account. In other words, VPF is an extension of EPF. Should you wish to invest more than just 12% of your salary into EPF, you can raise a request with your employer to start a VPF account. A VPF account can be opened even in the middle of a financial year.

Once you start contributing to VPF you have to continue it for the entire financial year.

VPF Eligibility:

  • Individuals holding EPF account

VPF Contribution:

  • As it is voluntary PF, only you can contribute to your VPF account. Your employer will not contribute.
  • There is no restriction on the quantum of your investment. You are free to invest any percentage of your salary over and above EPF contribution, even up to 100% of basic salary.
  • There is no matching contribution from your employer.
  • You’ve to inform your employer on the additional amount that you want to invest in the VPF.

Effect of VPF on your salary structure:

  • VPF reduces your take-home pay because you contribute more than 12% of your salary.

VPF Interest Rate:

  • As VPF is an extension of EPF, it earns the same interest as EPF. Currently, it is 8.55% for FY 2017-18.
  • The returns are above inflation.
  • VPF offers higher interest than most fixed income investments like PPF, FD, NSC and so on.

VPF Withdrawals:

VPF withdrawals are governed by the EPF withdrawal rules. If you withdraw before 5 years, you’ll have to pay tax. You can withdraw in case of a financial emergency only after completion of 5 years.

  • Medical expenses of self and close family members.
  • Children's marriage
  • Children's higher education
  • Purchase or construction of a house or residential apartment
  • Repayment of home loans or other loans.
  • Complete withdrawal on resignation and retirement.

Where are the VPF funds invested?

As VPF is an extension of EPF, the funds are invested the same as in the case of EPF.

VPF is a debt-dominant investment option, with low proportions in equity. VPF is not a great option for growth. If security of principal and fixed income is what you are looking for, this is for you.

It is not advisable to make huge contributions to VPF because:

1. Same rules as EPF are applicable to VPF. All the shortcomings of EPF apply to VPF too.

2. Retirement planning is a long-term goal. If you restrict a high amount of your investments to VPF, your funds will not grow much. Debt simply gives you moderate returns with capital preservation. Hence, your funds won’t grow a great deal. Diversify your portfolio. Invest in other options which have higher equity exposure and give more growth. Also, consider investing in FD, RD, NSC, NPS, SSY and so on.

Public Provident Fund

PPF is a long-term saving instrument intended to provide income security in retirement years. As EPF is applicable only to the salaried people, PPF was introduced for the benefit of self-employed and workers in the unorganized sector.

Any resident Indian and minors can open a PPF account.

PPF Requirements:

  • PPF account can only be held by a single holder. No joint accounts are allowed.
  • A PPF account can be held in the name of minor by parents or guardians.
  • NRI and HUF can’t open PPF account.

Note:

If an individual having a PPF account leaves India and becomes an NRI within the 15 year lock-in, their account will be closed as soon as they leave the country.

PPF Contribution:

In a financial year, you can contribute:

  • A minimum of Rs 500
  • A maximum of Rs 1.5 Lakhs in a maximum of 12 transactions.

PPF Maturity:

PPF account has a lock-in period of 15 years.

PPF interest rate:

A PPF account earns interest higher than bank deposits. It is usually in line with inflation or 0.25% or 0.5% higher than the government bonds (10yrs). Currently, it is 8% for October to December Quarter.

PPF interest is:

  • Compounded annually
  • Credited yearly
  • Calculated monthly

The PPF interest is calculated on the lowest account balances between the 5th and the last day of the month.

How to optimize PPF returns?

To optimize the PPF returns, invest before the end of the 5th day of each month.

PPF Maturity:

  • PPF account matures after 15 years
  • After maturity, it can be extended for a block of 5 years

What to do after PPF account matures?

After a PPF account matures, you can extend it for a block of 5 years.

  • If you close the account and open another fresh PPF account, you have access to 100% of your account balance.
  • Extending the same account for a block of five years give you access to only 60% of your account balance at that time. This means that a large amount of money gets blocked for five years.
  • PPF enjoys the EEE benefit. Investments made in PPF are exempt from tax up to Rs 1.5 Lakhs under Section 80C of the Income Tax Act.
  • The money accumulated and withdrawn at maturity, are also tax-free.
  • Investment in PPF is in fixed income and is not exposed to equities. You can expect steady, risk-free returns from PPF.

Loan against PPF:

In times of financial need, instead of liquidating your investments, selling off an asset or withdrawing PPF funds and losing out on interest, you can avail a loan against PPF.

  • You can avail a loan against PPF from the 3rd financial year to the 6th financial year.
  • The loan amount is capped at 25% of the balance available at the end of the second year, immediately preceding the year in which you apply for the loan.
  • The balance amount in the PPF account continues to earn interest.
  • Repayment of a loan taken against PPF should be repaid within 36 months or 3 years.
  • The interest rate applicable on a loan against PPF is 2% higher than the interest received on the PPF.
  • The interest portion of the loan is to be paid in two monthly installments after repaying the principal.
  • No loan can be taken from the 7th year of opening the PPF account.

PPF Withdrawals rules:

Even though PPF account matures after 15 years, you can partially withdraw funds from the 7th year onwards:

A maximum of:

  • 50% of the account balance at the end of the 4th preceding year in which the loan was applied for or
  • 50% of the account balance of the immediate previous year in which the loan was applied for

whichever is lower.

Premature closure:

  • You’re allowed to close the PPF account before maturity after completion of 5 years.
  • The amount has to be used for higher education or treatment of life threatening disease of self, spouse or dependent children.

PPF is ideal if:

1. You are a resident Indian.

2. You want to stay invested for long-term.

3. You want capital preservation.

4. You want guaranteed fixed returns.

5. You want to build a retirement corpus without having access to the funds.

Mutual Funds Investment

Mutual Funds are attractive long-term investment options to grow your savings over the long-term. Mutual Fund houses pool the savings of various investors and invest it in different financial instruments. These are subject to market risks.

Mutual Funds are flexible and can be availed for an amount as low as Rs 500. These can be held as long as you desire.

Types of Mutual Funds:

Mutual Funds are classified based on their asset class, investment objective, and structure:

i. Equity Funds:

These funds invest in equity shares and stocks of various companies. Equity Fund involves high risk; hence, there are chances of earning high return. Equity Funds have generated higher returns than any other types of mutual funds. On an average, you can earn returns at 10%-12% before-tax. Of course, returns fluctuate as per market and economic conditions.

These are ideal if:

1. You start retirement planning early and wish to stay invested for long-term.

2. You want to create wealth over the long-term as equities yield great returns over the long term.

3. You can assume high risk.

ii. Debt Funds:

These funds invest in government bonds, debentures and other fixed-income instruments. Debt funds are exposed to credit risk and interest rate risk. The aim is to earn fixed returns and not high returns. Therefore, Debt Funds come with moderate risk. Short-term debt funds yield returns up to 7-8% in a year.

These are ideal if:

1. You want to earn fixed returns.

2. You want to assume moderate risk.

3. You opt for asset allocation.

iii. Money Market Funds:

These are also called Liquid Funds. The money is invested in money market instruments like Commercial Papers, Treasury Bills, Certificate of Deposits, and so on. Money market instruments are liquid. The holding period ranges from 3 months to a year. Hence, these can be held for emergencies. These investments aim at preserving capital and ensure liquidity. These earn higher returns than bank deposits.

These funds are exposed to interest rate risk, credit risk and reinvestment risk. Interest rate risk means the prices of the underlying asset increase with an increase in interest rates and vice versa. Credit risk is the risk of default on interest. Reinvestment risk means maturity proceeds in lower-yielding securities of the same asset class due to a fall in interest rates.

These are ideal if:

1. You expect moderate returns from investments.

2. You want to save for emergencies.

3. You want liquidity.

4. You want to modify the investment strategy whenever you wish.

iv. Balanced or Hybrid Funds:

Hybrid funds are invested in both a combination of high risk and low-risk assets in order to balance risk and returns. These are mainly invested in stocks and bonds (sometimes money market instruments). Equity-oriented hybrid funds are safer than equity mutual funds as they invest up to 35% of the corpus, in government and corporate bonds. Investment in balanced funds is made based on your risk objective. Balanced funds have generated double-digit returns over the years.

These are ideal if:

1. You want exposure to equities and debt.

2. You want to achieve income and growth objective.

3. You want to decide your own investment mix.

v. Equity-Linked Saving Scheme (ELSS):

Equity-Linked Saving Scheme is the most efficient tax-saving diversified mutual fund. These are invested in equity shares of small-cap, mid-cap and large-cap companies. ELSS has a lock-in period of 3 years.

Systematic Investment Plan (SIP):

SIP is a method of investing in Mutual Funds. SIP encourages investing in a disciplined and regular manner. To make it simple, SIP is similar to Recurring Deposit. Through SIP, a pre-determined amount of your money is deployed into mutual funds at regular intervals (weekly, monthly, quarterly, and so on). Mutual Fund houses have also introduced daily SIPs which cut worries on the market volatility and timing.

Choose to receive an amount which doesn’t exceed the exemption limit.

Equity Linked Savings Scheme

ELSS stands for Equity Linked Schemes. ELSS is a diversified Equity Mutual Funds that invest mainly in stocks. It invests in companies with strong growth potential and a resilient business model.

Though ELSS invests heavily in equities, studies show that equities give good returns over the long term.

ELSS is the most tax-efficient Mutual Fund scheme. Investments in ELSS are eligible for a tax deduction of up to Rs 1.5 Lakhs under Section 80C of the Income Tax Act, 1961.

Types of ELSS:

ELSS mutual funds are of two types:

1. Dividend funds

2. Growth funds

1. Dividend funds:

Dividend funds are further classified as Dividend Payout and Dividend Reinvestment. If you opt for Dividend Payout, you will receive tax-free dividends. The dividend by way of Dividend Reinvestment is reinvested as a fresh investment.

2. Growth funds:

Growth funds are meant for long-term wealth creation. It is cumulative in nature. The full value of such investments is realized on redemption of the fund.

Methods of investment in ELSS:

Investors can invest in ELSS via two ways:

1. Lump sum

2. SIP (Systematic Investment Plan): SIP is a method of investing in Mutual Funds. It involves investing a fixed amount of money every month at a specified date. SIP gives the benefit of rupee cost averaging.

Things to keep in mind before investing in ELSS:

1. Investing directly in equity requires a sound knowledge of stock markets. If you’re a new investor willing to invest in equities, start with ELSS. This is an ideal way to get exposure to equities.

2. ELSS is managed by professional fund managers. You don’t need to worry about entry and exit timings.

3. ELSS has a well-diversified portfolio.

4. You can start investing in ELSS with a nominal initial investment.

5. You can invest in ELSS via systematic investment plan (SIP) with an amount as low as Rs 500.

ELSS maturity:

ELSS investment comes with a lock-in period of 3 years, the shortest among all other tax-investments eligible under Section 80C.

Even though ELSS has a lock-in period of 3 years, it is advisable to hold the investment for 7-10 years. Investing in ELSS funds for a short-term will not reap great returns. As discussed, equities yield great returns in the long-term.

Attaching long-term goals to ELSS investments will make you a committed and dedicated investor.

ELSS returns:

ELSS gives tax-free returns of around 10-12% over the long term.

Note:

Equities are exposed to high risks and have a potential to earn high returns. This doesn’t mean you can expect unrealistic returns. Returns are not guaranteed. Returns don’t remain consistent year on year.

National Pension System

National Pension System (NPS) is a voluntary retirement savings scheme launched by the government. You earn returns according to the asset mix of your investment. If you don’t make a choice, the asset mix will be automatically selected for you based on your age.

NPS Eligibility criteria:

  • Individual aged between 18 to 60 years.
  • Comply with the Know Your Customer (KYC) norms.
  • Government subscribers mandatorily covered under NPS are not eligible.

NPS Contribution:

  • Minimum contribution is Rs 6,000 a year.
  • Investment can be made in lump sum or installments of minimum Rs 500 each month.
  • No maximum limit for contribution.

NPS maturity:

  • NPS account matures when you turn 60 years.

NPS withdrawals:

  • You get 60% of the amount as a lump sum when you retire (turn 60).
  • Alternatively, you can withdraw 60% of the amount in installments till you turn 70.
  • The remaining 40% of the amount has to be utilized to purchase an immediate annuity plan.

Premature withdrawals:

  • Withdrawal before turning 60 years is restricted to 20% of the corpus.
  • The remaining 80% of the amount should be compulsorily utilized to take an annuity policy.

NPS Contribution Rules:

a. By employer:

Employer’s contribution to NPS account is not mandatory. If at all your employer offers NPS:

• It’ll be treated as Tier I type account.

• Employer should make an equal contribution.

• You can claim additional tax benefit on employer’s contribution.

NPS Tier 1 and Tier 2

There are two types of accounts in NPS:

1. Tier 1 NPS account

2. Tier 2 NPS account

1. Tier 1 NPS Account:

  • Tier 1 NPS Account is a default account.
  • Tier 1 NPS Account for government employees invest in government and corporate bonds.
  • Tier 1 NPS accounts for non-government entities diversify the investment in stocks and government/corporate bonds.
  • In Tier 1 government schemes, 10% of basic + dearness allowance has to be invested each year. Government contributes the same amount.
  • In Tier 1 private sector schemes, a minimum of Rs 6,000 has to be invested every year (minimum deposit of Rs 500 per month).
  • Amount can be withdrawn to buy or construct your first house.
  • You can change jobs from private sector to public and vice versa.

Withdrawal of NPS Tier 1 Account:

To exit from an NPS Tier 1 Account, a withdrawal form must be submitted.

NPS withdrawals:

  • Premature withdrawals are only allowed after completion of 15 years of service.
  • Premature withdrawals are in the form of repayable advance and are only allowed in case of critical illness and emergencies.
  • Partial withdrawal up to 50% of the funds is allowed after completion of 25 years of service.

2. Tier 2 NPS Account:

  • Tier 2 NPS Account is a voluntary account.
  • Withdrawing from Tier 2 NPS Account is quite flexible. Withdrawals can be made as and when you want. No penalty is charged.
  • There are three funds available for investment: equity, government securities and fixed income securities.
  • If you don’t choose a fund, investment will be made in funds based on your job profile and age.
  • Tier 2 NPS Account offers no tax benefits.
  • This is suited for medium-term investment.
  • Investment in equity funds is restricted up to a maximum of 50%.
  • No limit on the number of withdrawals.
  • Transfer of funds from Tier 2 to Tier 1 NPS Account is allowed. Vice-versa is not possible.

Tier 1 NPS Eligibility Criteria:

  • You should be an active subscriber to Tier 1 NPS Account.

Withdrawal from Tier 2 NPS Account:

  • Withdrawal is based on the NAV applicable at the time of redemption.
  • Funds are transferred in 3 working days.

NPS Pension Funds

The subscribers to NPS can make a choice from seven pension funds. If you want to shift between funds, you can do so only once a year.

You have two investment options in NPS: Active choice and Auto choice. An active choice gives you the option of choosing from one among the three asset mixes, C Class funds, E Class funds and G Class fund.

1. C Class funds: These are corporate debt funds issued by companies.

2. E Class funds: These invest in equities.

3. G Class funds: These are invested in gilt funds, i.e. government securities.

You can invest 100% in corporate bonds and government securities but only 50% of the corpus in equity.

Auto choice is for those subscribers who are not sure of which asset mix to invest. Funds are allocated based on your age. The allocation changes with age.

NPS returns:

As the scheme invests in different asset classes, there is no specific rate of interest applicable.

A portion of the NPS is invested in equities which do not offer guaranteed returns. However, it can earn higher than traditional tax-saving investments like the PPF. Over the last decade, this scheme has yielded 8% to 10% returns annually. The scheme allows you to change the fund manager if you find the performance below expectations.

NPS contribution:

• The minimum contribution should be Rs 6,000 a year.

• The deposit can be made in lump sum or installments of minimum Rs 500 each month.

• There is no maximum limit for contribution in NPS.

Pradhan Mantri Vaya Vandana Yojana

Pradhan Mantri Vaya Vandana Yojana (PMVVY) was launched in 2017 to provide a long-term income option for senior citizens. PMVVY scheme is available only till March 31, 2020. So, act fast and subscribe to it. PMVVY is operated by Life Insurance Corporation of India (LIC).

You can purchase this scheme offline as well as online. The money invested in this scheme is called the “purchase price”. This scheme gives you an assured pension.

Pradhan Mantri Vaya Vandana Yojana Eligibility:

  • Only senior citizens can subscribe to PMVVY (minimum entry age: 60 years)
  • There is no limit on maximum entry age

PMVVY Contribution:

  • The investment is restricted to a maximum of Rs 15 Lakhs per senior citizen (and not per family).
  • If your spouse is a senior citizen, he/she too can invest a maximum of Rs 15 Lakhs in PMVVY. You and spouse can invest a maximum of Rs 30 Lakhs.

PMVVY Interest Rate:

  • PMVVY offers a guaranteed interest of 8%.
  • Interest is compounded monthly. As such, the effective annual return is 8.3%.
  • PMVVY is exempt from Goods and Services Tax (GST).

PMVVY maturity:

The pension will be paid for a maximum of 10 years as per the payment frequency chosen.

On maturity, the purchase price along with the final pension installment is paid.

NPS Calculations

  • You can opt to receive pension monthly, quarterly, half-yearly or annually.
  • Minimum pension on investment of Rs 1.5 Lakhs: Rs 1,000 a month, Rs 3,000 a quarter, Rs 6,000 half yearly or Rs 12,000 a year.
  • Maximum Pension on investment on Rs 7.5 Lakhs: Rs 5,000 a month, Rs 15,000 a quarter, Rs 30,000 half yearly or Rs 60,000 a year.

Premature exit from PMVVY

  • Premature exit from PMVVY is allowed only in case of treatment of terminal or critical illness of self or spouse.
  • A premature exit attracts penalty at 2%.

PMVVY Tax benefits:

Investment in PMVVY gives no tax benefits.

PMVVY Interest Rate:

  • Interest rate on PMVVY is higher than bank deposits rates.

Loan against PMVVY:

PMVVY offers a loan up to 75% of the purchase price after 3 policy years. The interest will be recovered from the pension installments. The loan amount will be recovered from claim proceeds.

PMVVY is an attractive option which gives regular income to senior citizens. It gives assured returns at 8% and is a savior in a falling interest rate regime. The interest rates on other retirement tools like EPF are subject to changes each year. This is the best option for senior citizens who rely on interest income to meet regular expenses.

However, PMVVY doesn’t account for inflation and the pension payout remains the same throughout the 10 years. You cannot access the funds except in case of serious illnesses. Moreover, PMVVY doesn’t offer any tax benefits.

Considering all these factors, it is wise not to block a huge chunk of your savings in this scheme. Take into consideration the tax implications before choosing the pension amount and frequency at which you want to receive the pension. Choose to receive an amount which doesn’t exceed the exemption limit.

Atal Pension Yojana (APY)

Atal Pension Yojana (APY) is an affordable pension plan launched for the welfare of the unorganized sector like maids, delivery guys, gardeners and so on. Employees belonging to the private sector and organizations not providing pension benefit can also benefit from APY.

APY allows you draw a fixed pension of Rs 1000, Rs 2000, Rs 3000, Rs 4000 or Rs 5000 on attaining 60 years. The pension is calculated based on your age and contribution. If you start investing early you’ll get a higher pension on retirement.

Upon your (contributor’s) death, your spouse can claim the pension amount. On death of both parties, nominees will receive the accumulated corpus.

If you die before 60 years, your spouse can either exit the scheme and claim the corpus or continue with it till the end of the term.

Atal Pension Yojana Eligibility criteria:

  • Indian citizens aged between 18-40 years.
  • Make contributions for at least 20 years.
  • Maximum age for subscription is 40 years.
  • Have a valid mobile number.
  • Bank account must be linked to Aadhaar.
  • You must not be a subscriber to Employee Provident Fund (EPF) and the Employee Pension Scheme (EPS).

Atal Pension Yojana Monthly contributions:

The monthly contribution depends on the amount of pension you want to receive on retirement and also the age at which you start contributions.

Atal Pension Yojana Tax benefits:

Contributions made to APY are eligible for deduction under Section 80C.

Government schemes

1. Tax-free bonds:

These are fixed income bonds issued by the government which are meant for long-term investment. These bonds carry low risk of default (non-payment of interest) and have a fixed interest rate.

Tax-free bonds have a lock-in period of 10, 15 and 20 years. The interest rate paid on bonds is known as ‘coupon rate’. Usually, the coupon rate on tax-free bonds is less than the interest rate on fixed deposits of similar tenure.

These are ideal if:

1. You want to earn fixed and guaranteed returns.

2. If you want to stay invested for the long-term.

3. If you fall in the higher tax brackets, you can earn higher effective interest on the bonds (explained in tax section).

4. If you don’t need access to your money immediately.

2. Monthly Income Schemes (MIS):

Monthly Income Schemes are offered by post-offices. Also known as post-Office Monthly Income Schemes (POMIS), MIS works like fixed deposits with monthly interest payments.

The Post Office MIS has a lock-in period of 5 years and currently gives 7.3% interest which is payable each month. It protects capital and gives a fixed income. You can start by investing as low as Rs 1,500. You can invest a maximum of Rs 4.5 Lakhs in a single account and Rs 9 Lakhs in a joint account. You can hold more than one MIS account but the total investment in all the MIS accounts put together should not exceed Rs 4.5 Lakhs.

POMIS offers higher interest compared to FDs. Interest on MIS is calculated on a monthly basis. MIS interest can be auto credited into a Savings Bank account through ECS (Electronic Clearing System). POMIS can be enchased before 5 years subject to a penalty.

Interest is paid a month after making the first investment, not at the beginning of each month. Monthly interest payouts, if not withdrawn, don’t earn interest. Maturity proceeds can be reinvested.

This is ideal if:

1. You are a Resident Indian.

2. You want capital protection.

3. You don’t wish to access the funds anytime soon.

4. You wish to have a fixed monthly income.

5. You want to reinvest the interest in the same MIS.

6. You fall under no-tax bracket or the 5% tax slab. This is because MIS interest is taxed.

3. Mutual Fund MIPs:

POMIS is not tax-efficient if you fall in 20% and 30% tax brackets as interest is taxed. To overcome this issue, you can consider investing in Monthly Income Plans (MIPs) of mutual funds. Though MIPs invest in debt and equity, a major portion goes into debt.

MIPs aim at offering regular income in the form of periodic dividend payouts (monthly, quarterly or half-yearly). The frequency and quantum of dividend payouts vary and are based on the returns and corpus.

MIPs can generate better returns than MIS as 10 - 15% of the corpus is invested in stocks.

These are ideal if:

1. You want to earn fixed income.

2. You want equity exposure for investments.

3. You want to earn better post-tax returns.

4. Senior Citizen Savings Scheme (SCSS):

Senior Citizen Savings Scheme is available for:

1. Individuals older than 60 years

2. Individuals retired under a voluntary retirement scheme (VRS) aged between 55 to 60 years.

Currently, SCSS offers interest at 8.7% which is paid quarterly. You can hold more than one SCSS account but total investment should not be more than Rs 15 Lakhs. SCSS has a lock-in period of 5 years which can be extended for 3 years. You can close SCSS accounts prematurely subject to certain conditions.

Reverse mortgage

Reverse mortgage is the exact opposite of a home loan. In reverse mortgage, you pledge your residential property as security with a bank. The bank in turn sanctions the loan amount, paid in lump sum or periodic payments/installments.

A reverse mortgage enables senior citizens to have regular income. You (the borrower) can still reside in the house.

How does reverse mortgage work?

On pledging a house, the bank arrives at its monetary value based on its condition, demand and market price. Based on the property values, bank disburses the loan amount in the form of reverse EMIs.

Reverse EMIs are calculated after taking into consideration interest costs and price fluctuations. These are the periodic payments that banks pay the borrower over a fixed tenure. With each payment, the property owner’s interest in the house decreases.

Reverse Mortgage Eligibility:

  • Only individuals above 60 years can apply.
  • If the co-applicant is your spouse, she should be above 58 years.
  • You should be the owner of a self-acquired and self-occupied residential property located in India.
  • Your ownership titles should be clear and marketable.
  • The property should have no encumbrances.
  • The property should not be more than 20 years old.
  • The house should be your permanent primary residence.

Reverse Mortgage Conditions:

  • A maximum of 60% of the residential property value is sanctioned as loan amount.
  • Minimum tenure of reverse mortgage is 10 years.
  • Maximum tenure of reverse mortgage is 15-20 years.
  • Choose from options to receive reverse EMI monthly, quarterly, annually or as a lump sum.
  • Banks undertake property revaluation once every 5 years. You can choose to receive an appreciation in property value in the form of an increased loan amount. This increment is given as a lump sum.

Reverse mortgage Tax Benefits

Reverse mortgage is a loan and not income. Therefore, installments received under reverse mortgage are not taxed. However, if you alienate the mortgaged property or transfer its rights, you’ll be liable to pay capital gains tax.

Pension plans from mutual funds

When it comes to retirement planning, pension funds offered by mutual funds are rarely known. The pension plans offered by Mutual Fund houses are also good investments to be included in your retirement portfolio.

Pension plans from Mutual Funds invest in both debt and equity. You can start investing in Mutual fund retirement plans via SIP (Systematic Investment Plan) and withdraw at retirement via SWP (Systematic Withdrawal Plans)]. SWP is a method of realizing or redeeming mutual fund investments and transferring the amount to your bank account. SWP is just like an annuity plan. It provides liquidity to meet immediate cash flow requirements.

SIP is a method of investing a fixed amount regularly, say monthly or quarterly. SIP yield long-term gains.

How do mutual funds pension plans work?

1. The SIP and SWP features of mutual fund pension plans make these work just like deferred annuity pension plans.

2. In the accumulation phase, you can invest in mutual funds via SIPs. This is like paying premiums.

3. When you wish to start withdrawing funds, opt for SWP. You can withdraw a pre-determined amount at regular intervals (monthly, quarterly, and so on). This is like a pension.

4. You can choose to receive the pension as long as you like.

5. You enjoy uninterrupted income after retirement.

6. Mutual fund pension plans have no cap on annuities.

7. Invest in mutual funds that have a mix of large caps and mid caps. They yield better returns.

8. These plans don’t offer death benefits. Your nominee gets only the fund value depending on the NAV.

9. Invest in mutual fund pension schemes for the long-term. Remember, you’re investing for retirement and not to earn profits. Take calculated risks.

10 Be flexible when it comes to terminating the plan or modifying the investment.

11. Mutual fund pension plans have exit loads for early redemptions. Think before you exit.

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