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All employees of private, public or government organizations have one long-term goal in mind: to secure their retirement age financially. And pension funds do that perfectly. Apart from the government’s mandatory Public Provident Fund (PPF), many people consider purchasing an additional pension plan, mostly for the purpose of saving tax. Read on to know all about pension funds in India.

What are pension plans in India?

Pension plans in India offer tax relief, various withdrawal benefits, and reinvestment of balance corpus in annuities and other securities. Apart from tax benefits, pension plans offer people the security of money post-retirement. Pension plans are ideal if you want tax relief in the interim, and partial lump sum disbursement that you’ll benefit from at the time of retirement.

Why are pension plans Important?

Future Security: Pension plans enable you to maintain your lifestyle and meet expenses even after retirement. Different pension plans provide different benefits. Some make lump sum payments to help you meet major expenses. Some offer deferred monthly payouts for the rest of your life. Be sure to understand the policy in full so you know what kind of benefit you’ll be getting from it.

Tax Benefits:  When you invest in a retirement pension plan, you get to enjoy a set of tax benefits which you can avail under Section 80C of the Income Tax Act. The sooner you invest in a retirement pension plan, the greater the tax benefits.

Insurance Protection:  Most pension plans come with insurance cover, in addition to ensuring income post retirement. In the case of the unfortunate demise of the insured, the insurance will ensure that the family’s income is protected.

Different types of pension funds – Government

The Indian Government has various pension schemes that can be broadly classified as follows:

  • National Pension Scheme
  • Public Provident Fund (PPF)

Each government pension scheme offers tax benefits, insurance cover and fund disbursement according to specific schedules. Government pension plans offer the following benefits:

Deferred Annuity: The accumulated corpus is distributed over a period of time. Funds stored in deferred annuity schemes are exempt from tax unless the funds are withdrawn.

Immediate Annuity: Pension payout begin immediately, based on the premiums or the lump sum paid into the scheme. Premiums are exempted from tax.

With and Without Life Cover: Deferred Pension plans are with life cover and Immediate Annuity plans are without life cover. In the latter case, the heirs of the policyholder don’t benefit upon the policyholder’s death.

National Pension Scheme: Accumulated corpus is invested by the government in debt or equity, as per policy holder’s preference. 60% of the maturity funds can be withdrawn and is taxable. 40% of the maturity funds must be used to purchase annuity.

Different Types of Pension Funds – Private

LIC has been the forerunner for a long time. Alternatively, you can also purchase pension plans from private providers such as MetLife, ICICI, SBI, HDFC and others.

Pension-oriented Mutual Funds

A combination of equity and debt securities is used to allow corpus accumulation in pension-oriented mutual fund plans. These are open-ended mutual funds, to contribute premiums at any time. If you withdraw funds before retirement age, penalties will be levied. Upon retirement, you withdraw the corpus to buy an annuity, or opt for part-periodic payments while the rest of the funds remain invested.

When you’re planning for your retirement, the important thing is to start early. With so many types of pension plans in the market, both government and private, it is prudent to take a plan that fits your need.

If you had invested Rs 10,000
every month for last 25 years
in equity funds, you could make

₹ 3.3 Crores
at 15%* annual returns

Rs 30 Lakhs

Rs 3.3 Crores

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