Money Matters: All You Need to Know About Pensions
Pension planning is one of the most critical aspects of financial security, yet many people overlook it until it’s too late. Whether you're a salaried professional, a business owner, or self-employed, understanding how pensions work in India is essential for building a stable post-retirement life.
Here’s a comprehensive guide to help you navigate pension schemes, eligibility, tax benefits, and smart retirement planning.
What Is a Pension?
A pension is a retirement plan that provides you with regular income after you stop working. It serves as a financial cushion, ensuring you continue to meet your expenses and maintain your lifestyle during retirement.
Types of Pension Schemes in India
1. Employee Provident Fund (EPF)
Mandatory for salaried employees in companies with over 20 employees.
12% of basic salary + DA is contributed by both employer and employee.
Earns interest and is tax-exempt under Section 80C.
2. National Pension System (NPS)
Open to all Indian citizens aged 18–70.
Allows voluntary contributions toward retirement.
Offers market-linked returns and partial tax benefits under 80C and 80CCD(1B).
3. Atal Pension Yojana (APY)
Government-backed pension for unorganized sector workers.
Monthly pension ranging from ₹1,000 to ₹5,000 after 60 years of age.
Contributions vary by age and chosen pension amount.
4. Public Provident Fund (PPF)
Though not a pension per se, PPF is often used for retirement savings.
15-year lock-in with tax-free returns and exemption under 80C.
5. Private Pension Plans
Offered by insurance companies and mutual funds.
Includes annuity plans, ULIPs, and retirement-focused mutual fund schemes.
Key Benefits of Pension Plans
Steady income post-retirement
Tax savings under various sections of the Income Tax Act
Inflation protection through long-term returns
Financial independence and reduced reliance on children or others
Taxation on Pension Income
EPF withdrawals are tax-free if held for at least five years.
NPS has a partial tax exemption—60% of the corpus is tax-free at retirement.
Pension received from annuity plans is taxable as income.
APY payouts are fully taxable under existing slabs.
How to Choose the Right Pension Plan
| Criteria | What to Consider |
|---|---|
| Employment Type | Salaried (EPF, NPS), Self-employed (NPS, PPF) |
| Risk Appetite | Market-linked (NPS) vs. Fixed-return (EPF, PPF) |
| Time Horizon | Longer duration = Higher compounding benefits |
| Tax Planning Needs | Look for 80C, 80CCD, and Section 10(10D) benefits |
| Retirement Goals | Estimate expenses post-retirement and plan accordingly |
FAQs
Q1: What is the best age to start pension planning?
The earlier, the better. Starting in your 20s or 30s allows for compounding benefits over time.
Q2: Is NPS better than EPF?
Both have their merits. EPF is safer with fixed returns, while NPS offers market-linked growth with more flexibility and tax-saving options.
Q3: Can I withdraw money from a pension plan before retirement?
Some plans like EPF and NPS allow partial withdrawals under specific conditions. However, early exit may affect your retirement corpus.
Q4: Are pension benefits available to self-employed individuals?
Yes, schemes like NPS, PPF, and private pension plans are suitable for self-employed professionals.
Q5: How much should I invest for a secure retirement?
Experts suggest setting aside at least 15–20% of your monthly income toward retirement planning, adjusting for inflation and expected lifestyle.
Published : On 9th July
Published : Pankaj
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