Having a stable source of income even after retirement means you can lead a life with no worries about your finances. This can be possible when you have a pension plan in place. These plans can help you manage your financial challenges even without a regular job during retirement years.
What are pension plans?
A pension plan, or retirement plan, allows you to receive regular income after retirement, at chosen intervals. To enjoy retirement benefits with a pension plan, you can invest as a lump sum amount in a single time or systematically invest in monthly, quarterly, half-yearly or annual premiums over a period of time. A pension plan ensures that you don’t have to compromise on your lifestyle and life goals even after retirement
Types of Pension Plans in India – Features & Benefits
Today, insurance companies have come up with many unique and well-designed pension plans that promise consistent financial support and ensure a worry-free retirement life. Here are the types of pension plans in India along with its features and benefits.
National Pension Scheme (NPS)
If you want to invest in a market-linked pension plan then NPS is one of well-regulated pension schemes in India. It is a safe scheme offered by the Government of India where you need to make regular contributions and can build a big corpus for your retirement years. Since these are market-linked so you can expect decent returns as they invest in equities and bonds.
Features & Benefits
- Make flexible contributions as per budget, with a minimum amount for tier 1 as ₹500. And tier II as ₹250 1
- A subscriber (subject to being eligible to make partial withdrawals) is permitted to make a partial withdrawal not exceeding twenty-five percent of their contributions to their individual pension account excluding the employer’s contribution, if any. Partial withdrawals are allowed for the purposes such as higher education of children, marriage etc 4.
- Explore tax benefits under Section 80C and 80CCD(1B), 80CCD(2) for Tier 1 subscribers. 1* 60% can be withdrawn during retirement, exit or supernnation and the remaining 40% has to be invested to buy an annuity plan1.
Atal Pension Yojana (APY)
Atal Pension Yojana is designed for unorganised sector workers. It offers a fixed monthly pension to subscribers after the age of 60. The pension amount depends on your contribution and age of joining.
Features & Benefits2
- Pension options: ₹1,000 to ₹5,000 per month
- Government co-contribution for eligible subscribers
- Auto-debit facility for easy contribution
Employee Provident Fund (EPF)
EPF is a retirement scheme for salaried employees where both the employee and employer contribute a fixed portion of salary each month. It helps build a large retirement corpus over time.
Features & Benefits3
- 12% salary contribution (basic salary and dearness allowance) by both employee and employer
- Capital appreciation on savings
- Partial withdrawals allowed for emergencies
- Tax benefits under Section 80C
Pension Plans With Life Cover
These are insurance plans that offer life insurance as well as help build a corpus for your retirement. If the policyholder passes away, the nominee receives a lump sum, and the pension continues if opted.
Features & Benefits
- Dual protection – insurance + pension
- Regular income post-retirement
- Life cover for family security
- Tax benefits under Section 80C
Tax Benefits on Pension Plans
Contributions made on pension plans are eligible for deductions under Section 80CCC of the Income Tax Act 1961, up to an extent of Rs. 1.5 lakh per annum.
Tax Benefits on Immediate Annuity Plans
In an immediate annuity, the entire annuity received is taxable as income in the year of receipt, as per prevailing tax slabs. There is no separate exemption for principal in most annuity taxation rules.
In an immediate annuity, the entire annuity received is taxable as income in the year of receipt, as per prevailing tax slabs. There is no separate exemption for principal in most annuity taxation rules.
Annuity Period and Conditions
The annuity period is when you start receiving regular income from your pension plan. You can choose between immediate or deferred annuity depending on your retirement needs. It’s important to review the payout options and terms before investing.
Sum Assured
The sum assured in a pension plan usually means the amount that the nominee receives if the policyholder passes away during the accumulation phase. However, not every pension plan promises a fixed payout — the actual benefits can vary depending on the type of plan you choose.
Accumulation Period
This is the phase where you regularly invest or pay premiums to build your retirement corpus. It typically ends just before your retirement age. Choosing the right accumulation period helps you plan for a comfortable post-retirement life.
Premium Payment Period
This is the duration for which you are required to pay premiums into your pension plan. It may or may not be equal to the accumulation period. Pick a premium term that fits your income cycle and retirement planning.
Surrender Value
Surrender value is the amount you receive if you exit the pension plan before maturity. However, you must have paid a minimum number of premiums to be eligible. Exiting early may result in loss of key benefits and returns.
How Much Should You Invest in a Pension Plan?
- Start with your retirement goal: Estimate how much money you’ll need monthly after retirement.
- Account for inflation: A ₹25,000 monthly need today may double in 20–25 years.
- Use retirement calculators: They help you figure out how much to save every month.
- Start early: Investing small amounts in your 20s or 30s will build a larger corpus than starting late.
- Balance current expenses and savings: Don’t overcommit and ensure you can pay premiums consistently.
- Increase investments gradually: As your income grows, try to increase your contribution.
Things to Consider While Buying a Pension Plan
When choosing a pension plan, always check the returns, tax benefits, lock-in period, type of annuity offered, and how the plan fits your long-term retirement goals.
How Different Pension Plans Impact Your Investment Amount?
Different pension plans have varied investment rules. For example, PPF has a yearly investing limit of ₹1.5 lakh, while NPS allows flexible contributions but offers tax benefits up to ₹2 lakh for tier I per annum and ₹ 1.5 lakhs for government employees of tier II and none for others .
FAQs
What is a pension plan?
A pension plan means a long-term saving which can help you cover your important costs once you retire. It helps to keep having an income after retirement and cover all major expenses like medical costs, and daily needs. With a pension plan, you get an income that is received monthly, quarterly, half yearly or yearly as per the plan’s terms and conditions.
Which is the best type of pension plan in India?
There are many pension plans available in India that can help you plan for your retirement years. The most popular ones are NPS, PPF, annuity plans, ULIP based pension plans etc. They offer better income during retirement to cover many important expenses.
What is annuity in a pension plan?
An annuity in a pension plan means a fixed income you get after retirement. Whatever you have accumulated during your working years, this money is converted into regular payments. Annuity plans start immediately in case of an immediate annuity or after a certain period in case of a deferred annuity.
What is the best time to invest in a pension plan?
There is no one-size-fits all but it is recommended to start investing as early as possible. The ideal time can be 20s or early 30s. Starting early means you can accumulate a larger corpus for your retirement years to avoid any stress during those years.
How many types of pension plans are there in India?
There are several types of pension plans in India, including government-backed schemes like NPS, PPF, EPF, and APY; insurance-based annuity like ULIP based pension plans; mutual fund retirement schemes; and private pension funds, among others. These cater to various financial needs, return expectations, and retirement goals.
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