The pension schemes and products in operation in India

This article elucidates – Pension System and its Aspects – Pension Products – Different Types of Pension Schemes, – Employees Provident Funds Scheme – Public Provident Fund (PPF) Scheme **– Insurance Annuity Schemes – National Pension Scheme (NPS)– Atal Pension Yojana (APY).]

The Royal Commission on Civil Establishments, in 1881, first awarded pension benefits to government employees. The Government of India Acts of 1919 and 1935 made further provisions. These schemes were later consolidated and expanded to provide retirement benefits to the entire public sector working population.

Pension Policy in India has traditionally been based on financing through employer and employee participation. Nearly one-eighth of the world’s elderly population lives in India. However, the vast majority of this population is not covered by any formal pension scheme and they do not have access to formal channels of old-age financial support. The retirement benefits offered by Central and State Governments and Government enterprises covered only about 10% of the total workforce. es.

The classes of Government pension schemes in operation in India are currently known as old pension schemes (OPS). The government bears the expenditure incurred on the pension under the OPS. The OPS that assured life-long income, post-retirement, usually equivalent to 50% of the last drawn salary, was discontinued in 2004. The Central Government introduced the National Pension System (NPS) with effect from January 1, 2004 (except for armed forces) instead of the Old Pension Scheme.

There are other pension products like the Employees Provident Funds Scheme, Public Provident Fund (PPF) Scheme, Insurance Annuity Schemes, NPS – Swavalamban Yojana, etc., for people to save money for their old age necessities.

The Old Pension Schemes can broadly be divided into Superannuation pension, Retiring Pension, Voluntary Retirement pension, Invalid Pension Compensation Pension, Compulsory Retirement Pension, Compassionate Allowance, Extraordinary Pension, and family pension.

Superannuation Pension: A superannuation pension shall be granted to a Government servant who is retired upon his attaining the age of superannuation. A superannuation benefit is also a retirement benefit offered by employers to their employees. Superannuation is an organizational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan.

Retiring Pension:

At any time after a Government servant has completed thirty years of qualifying service, he may retire from service, or he may be required by the Appointing Authority to retire in the public interest. In the case of such retirement, the Government servant shall be entitled to a retiring Pension. The amount of pension is 50% of the emoluments or average emoluments at the time of retirement whichever is beneficial. The minimum pension presently is Rs. 9000 per month. The maximum pension limit is 50% of the highest pay in the Government of India (presently Rs. 1,25,000) per month. Pension is payable up to and including the date of death.

Voluntary Retirement:

Government servants may retire from service voluntarily with pension benefits before attaining the age of superannuation under the voluntary retirement scheme. Such a Government servant can apply for voluntary retirement, three months in advance, only after the completion of twenty years of his qualifying service, provided no vigilance or Departmental Enquiry is pending/initiated against him/her.

Invalid Pension:

A Government servant who is declared by the Competent Medical Authority to be permanently incapacitated for further service is entitled to an Invalid Pension. The request for an invalid pension has to be supported by a medical report from the competent medical board.

Compensation Pension:

If a Government servant is selected for discharge owing to the abolition of a permanent post, he shall, unless he is appointed to another post the conditions of which are deemed by the authority competent to discharge him/her to be at least equal to those of his own, have the option.

(a) Of taking compensation pension to which he may be entitled for the service he had rendered, or

(b) Of accepting another appointment on such pay as may be offered and continuing to count his previous service for pension.

Compulsory Retirement Pension:

A Government servant compulsorily retired from service as a penalty may be granted, by the authority competent to impose such penalty, pension or gratuity, or both at a rate not less than two-thirds and not more than full compensation pension or gratuity, or both admissible to him on the date of his compulsory retirement. The pension granted or allowed shall not be less than Rs. 9,000/- p.m.

Compassionate Allowance

 A Government servant who is dismissed or removed from service for misconduct, insolvency, or inefficiency shall forfeit his pension and gratuity. However, if the Competent authority while issuing orders of removal states that a certain proportion of the compensation pension is to be granted as compassionate allowance, no further sanction to pension is necessary, and all that is required is that the Accounts Officer should certify to the admissibility of the pension on a pension application completed and signed by the Head of the Office. If the case is deserving of special consideration, sanction a compassionate allowance not exceeding two-thirds of pension or gratuity or both which would have been admissible to him if he had retired on compensation pension. ) A compassionate allowance sanctioned under the proviso to sub-rule shall not be less than Rs. 9,000/- p.m.

Extraordinary Pension

Extraordinary Pension in the form of Disability pension/extraordinary family pension may be paid to the Government servant/his family if disablement/death (or the aggravation of disablement/death)of the Government servant, during his service, is attributed to the Government service. For the award of extraordinary pension, there should thus be a causal connection between disablement and Government service; and death and Government service, for attributability or aggravation to be conceded. The quantum of the pension, however, depends upon the category of the disablement/death.

Family Pension: A spouse of a deceased Government servant is entitled to a family pension till his/her remarriage or up to life. Widow daughter / divorced daughter/ unmarried daughter of deceased Government servant is also entitled to the family pension till her remarriage or up to life is paid for a lifetime subject to conditions. If the son or daughter, of a Government servant, is suffering from any disorder or disability of mind or is physically crippled or disabled to render him or her unable to earn a living even after attaining the age of 25 years, the family pension can continue to be paid for lifetime subject to conditions. As per the rules laid by the Indian government, the family pension shall be calculated at a uniform rate of 30% of basic pay in all cases and shall be subject to a minimum of 3500/-pm and a maximum of 30% of the highest salary in the government. Family pension is payable to the children up to 25 years of age, or married or till they start earning a monthly income exceeding Rs. 9,000/- + DA admissible from time to time p.m. whichever is earlier.

New Pension Scheme:

The Central Government introduced the National Pension System (NPS) with effect from January 1, 2004 (except for the armed forces). Pension Fund Regulatory and Development Authority (PFRDA) to oversee the National Pension System (NPS), and regulate India’s pensions sector. NPS is a voluntary, defined contributions retirement savings scheme that is promoted as old age income security to all citizens of India including workers of the unorganized sector.
Under NPS, Resident or non-resident Indians between the age group of 18 to 70 years; salaried or self-employed can join this scheme. The people within the age group 60-70 can also join/re-join NPS. An account can be opened by Individuals and Corporate.
To learn more read: Details of the new pension system (NPS)

PPF Account:

As per new PPF deposit rules; an account holder can make deposits in multiples of ₹50 any number of times in a financial year, with a maximum of a combined deposit of ₹1.5 lakh a financial year. Earlier, a minimum amount of Rs.500 and a maximum of 12 deposits in a financial year is permitted in 1 year. As per the earlier rule, not more than one subscription can be accepted in a month, now that condition is removed, the account holder can remit any number of times in a month. The Government of India notified new rules for the PPF scheme called ‘Public Provident Fund Scheme 2019’, which has replaced all previous rules in respect of deposits, loans, and premature withdrawals. PPF provides EEE tax benefits, which means the principal, interest, and maturity proceeds are all tax-free. T
To know all the latest information about the PPF account click PPF

Atal Pension Yojana (APY):
Atal Pension Yojana (APY) was launched on 9th May 2015. The Savings Bank account holder in the age group of 18 to 40 years in any bank or post office is eligible to subscribe to the Atal Pension Yojana (APY). The subscriber has to make monthly contributions of the defined amount until he or she is 60 years of age. The contributions differ, based on the pension amount chosen by the subscriber. After completion of 60 years of age, the subscriber would receive the guaranteed minimum monthly pension of Rs.1,000, Rs.2,000, Rs.3,000, Rs.4,000, or Rs.5,000 till his death. The minimum pension is guaranteed by the Government of India. In case the accumulated corpus based on contributions earns a lower than estimated return on investment, then the Central Government would fund such inadequacy to pay a minimum guaranteed pension. On the other hand, if the returns on investment are higher, the subscribers would get enhanced pension benefits.
To know more details click “What is Atal Pension Yojana (APY)

Employees Provident Fund

The Provident Funds Bill was introduced in the Parliament as Bill Number 15 of the year 1952 as a Bill to provide for the institution of provident funds for employees in factories and other establishments. The Act is now referred to as the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 which extends to the whole of India. The Act and Schemes framed there under are administered by a tri-partite Board known as the Central Board of Trustees, Employees’ Provident Fund, consisting of representatives of Government (Both Central and State), Employers, and Employees.

The employee and employer each contribute 12% of the employee’s basic salary and dearness allowance towards EPF. Of the 12% of the employer’s contribution, 8.33% of the salary is directed to the EPS account and 3.67% of the salary is directed to the EPF scheme. On the other hand, 12% of the employee’s contribution is directed solely to the EPF Account. However, if the employee is a woman, she only needs to contribute 8% of her basic salary for the first three years. During this period, the employer’s EPF contribution will remain at 12%. The current rate of interest on EPF deposits is 8.15% p.a. The accrued interest on the EPF is tax-free and can be withdrawn without paying for the same. Employees avail of a lump-sum amount on their retirement, which is inclusive of the accrued interest.

Retirement-Focused Mutual Fund Schemes

A retirement fund’s investments typically include a broad portfolio of stocks, bonds, mutual funds, and other assets. The primary goal is to gradually accumulate wealth; ensuring individuals have a sizeable nest egg to support a comfortable and financially secure retirement. Retirement mutual funds are focused funds for the golden years with a lock-in of at least five years or the retirement age, whichever is earlier, as per the Securities and Exchange Board of India’s (Sebi) scheme guidelines. Those nearing retirement can explore this option, which offers liquidity and a tax benefit of up to Rs 1.50 lakh under Section 80C of the Income-tax Act, 1961.

As of November 30, 2023, there were 27 retirement mutual funds, with Rs 22,680.43 crore of net assets under management (AUM), held by only 11 asset management companies (AMCs), including UTI, Franklin, SBI, HDFC, and ICICI offer retirement schemes.

Annuity Plans provide a regular stream of pension

An annuity plan is an insurance contract between you (the annuitant) and an insurance company to provide you with a regular stream of 100% guaranteed pension for a lifetime after retirement. This helps you to secure your life goals and create a financial net for your family. The life insurance company invests your money and pays back the returns generated from it. You could think of it as a pension payment that is made to you.  The annuitant has the option to choose how he/she wishes to receive a pension – monthly, quarterly, half-yearly, or yearly. Annuity plans come with flexible investment options as well as payout options to ensure that you can accumulate your retirement funds at your convenience and receive the payouts for fulfilling your financial goals. You can claim a deduction of up to Rs. 1.5 lakhs on the premiums paid for an annuity plan u/Sec 80CCC of the IT Act, 1961. Taxation on Income Received.          The income earned as annuity is taxable as per your income tax slabs under the chosen old vs. new income tax regime for FY 2023-24. Individuals, who intend guaranteed returns post-retirement, along with a financial safety net for their family, will opt for annuity plans. Various options like a single annuity, joint annuity, and an annuity with returns of purchase price are available to suit individual preferences. Flexibility to pay a regular premium or a single premium is also offered.

Pension Plans with Life Cover

In India, insurance companies offer various types of pension plans. These include immediate annuity plans, deferred annuity plans, and plans with or without life cover. The most favorite types of pension plans are plans with life cover. These plans involve two components, i.e., the investment component and the insurance component. A part of the premium is invested in the market, and the rest goes towards life cover. The primary object of these types of pension funds is to provide a sustainable pension to cover the monthly expenses on retirement. They also serve as a financial safety net for the family in case of the demise of the policyholder during the policy term.

NPS – Swavalamban Yojana

The Swavalamban Yojana is a low-cost version of the new pension scheme (NPS). In essence, the scheme is designed to secure the future of the financially weaker section of society. The scheme is now a part of Jan Dhan Yojana.

A citizen of India between the age of 18 and 60 years as of the date of submission of his / her application, who belongs to the unorganized sector. He or she should not be on a regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government. The subscriber of NPS -Swavalamban- External website that opens in a new window account should not be covered under social security schemes like the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948, The Seamen’s Provident Fund Act, 1966, The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955 and The Jammu and Kashmir Employees’ Provident Fund Act, 1961.

Presently, the tax treatment for contributions made in Tier I account is Exempted-Exempted-Taxed (EET) i.e., the amount contributed is entitled to a deduction from gross total income up to Rs.1.00 lakh (along with other prescribed investments) as per section 80C (as per the provisions of the Income Tax Act, 1961 as amended from time to time).

To know more click ‘NPS-Swavalamban Yojana’

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a purchase.