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Introduction of pension plan
A pension is a fund into which a sum of money is added during an employee's

employment years, and from which payments are drawn to support the
person's retirement from work in the form of periodic payments. A pension may be a
"defined benefit plan" where a fixed sum is paid regularly to a person, or a "defined
contribution plan" under which a fixed sum is invested and then becomes available at
retirement age. Pensions should not be confused with severance pay; the former is
usually paid in regular instalments for life after retirement, while the latter is typically
paid as a fixed amount after involuntary termination of employment prior to
retirement.
The terms "retirement plan" and "superannuation" tend to refer to a pension granted
upon retirement of the individual retirement plans may be set up by employers,
insurance companies, the government or other institutions such as employer
associations or trade unions. Called retirement plans in the United States, they are
commonly known as pension schemes in the United
Kingdom and Ireland and superannuation plans (or super) in Australia and New
Zealand. Retirement pensions are typically in the form of a guaranteed life annuity,
thus insuring against the risk of longevity.
A pension created by an employer for the benefit of an employee is commonly referred

to as an occupational or employer pension. Labour unions, the government, or other
organizations may also fund pensions. Occupational pensions are a form of deferred
compensation, usually advantageous to employee and employer for tax reasons. Many
pensions also contain an additional insurance aspect, since they often will pay
benefits to survivors or disabled beneficiaries. Other vehicles (certain lottery pay-
outs, for example, or an annuity) may provide a similar stream of payments.
The common use of the term pension is to describe the payments a person receives
upon retirement, usually under pre-determined legal or contractual terms. A recipient
of a retirement pension is known as a pensioner or retiree.
N G Acharya & D K Marathe college pg. 1

Pension plans or retirement plans offer you the dual benefits of investment and
insurance cover. You just have to invest a certain amount regularly to accumulate
over a specific tenure in a phase-by-phase manner. This will ensure a steady flow of
monthly pension once you retire. Example, Public Provident Fund is a popular
retirement planning scheme.
If you begin contributing early, it will build towards a secure golden year money-wise.
A well-chosen retirement plan can help you rise above inflation, thanks to the power
of compounding. The corpus (investment + gains) in your name by the retiring age
can take care of increasing healthcare costs and lifestyle requirements.

Pension scheme in India
History
The Pension system in India was introduced by the British Government after the India
Independence struggle in 1857. This reflects the Pension system the prevailing in
Britain. The pay scales in the government service in India were planned to enable the
“native employees” of the British Government to meet their normal substance,
leaving very negligible margin for them to make provision for their post – retirement
life. The service conditions did not allow the Govt. employees to earn any extra
income by doing business or by carrying any other profession. So, the provision
pension of Pension system providing some sure income for the employees after their
retirement was aimed at, to discourage them from resorting to malpractices for
creating money cover for their post – retirement life. The Pension System thus started
in India was finalized by the Indian Pension Act of 1871. It appears that the British
Government had the conception of providing its pensioners increase in their pensions
to neutralize the effect of inflation. Accordingly, the British govt. granted temporary
increases in pension in 1921 to compensate the rise in prices after the First World
War. Similarly increases were also given in 1943, 1944 & 1945 after Second World
War. Thereafter for a long time no rise in pensions was sanctioned even though the
prices were rising. But serving employees were given some dearness allowance from
time to time and part of that was treated as pay for calculation of pension. No real
benefit could be got by pensioners up to 1945. The first pay commission was
appointed in 1946. The P & T Pensioners Association tried its best to bring the
problems of pensioners into the orbit of the pay commission but in vain. The
commission clarified that the pensioner’s problems could not be examined as the
same were not ‘referred to’. Even though the retirement benefits were being given by
the Govt. from time to time, they were not incorporated in Fundamental Rules made
effective from 1-1-1922. It was later decided by the govt. to make revised pension
rules governing the cases of post-1938 entrants. These rules were out only in 1945
giving rise to many problems. Later, Liberalized pension rules were formed in 1950
and made effective from 17-04-1950, providing for DCRG and commutation of

pension. Family pension scheme came into existence with effect from 1- 1-1964. In
1968 on a writ filed, Supreme Court rules that Pension is binding obligation of
government (and not a gift / reward or bounty). (Writ No. 217 / 1968) It was only in
1972 that the Govt. brought out a consolidated publication of all scattered pension
rules under the title “New Pension Rules 1972”, after the issue of fundamental rules
in 1922, which is after half a century. In 1985 CGH Scheme was made applicable to
pensioners including their dependant. A non-statutory committee called standing
committee of voluntary Association (SCOVA) was constituted in 1986 in the Ministry
of Pension and Pensioners’ Welfare to discuss problems of pensioners and make
recommendations to the Government. Many pensioners’ organization is nominated to
the committee by the Ministry and Quarterly meeting are held under the chairmanship
of the Minister. The period of 7 years for grant of Family Pension in the case of
absconded pensioners was brought down to one year in 1977. Widows of retirees
covered by CPF scheme were granted ex-gratia with effect from 1986.
Chronological events in pension scheme are dotted below.
1. India Pension Act introduced in 1871.

2. First increase in pension made in (1914-18) when First war was over.
3. Second temporary increase was sanctioned in 1943-1945 (2nd World War is
over) due to high inflation.
4. Due to increase in high rate’s etc. some portion of pay (D.P.) was ordered to
add while fixing pension w.e.f. 1.1.46 (Retired between 2.3.39 to 31.12.47).
This was affected w.e.f. 23.3.1947. This concession was extended up to
31.12.52.
5. F.R made effective from 1.1.1922. But pension rules were not consolidated up
to 1.10.38. Liberalized Pension Rules 1950 were formed and made effective
from 17-4- 1950. Pension rules 1972 were framed based on Liberalized
Pension Rules 1950.
6. As per Supreme Court decision dated 17-12-82 in Writ petition NO. 5939/80
that pension is binding / obligation on Govt. it is not a gift / reward/bounty.
(Nakra Judgment)

7. Liberalised Pension Rules 1950 had provided DCRG/family pension for
restricted period. ½ rd commutation of pension amount was allowed and
provision of nomination.
8. Supply of calculation sheet to pensioners started by order dated. 26-12-1970.
9. D.A. Committee granted following temporary increase w.e.f. 1-4-1958.
10. Ex-Pakistan Pension cases since 1948 to 1965.
11. Late P.M. Shri Lal Bahadur Shastri granted relief w.e.f. 1-10-1963.
12. Family pension scheme introduced w.e.f. 1-1-1964 (reducing 2 months DCRG)
Reduction of 2 months D.C.R.G w.e.f. 22-9-1977. Spouses alive on 22-9-1977
were granted Family Pension w.e.f. 22-9-1977 in pursuance of the Supreme
Court decision. If record is not available Affidavit was accepted as proof due to
efforts of Shri B. S. Vaze.
13. Recommendation of Committee (Lok Sabha) submitted dated. 19-12-1968 to
the Government.
14. Minimum Pension Rs. 100/- fixed w.e.f. 1-1-1973, Rs. 375/- W.e.f. 1-1-1986
and Rs. 1,275/- w.e.f. 1-1-1996. (Equal to minimum living standard).
15. Provision of Medical Aid introduced through CGHS in 1985.
16. Formation of SCOVA in 1986.
17. Formation of CAT in 1985 for Central Govt. Pensioners to get their grievances
solved through it.
18. Restoration of full pension is expected after 15 years of retirement. This is
because pension commutation is for the period of 15 years. However, in many
cases disbursing authorities did not take appropriate action and wanted
specific orders from pension fixing authority. Association files writ petition in
Supreme Court and decision obtained in favour of pensioners. Government of
India has issued appropriate orders based on NAKARA case.
19. Physically and mentally handicapped children and widowed daughter of
pensioners are now eligible for family pension. Government accepted this, and
the decision is in force since 1974. Further family pension is now admissible
for unmarried and divorced daughters. There is no age limit for daughters, but
income limit is applicable.

20. Association took up a case for granting of family pension to the spouse where
pensioner absconds for 1 year. Earlier this limit had been 7 years. This
decision is implemented since 1997. (54.10.12).
21. Now parents of deceased pensioner are eligible for family pension provided the
parents have no other children and their income is less than Rs. 2250.This is
based on recommendation in memorandum submitted by the Association to
Fifth CPC. CPC accepted this and included in their recommendation [54(20)]
to the Government of India. The Government accepted this and is in effect since
1-1-96.
22. Grant of ex-gratia payment to widows of CPF Retirees in 1986 (Rs. 150 + D/r
and Rs. 605 + DR w.e.f. a.a. 1996).
23. Pensioners retired prior to 1986 were given relief by re-fixing pension and
payment of pension was revised w.e.f. 1-1-1986. Dearness Relief also has been
made applicable to All India Central Government Pensioners' Association
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category of pensioners. (Fifth CPC).
24. This is not an achievement of the association. Noted here for information only.
All State Governments have accepted and implemented recommendations of
Fourth and Fifth CPC for their employees and pensioners.
25. Fixed Medical Allowance now admissible to Pensioners who are not residing
in Medical Scheme like CGHS etc. w.e.f. 1-12-1997 vide orders dated 27-12-
1997.
26. Dearness Relief allowed to Family Pensioners / Pension (2nd & 3rd) w.e.f. 18-
7-1997 dated. 25-6-1997 (Gazette dated. 19-7-1997- 55A.)
27. 50% Dearness Relief merged with basic Pension w.e.f. 1-4-2004, named as
Dearness Pension.
28. Military Pensioners up to JCOs rank granted revised pension w.e.f. 1-1-2006.
Tables published by CDA (P) Allahabad.

Breaking Down Pension Plan
There are two main types of pension plans:
In a defined-benefit plan, the employer guarantees that the employee receives a

definite amount of benefit upon retirement, regardless of the performance of the
underlying investment pool. The employer is liable for a specific flow of pension
payments to the retiree (the dollar amount is determined by a formula, usually based
on earnings and years of service), and if the assets in the pension plan are not
sufficient to pay the benefits, the company is liable for the remainder of the payment.
American employer-sponsored pension plans date from the 1870s (the American
Express Company established the first pension plan in 1875), and at their height, in
the 1980s, they covered nearly half of all private sector workers. About 90% of public
employees, and roughly 10% of private employees, in the U.S are covered by a
defined-benefit plan today, according to the Bureau of Labor Statistics.
In a defined-contribution plan, the employer makes specific plan contributions for the
worker, usually matching to varying degrees the contributions made by the employees.
The final benefit received by the employee depends on the plan's investment
performance: The company’s liability to pay a specific benefit ends when the
contributions are made. Because this is much less expensive than the traditional
pension, when the company is on the hook for whatever the fund can't generate, a
growing number of private companies are moving to this type of plan and ending
defined-benefit plans. The best-known defined-contribution plan is the 401(k), and its
equivalent for non-profits' workers, the 403(b).
In common parlance, "pension plan" often means the more traditional defined-benefit
plan, with a set pay out, funded and controlled entirely by the employer.
Some companies offer both types of plans. They even allow employees to roll over
401(k) balances into their defined-benefit plans.
There is another variation, the pay-as-you-go pension plan. Set up by the employer,
these tend to be wholly funded by the employee, who can opt for salary deductions or
lump sum contributions (which are generally not permitted on 401(k) plans).
Otherwise, they similarly to 401(k) plans, except that they usually offer no company
match.
Pension Plan: Factoring in ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a Federal law
designed to protect the retirement assets of investors, and the law specifically
provides guidelines that retirement plan fiduciaries must follow to protect the assets
of private sector employees.
Companies that provide retirement plans are referred to as plan sponsors

(fiduciaries), and ERISA requires each company to provide a specific level of plan
information to employees who are eligible. Plan sponsors provide details Son
investment options and the dollar amount of worker contributions that are matched by
the company, if applicable. Employees also need to understand vesting, which refers
to the dollar amount of the pension assets that are owned by the worker; vesting is
based on the number of years of service and other factors.
Pension Plan: Vesting

Enrolment in a defined-benefit plan is usually automatic within one year of
employment, although vesting can either be immediate or spread out over seven years.
Limited benefits are provided and leaving a company before retirement may result in
losing some or all an employee’s pension benefits.
With defined-contribution plans, your individual contributions are 100% vested as

soon as they reach your account. But if your employer matches those contributions or
gives you company stock as part of your benefits package, it may set up a schedule
under which a certain percentage is handed over to you each year until you are "fully
vested." Just because retirement contributions are fully vested doesn’t mean you’re
allowed to make withdrawals, however.

Pension Plan: Are They Taxable?
Most employer-sponsored pension plans are qualified, meaning they meet Internal
Revenue Code 401(a) and Employee Retirement Income Security Act of 1974 (ERISA)
requirements. That gives them their tax-advantaged status. Employers get a tax
break on the contributions they make to the plan for their employees. So, do
employees: Contributions they make to the plan come "off the top" of their pay checks
– that is, are taken out of their gross income. That effectively reduces their taxable
income, and, in turn, the amount they owe the IRS come April 15. Funds placed in a
retirement account then grow at a tax-deferred rate, meaning no tax is due on them as
long as they remain in the account. Both types of plans allow the worker to defer tax
on the retirement plan’s earnings until withdrawals begin, and this tax treatment
allows the employee to reinvest dividend income, interest income and capital gains,
which generates a much higher rate of return before retirement.
Upon retirement, when you start receiving funds from a qualified pension plan, you
may have to pay federal and state income taxes.
If you have no investment in the plan because you have not contributed anything or
are considered to not have contributed anything, your employer did not withhold
contributions from your salary or you have received all your contributions
(investments in the contract) tax free in previous years, your pension is fully taxable.
If you contributed money after tax was paid, your pension or annuity is only partially
taxable. You don't owe tax on the part of the payment you made that represents the
return of the after-tax amount you put into the plan. Partially taxable qualified
pensions are taxed under the Simplified Method.
Pension Plan: Can Companies Change Their Pension Plans?

Some companies are keeping their traditional defined-benefit plans, but are freezing
their benefits, meaning that after a certain point, workers will no longer accrue
greater payments, no matter how long they work for the company or how large their
salary grows.

When a pension plan provider decides to implement or modify the plan, the covered
employees almost always receive a credit for any qualifying work performed prior to
the change. The extent to which past work is covered varies from plan to plan. When
applied in this way, the plan provider must cover this cost retroactively for each
employee in a fair and equal way over the course of his or her remaining service
years.
Pension Plan vs. Pension Funds

When a defined-benefit plan is made up of pooled contributions from employers,
unions or other organizations, it is commonly referred to as a pension fund. Run by
a financial intermediary and managed by professional fund managers on behalf of a
company and its employees, pension funds control relatively large amounts of capital
and represent the largest institutional investors in many nations; their actions can
dominate the stock markets in which they are invested. Pension funds are typically
exempt from capital gains tax. Earnings on their investment portfolios are tax
deferred or tax exempt.
Pension Plan: Advantages and Disadvantages

A pension fund provides a fixed, preset benefit for employees upon retirement, helping
workers plan their future spending. The employer makes the most contributions and
cannot retroactively decrease pension fund benefits. Voluntary employee
contributions may be allowed as well. Since benefits do not depend on asset returns,
benefits remain stable in a changing economic climate. Businesses can contribute
more money to a pension fund and deduct more from their taxes than with a defined-
contribution plan. A pension fund helps subsidize early retirement for promoting
specific business strategies. However, a pension plan is more complex and costly to
establish and maintain than other retirement plans. Employees have no control over
investment decisions. In addition, an excise tax applies if the minimum contribution
requirement is not satisfied or if excess contributions are made to the plan.
An employee’s pay out depends on his salary and length of employment with the
company. No loans or early withdrawals are available from a pension fund. In-service

distributions are not allowed to a participant before age 62. Taking early retirement
generally results in a smaller monthly pay out.
Pension Plan: Monthly Annuity or Lump Sum?

With a defined-benefit plan, you usually have two choices when it comes to
distribution: periodic (usually monthly) payments for the rest of your life or a lump
sum distribution. Some plans allow you to do both, i.e., take out some of the money in
a lump sum, and use the rest to generate periodic payments. In any case, there will
likely be a deadline by which you have to decide, and your decision will be final.
There are several things to consider when choosing between a monthly annuity and a
lump sum.
• Annuity: Monthly annuity payments are typically offered as a single life

annuity for you only for the rest of your life – or as a joint and survivor annuity
for you and your spouse. The latter pays a lesser amount each month (typically
10% less), but the pay-outs continue after your death, until the surviving
spouse passes away.
Some people decide to take the single life annuity, opting to purchase a whole life or
other type of life insurance policy to provide income for the surviving spouse. When
the employee dies, the pension pay out stops; however, the spouse then receives a
large death benefit pay out (tax-free) which can be invested and uses to replace the
taxable pension pay out that has ceased. This strategy, which goes by the fancy-
sounding name pension maximization, may not be a bad idea if the cost of the
insurance is less than the difference between the single life and joint and survivor
pay-outs. In many cases, however, the cost far outweighs the benefit.
Can your pension fund ever run out of money? Theoretically, yes. But if your pension
fund doesn’t have enough money to pay you what it owes you, the Pension Benefit
Guaranty Corporation (PBGC) could pay a portion of your monthly annuity, up to a
legally defined limit. For 2019, the annual maximum PBGC benefit for a 65-year-old

retiree is $67,295. Of course, PBGC payments may not be as much as you would have
received from your original pension plan.
Annuities usually pay out at a fixed rate. They may or may not include inflation
protection. If not, the amount you get is set from retirement on. This can reduce the
real value of your payments each year, depending on how the cost of living is going.
And since it rarely is going down, many retirees prefer to take their money in a lump
sum.
• Lump Sum: If you take a lump sum, you avoid the potential (if unlikely)
problem of your pension plan going broke or losing some or all your pension if
the company files for bankruptcy. Plus, you can invest the money, keeping it
working for you – and possibly earning a better interest rate, too. If there is
money left when you die, you can pass it along as part of your estate.
On the downside: No guaranteed lifetime income, as with an annuity. It’s up to you to

make the money last. And, unless you roll the lump sum into an IRA or other tax-
sheltered account, the whole amount will be immediately taxed and could push you
into a higher tax bracket.
If your defined-benefit plan is with a public-sector employer, your lump sum

distribution may only be equal to your contributions. With a private sector employer,
the lump sum is usually the present value of the annuity (or, more precisely, the total
of your expected lifetime annuity payments discounted to today's dollars). Of course,
you can always use a lump sum distribution to purchase an immediate annuity on
your own, which could provide a monthly income stream, including inflation
protection. As an individual purchaser, however, your income stream will probably
not be as large as it would with an annuity from your original defined-benefit pension
fund.

Pension Plan: Which Yields More Money?
With just a few assumptions, and a small amount of math, you can determine which
choice yields the largest cash pay out.
You know the present value of a lump-sum payment, of course. But to figure out which
makes better financial sense, you need to estimate the present value of
annuity payments. To figure out the discount or future expected interest rate for the
annuity payments, think about how you might invest the lump sum payment and then
use that interest rate to discount back the annuity payments. A reasonable approach
to selecting the ‘discount rate’ would be to assume that the lump sum recipient invests
the pay out in a diversified investment portfolio of 60% equity investments and 40%
bond investments. Using historical averages of 9% for stocks and 5% for bonds, the
discount rate would be 7.40%.
Imagine that Sarah was offered $80,000 today or $10,000 per year for the next 10
years. On the surface, the choice appears clear: $80,000 versus $100,000 ($10,000 x
10 years): Take the annuity.
But the choice is impacted by the expected return (or discount rate) Sarah expects to
receive on the $80,000 over the next 10 years. Using the discount rate of 7.40%,
calculated above, the annuity payments are worth $68,955.33 when discounted back
to the present, whereas the lump-sum payment today is $80,000. Since $80,000 is
greater than $68,955.33, Sarah would take the lump-sum payment.
Pension Plan: Other Deciding Factors

There are other basic factors that must almost always be taken into consideration in
any pension maximization analysis. These variables include:
• Your age: One who accepts a lump sum at age 50 is obviously taking more of
a risk than one who receives a similar offer at age 67. Younger clients face a
higher level of uncertainty than older ones, both financially and in other ways.

• Your current health and projected longevity: If your family history shows a
pattern of predecessors dying of natural causes in their late 60s or early 70s,
then a lump-sum payment may be the way to go. Conversely, someone who is
projected to live to age 90 will quite often come out ahead by taking the
pension. Remember that most lump sum pay-outs are calculated based on
charted life expectancies, so those who live past their projected age are, at
least mathematically, likely to beat the lump sum pay out. You might also
consider whether health insurance benefits are tied to the pension pay-outs in
any way.
• Your current financial situation: If you are in dire straits financially, then the
lump-sum pay out may be necessary. Your tax bracket can also be an important
consideration; if you are in one of the top marginal tax brackets, then the bill
from Uncle Sam on a lump-sum pay out can be murderous. And if you are
burdened with a large amount of high-interest obligations, it may be wiser to
simply take the lump sum to pay off all your debts rather than continue to pay
interest on all those mortgages, car loans, credit cards, student loans and
other consumer liabilities for years to come. A lump-sum pay out may also be a
good idea for those who intend to continue working at another company and
can roll this amount into their new plan, or for those who have delayed
their Social Security until a later age and can count on a higher level of
guaranteed income from that.
• The projected return on the client’s portfolio from a lump-sum investment: If

you feel confident your portfolio will be able to generate investment returns
that will approximate the total amount that could have been received from the
pension, then the lump sum may be the way to go. Of course, you need to use a
reasonable pay out factor here, such as 3%, and don’t forget to take drawdown
risk into account in your computations. Current market conditions and interest
rates will also obviously play a role, and the portfolio that is used must fall
within the parameters of your risk tolerance, time horizon and
specific investment objectives.

• Safety: If you have a low risk tolerance, prefer the discipline of annuitized
income, or simply don't feel comfortable managing large sums of money, then
the annuity pay-out is probably the better option because it’s a safer bet. In
case of a company plan going bankrupt, along with the protection of the
PBGC, state reinsurance funds often step in to indemnify all customers of an
insolvent carrier up to perhaps two or three hundred thousand dollars.
• The cost of life insurance: If you're in relatively good health, then the
purchase of a competitive indexed universal life insurance policy can
effectively offset the loss of future pension income and still leave a large sum to
use for other things. This type of policy can also carry accelerated benefit
riders that can help to cover the costs for critical, terminal or chronic illness or
nursing home care. However, if you are medically uninsurable, then the
pension may be the safer route.
• Inflation protection: A pension pay out option that provides a cost-of-living
increase each year is worth far more than one that does not. The purchasing
power from pensions without this feature will steadily diminish over time, so
those who opt for this path need to be prepared to either lower their standard
of living in the future or else supplement their income from other sources.
• Estate planning considerations: If you want to leave a legacy for children or
other heirs, then an annuity is out. The payments from these plans always cease
at the death of either the retiree or the spouse, if a spousal benefit option was
elected. If the pension pay-out is clearly the better option, then a portion of that
income should be diverted into a life insurance policy or provide the body of
a trust.
Pension Plan: Retirement and Defined-Contribution Plans

With a defined-contribution plan, you have several options when it comes time to shut
that office door.
• Leave In: You could just leave the plan intact and your money where it is. You
may in fact find the firm encouraging you to do so. If so, your assets will

continue to grow tax-deferred until you take them out. Under the IRS' required
minimum distribution rules, you have to begin withdrawals once you reach age
70½. There may be exceptions, however, if you are still employed by the
company in some capacity.
• Instalment: If your plan allows it, you can create an income stream, using
instalment payments or an income annuity – sort of a pay checks-to-yourself
arrangement throughout the rest of your retirement lifetime. If you annuitize,
bear in mind that the expenses involved could be higher than with an IRA.
• Roll Over: You can roll over your 401(k) funds to a traditional IRA, where
your assets will continue to grow tax-deferred. One advantage of doing this is
that you will probably have many more investment choices. You can then
convert some or all the traditional IRA to a Roth IRA. You can also roll over
your 401(k) directly into a Roth IRA. In both cases, although you will pay taxes
on the amount you convert that year, all subsequent withdrawals from the Roth
IRA will be tax-free. In addition, you are not required to make withdrawals
from the Roth IRA at age 70½ or, in fact, at any other time during your life.
• Lump Sum: As with a defined-benefit plan, you can take your money in a lump
sum. You can invest it on your own or pay bills, after paying taxes on the
distribution. Keep in mind, a lump sum distribution could put you in a higher
tax bracket, depending on the size of the distribution.

Features & Benefits of Pension Plans
a. Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred plan) or immediately
after investing (immediate plan), based on how you invest. This ensures you a
financially independent life after retiring. Use a retirement calculator for a rough
estimate of how much money you might require monthly after retirement.
b. Tax-Efficiency
Pension plans are entitled to tax exemption specified under Section 80C. If you want
to contribute to pension plans, the Indian Income Tax Act, 1961, offers significant tax
respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail.
For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are
subject to tax deduction under 80CCD.
c. Liquidity
A retirement plan is essentially a product of low liquidity though some companies let
you withdraw even during the accumulation stage. So, you will have funds to fall back
on during emergency without having to rely on bank loans or borrow from other
people.
d. Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most
pension plans keep their minimum vesting age at 40 or 50. It is flexible up to age 70,
though some companies allow the vesting age to be up to 90.
e. Accumulation Duration
The investor can pay the premium in periodic intervals or once in this period. This is
when the wealth accumulates to build up a sizable corpus (investment + gains). For
instance, if you start investing at the age 30 and continues investing till 60, the

accumulation period will be 30 years. Your pension for the chosen period essentially
comes from this corpus.
f. Payment Period
Investors often confuse this with the accumulation period. This is the period in which
you receive the pension after retiring. For instance, if one receives the pension from
the age 60 to age 75, the payment period will be 15 years. Most funds keep this
separate from accumulation period, though some funds allow partial/full withdrawals
during accumulation periods too.
g. Surrender value
Surrendering one’s pension plan before maturity is not a smart move even
after paying the required minimum premium. This results in the investor losing every
benefit of the plan including the assured sum and life insurance cover.

Types of pension plan in India
It is never too early or late to start thinking about retirement plans – the sooner, the
better. Whether you are salaried or entrepreneurial, there is a slew of pension plans
you can choose from as listed below.
SL Plan Type In Detail

No.
1 Deferred Annuity Systematic premium or one lump sum premium over the tenure
Pension begins after completing the term
No taxation (unless you withdraw the corpus)
2 Immediate Annuity Only lumpsum investment allowed

Pension begins immediately after investment
Income Tax exempts tax on the premiums
The nominee can claim the pension or the corpus after the
passing of policyholder
3 Annuity Certain The pension is disbursed for a specific period

The policyholder can choose a period (say, age 65-70)
The nominee can claim the pension after the demise of the
policyholder
4 With Cover Pension Comes with a ‘cover’ policy – policyholder’s dependents are
Plan entitled to a lump sum after he/she expires
The insurance amount is not large a most of the premium goes
towards building the corpus

5 Life Annuity Pension paid till death
‘With spouse’ option – spouse continues to receive after the
policyholder’s demise
6 National Pension Launched and managed by the central government

Scheme (NPS) Your money will be distributed in equity and debt markets as
your preference.
Withdraw 60% when you retire, and the rest should be used to
buy the annuity
The tax levied on the 20% of the corpus you withdraw upon
maturity
7 Pension Funds Better returns once it matures

Regulated by the government body, Pension Fund Regulatory &
Development Authority (PFRDA)
Currently, 6 fund houses in India are authorized to offer pension

funds. Example, SBI
8 Guaranteed Period Annuity disbursed for specific terms like 5 to 20 years.

Annuity Plan

Role of Pension Funds in the Economy
Fully funded pension systems do not provide benefits to the pensioners alone, but they
may also exert strong externalities that may benefit the overall economy. The most
widely acclaimed externality that fully funded pension schemes are held to generate is
8 their stimulus for financial development. It is often claimed that fully-funded pension
systems help (a) raise the supply of long-term funds, (b) strengthen the efficiency of
fund allocation, and (c) stimulate the financial infrastructure of a country. Moreover,
it is often asserted that a funded pension system would also help stimulate the level of
national savings.
In a country’s social security system Pensions play an imperative part. The

development of the pension funds market is necessary for ensuring the future needs of
the country’s population and developing depth in the equity and bond markets. In fact,
liberalization of Insurance and Pension has been cornerstone of every developing
country’s embracing of free market economy. For instance, after Korean and
Taiwanese insurance sectors were liberalized, the Korean retirement cover market
has grown three times faster than GDP and in Taiwan; the rate of growth has been
almost 4 times that of its GDP. Philippines followed the trend in 1992. As a case in
point, over the past half-century, the U.S. financial sector has undergone a
transformation as household savings shifted from banks to pension funds and other
institutional investment pools. Between 1953 and 2003, the assets of all depository
institutions – banks, savings institutions and credit unions – dropped from 60.1
percent of total financial-sector assets to 23.0 percent. Meanwhile, the assets of
pension funds and mutual funds grew from 9.6 to 33.5 percent of the total. At yearend
2003, these institutional investment pools provided the dominant channels for
households’ saving and investment flows with combined assets of $14.4 trillion. By
contrast, the total assets of depository institutions amounted to $9.9 trillion.
Seen from the global economic scenario the pension industry is a key component of
the financial infrastructure of an economy, in the sense that it is one of the few
sources of long term funds which have null or least risk associated with maturity of
assets and liabilities, and its viability and strengths have far reaching consequences
for not only its money and capital markets, but also for each and every facet of the
economy.
Structure of Indian Pension System
Inspite of its limited scope and size, the Indian pension system in its current form, can
at best be described as an extremely complicated and fractured one inducing
distortion in the labor market. A large number of occupation-based retirement
schemes with wide diversity in plan characteristics and benefit provisions are in
existence and have created a wedge of disparity between public and private sector
workers. While private sector workers are aggrieved with low returns from their
benefit schemes, public employees are privileged with generous pension provisions.
As per 1991 census, approximately 75% of India’s population lives in rural areas. The
per capita income of the populace stood at Rs.13193 (at 1997-98 price levels). The
1991 census estimated the Indian labor force to comprise of 314 million workers. Of
these, 15.2% were regular salaried employees, 53% were self-employed and another
31% were casual /contract labor. The Central Government departments (including
P&T, Defence and Railways), States and UT Governments employed a total work
force of approximately 11.13 million thus accounting for 23% of the total salaried
employees in India. They are eligible for the full range of government’s pensionary
benefits including a non-contributory, indexed, defined benefit pension scheme.
Another 49% of the total salaried workers are covered by a mandatory Employees’
Provident Fund (EPF) and Employees’ Pension Scheme (EPS).
Employees' Provident Fund (EPF)
The EPF programme, established in 1952, is a contributory provident fund providing

benefits upon retirement, resignation or death, based on the accumulated contributions
plus interest, from employers and employees. Subscribers to the EPF have the option
to make partial withdrawals for specified purposes such as house construction, higher
education for children, marriage, and medical expenses associated with illness.
Establishments covered by the EPF can either have the EPFO manage the provident
fund or can undertake processes to qualify as an exempt establishment, whereby they

manage the provident fund themselves. In general, exempted establishments are large
companies. (Private Provident Funds)
Statistics about EPF:
Workers covered 24 million
Contribution rate 12 per cent employers’ share and 12 per

cent employees’ share
Total contribution 24 per cent
Diverted as under • Provident Fund - 15.67 per cent
• Pension Fund - 8.33 per cent
Government contribution in pension 1.16 per cent

fund
In India the EPF, has been used more as medium of tax evasion by the salaried classes
as the entire amount deposited in EPF is deductible for income-tax estimation purposes.
This negates the purpose for which it was originally set up for i.e. as a fund that would
cover expenditure during the lifetime after retirement.
Employees’ pension scheme(EPS)
The EPS, established in 1995, provides for the payment of a member’s pension upon
the member’s superannuation/retirement, disability, and widow/widower pension, and
children's pension upon the member’s death. The EPS program has replaced the
erstwhile Family Pension Scheme (FPS). Employers that are not mandated to be
covered may voluntarily apply for coverage. The new scheme, known, as the Employees’
Pension Scheme (EPS), is essentially a defined-benefit program providing earnings
related pension on superannuation, disability or death. Thus, EPF members are now
eligible for two benefit streams on superannuation – a lump sum EPF accumulation
upon retirement and a monthly pension from the EPS.

The amount of the pension benefit is based on the employee's average salary during the
final year of employment and the total number of years of employment. Under the EPS,
members must have completed a minimum of ten years of service and must be at least
58 years old. However, if an employee has completed twenty years of service, he/she
may obtain an early pension from age 50. Under this provision, the amount of pension
benefit is reduced by 3 per cent for every year falling short of 58. Exemption from the
EPS is allowed, but in this event, the employer will have to cover the government's
contribution.
However, participation to the EPS program was voluntary for the existing workers as
on 1995 but mandatory for the new workers whose monthly pensionable earnings did
not exceed Rs. 5000. Aggrieved workers alleged that the pension from the EPS was
substantially inferior compared to the public pension schemes and that the return from
the scheme was even lower than the provident fund arrangement. The debate
surrounding the EPS continues unabated till today, with many trade unions filing
litigations against the scheme.
This new system along with the recommendations of the Fifth Pay Commission Report
has only added to the liabilities of the government.
Employees Deposit Linked Insurance Scheme(EDLI)
The EDLI programme was established in 1976. This programme provides lump sum
benefits upon the death of the member equal to the average balance in the member’s
EPF account for the 12 months preceding death, up to Rs. 25,000 plus 25 per cent of
the amount in excess of Rs. 25,000 up to a maximum of Rs. 60,000. Contributions
received are kept in the Public Account and earn an interest of 8.5 per cent. Health care
and insurance are covered through Employees’ State Insurance Corporation.
Insured persons 8.8 million
Beneficiaries 34.2 million

Contribution rate 4.75 per cent employers’ share and 1.75
per cent employees’ share
Total contribution 6.5 per cent
Other Schemes
The central government alone administers separate pension programs for civil
employees, defence staff and workers in railways, post, and telecommunications
departments. This is called the Civil Servants’ Pension Scheme (CSPS). These benefit
programs are typically run on a pay-as-you-go, defined-benefit basis. The schemes are
non-contributory i.e. the workers do not contribute during their working lives. Instead,
they forego the employer’s contribution into their provident fund account. The entire
pension expenditure is charged in the annual revenue expenditure account of the
government.
Federal Government including military 4 million

personnel
State Government civil services 6 million

including personnel employed in state-
owned public-sector undertakings
Benefits available to those who are 50 per cent of average wage earned
covered under the pay-as-you-go during the last 12 months.
systems
In addition to the provident fund, workers in both public and private sectors receive a
second tier of lump sum retirement benefit known as gratuity. It is paid to the workers
who fulfil certain eligibility conditions like a minimum qualifying service period of five
years. It is equivalent to 15 days of final earnings for each years of service completed

subject to a maximum of Rs. 350,000. The cost of gratuity is entirely borne by the
employer.
The Public Provident Fund (PPF) scheme, introduced about three decades ago, is
meant to provide unorganised sector workers with the facility to accumulate savings
for old age income security. Under the scheme, amounts between Rs 100 to Rs 60,000
per annum can be deposited into the PPF account. These investments are eligible for
tax rebate under Sec 88 of the Income Tax Act and interest at a guaranteed 11 per cent
p.a. (till recently 12 per cent per annum) is fully tax exempt under Sec 10.
The scheme has poor coverage because of ineffective marketing and the service delivery
is grossly inadequate. Being largely urban centric, the scheme is used more as a tax
planning vehicle by high-income savers than an old age income security plan. The 11
per cent tax-free return that a PPF investor is guaranteed is equivalent to a 16.8 per
cent pre-tax return for a marginal income tax payer.
To widen the reach of the social safety net for the aged poor, the central government,
in 1995, introduced a more comprehensive old age poverty alleviation program called
the National Old Age Pension (NOAP) under the aegis of the National Social Assistance
Programme (NSAP). The scheme aims to provide monthly pension to thirty percent of
the poorest elderly. This programme provides benefits for poor people above the age of
75 years. Under the programme a pension of Rs. 75/- per month is provided to eligible
persons.
The formal old age income security system in India can thus be classified into three
categories:
• The upper tier consists of statutory pension schemes and provident funds for the
organised sector employees.
• The middle tier is comprised of voluntary retirement saving schemes for the self-
employed and unorganised sector workers.
• The lower tier consists of targeted social assistance schemes and welfare funds
for the poor.

National Pension System(NPS)
Pension plans provide financial security and stability during old age when people don't
have a regular source of income. Retirement plan ensures that people live with pride
and without compromising on their standard of living during advancing years. Pension
scheme gives an opportunity to invest and accumulate savings and get lump sum amount
as regular income through annuity plan on retirement.
According to United Nations Population Division World's life expectancy is expected

to reach 75 years by 2050 from present level of 65 years. The better health and
sanitation conditions in India have increased the life span. As a result, number of post-
retirement years increases. Thus, rising cost of living, inflation and life expectancy
make retirement planning essential part of today's life. To provide social security to
more citizens the Government of India has started the National Pension System.
The National Pension System (NPS), earlier known as New Pension Scheme is a
pension system open to all citizens of India. The NPS invests the contributions of its
subscribers into equities and debt and the final pension amount depends on the
performance of these investments. Any Indian citizen from the age of 18-65 can open
an NPS account. The NPS matures at the age of 60 but can be extended till the age of
70. Partial withdrawals up to 25% of your contributions can be made from the NPS
after three years of account opening for specific purposes like home buying, children’s
education or serious illness.

Government of India established Pension Fund Regulatory and Development Authority
(PFRDA) on 10th October 2003 to develop and regulate pension sector in the country.
The National Pension System (NPS) was launched on 1st January 2004 with the
objective of providing retirement income to all the citizens. NPS aims to institute
pension reforms and to inculcate the habit of saving for retirement amongst the citizens.
Initially, NPS was introduced for the new government recruits (except armed forces).
With effect from 1st May 2009, NPS has been provided for all citizens of the country
including the unorganised sector workers on voluntary basis.
Additionally, to encourage people from the unorganised sector to voluntarily save for
their retirement the Central Government launched a co-contributory pension scheme,
'Swavalamban Scheme' in the Union Budget of 2010-11. Under Swavalamban Scheme,
the government will contribute a sum of Rs. 1,000 to each eligible NPS subscriber who
contributes a minimum of Rs. 1,000 and maximum Rs. 12,000 per annum. This scheme
is presently applicable up to F.Y.2016-17.
NPS offers following important features to help subscriber save for retirement:

• The subscriber will be allotted a unique Permanent Retirement Account Number
(PRAN). This unique account number will remain the same for the rest of
subscriber's life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
• Tier I Account: This is a non-withdrawable account meant for savings for

retirement. This account carries a tax deduction under Section 80C up to Rs 1.5
lakh per annum and under Section 80CCD (1B) up to Rs 50,000 per annum. On
maturity at the age of 60, 40% of the corpus is tax free and can be withdrawn.
Another 40% must mandatorily be used to buy an annuity. The balance 20% can
either be used to buy an annuity or can be withdrawn after paying tax.
• Tier II Account: This is simply a voluntary savings facility. The subscriber is

free to withdraw savings from this account whenever subscriber wishes. No tax
benefit is available on this account. This is a voluntary retirement-cum-savings
account that can be opened only if you have a Tier I account. Subscribers are
free to invest or withdraw their funds anytime according to their convenience.
This account has no tax deductions, for private sector employees or self-
employed persons. In a press conference held on 10th December 2018, Finance
Minister Arun Jaitley announced that the NPS Tier 2 account will also be
eligible for tax benefits under Section 80C of the Income Tax Act with a 3-year
lock-in.

REGULATOR AND ENTITIES FOR NPS
Pension Fund Regulatory and Development Authority (PFRDA):
Pension Fund Regulatory and Development Authority (PFRDA) is an autonomous body
set up by the Government of India to develop and regulate the pension market in India.
Point of Presence (POP):

Points of Presence (POPs) are the first points of interaction of the NPS subscriber with
the NPS architecture. The authorized branches of a POP, called Point of Presence
Service Providers (POP-SPs), will act as collection points and extend several customer
services to NPS subscribers. The Pension Fund Regulatory and Development Authority
(PFRDA) has authorized 58 institutions including public sector banks, private banks,
private financial institutions and the Department of Posts as Points of Presence (POPs)
for opening the National Pension System (NPS) accounts of the citizens.
Central Recordkeeping Agency (CRA):

The recordkeeping, administration and customer service functions for all subscribers
of the NPS are being handled by the National Securities Depository Limited (NSDL),
which is acting as the Central Recordkeeper for the NPS.
Annuity Service Providers (ASPs):

Annuity Service Providers (ASPs) would be responsible for delivering a regular
monthly pension to the subscriber after exit from the NPS.
WHO CAN JOIN NPS

Central Government Employees
NPS is applicable to all new employees of Central Government service (except Armed
Forces) and Central Autonomous Bodies joining Government service on or after 1st
January 2004. Any other government employee who is not mandatorily covered
under NPS can also subscribe to NPS under "All Citizen Model" through a Point of
Presence - Service Provider (POP-SP)

The Central Government employees can subscribe for NPS (Tier-I) through following
process:
• Submit form S1 to the Drawing and Disbursing Officer (DDO) or equivalent

offices.
• The DDO shall provide and certify the employment details.
• Subsequently, the DDO shall forward the form to the respective Pay and
Accounts Office (PAO) / District Treasury officer (DTO).
• The form should be submitted to Central Recordkeeping Agency (CRA) for
registration
Contribution to NPS
For the Central Government employee’s contribution through their nodal office to
National Pension System (NPS) is mandatory. Every month 10% of his/ her salary
(basic + DA) and equivalent government's contribution will be invested in NPS.
Withdrawal
As per the guidelines of Pension Fund Regulatory & Development Authority

(PFRDA) or Ministry of Finance, the subscribers can withdraw from NPS on his/ her
retirement, resignation or death.
On retirement a subscriber would be required to invest minimum 40% of his / her
accumulated savings to purchase a life annuity from Pension Fund Regulatory &
Development Authority (PFRDA) empanelled and Insurance Regulatory and
Development Authority (IRDA) approved Annuity Service Providers (ASPs). Around
80% of amount must be annuitized and remaining can be withdrawn by the subscriber
on resignation. In case of death of the subscriber, entire amount will be handed over to
the nominee.
State Government Employees

NPS is applicable to all the employees of State Governments, State Autonomous Bodies
joining services after the date of notification by the respective State Governments. Any

other government employee who is not mandatorily covered under NPS can also
subscribe to NPS under "All Citizen Model" through a Point of Presence - Service
Provider (POP-SP).
Procedure to subscribe
The State Government employees can register for NPS (Tier-I) through following
process:
• Submit S1 form to the Drawing and Disbursing Officer (DDO) or equivalent

offices.
• The DDO shall provide and certify the employment details.
• Subsequently, the DDO shall forward the form to the respective Pay and
Accounts Office (PAO) / District Treasury officer (DTO).
• The form should be submitted to Central Recordkeeping Agency (CRA) for
registration.
Contribution to NPS
For the State Government employee’s contribution through their nodal office to
National Pension System (NPS) is mandatory. Every month 10% of his/ her salary
(basic + DA) and equivalent government's contribution will be invested in NPS.
Withdrawal

accumulated savings to purchase a life annuity from Pension Fund Regulatory &
80% of amount must be annuitized and remaining can be withdrawn by the subscriber
the nominee.

Corporate
A Corporate would have the flexibility to decide investment choice either at subscriber
level or at the corporate level centrally for all its underlying subscribers. The corporate
or the subscriber can choose any one of Pension Fund Managers (PFMs) available
under “All Citizen Model” and the percentage in which the funds are allocated in
various asset classes.
Benefits to corporate
NPS-Corporate model provides a platform to the corporate to co-contribute for the
employee's pension. The corporate can save expenses incurred on self-administration
of pension functions like setting up separate trust, recordkeeping, fund management,
providing annuity, etc. Under NPS the corporate may exercise choice of PFM, as also
the investment pattern (allocation of corpus amongst three asset classes) for its
employees or leave the option to employees.
NPS is a prudentially regulated scheme with transparent investment norms, regular
monitoring and performance review of Fund Managers by NPS Trust and overall
supervision of Pension Fund Regulatory and Development Authority (PFRDA). It offers
a lot of flexibility in terms of choice of investment mix across Equity (max up to 50%),
Corporate and Government bonds.
Those not financially aware or inclined can manage the funds passively by opting for
Life Cycle Fund in NPS in which the 50% equity exposure is reduced by 2% every year
after the investor turns 35 till it becomes 10%. This is in keeping with the strategy to
opt for higher- risk- higher- return portfolio mix earlier in life, when there is ample time
to make up for any possible black swan event. Gradually one can move on to fixed-
return -low -risk portfolio as one approaches retirement. Also, the choice of PFMs and
the investment pattern can be changed once in a year.
Also, employer can claim tax benefits for the amount contributed towards pension of
employees up to 10% of the salary (basic and dearness allowance) as Business Expense'
from their Profit & Loss account under section 36(1) of the IT-Act.

Benefits to subscribers
NPS allows one to accumulate corpus from the age of 18 years for forty odd years
irrespective of geographies and employers in a single PRAN account with minimal
leakages in the form of withdrawals for competing consumption expenses, reap the
compounding effect of tax concessions and low fees, invest the corpus as per one's risk
appetite with professionally managed funds, generate optimum returns followed by a
seamless transfer of retirement wealth from the accumulation phase to any of the
seven IRDA regulated Annuity Service Providers (ASPs) of ones' choice on reaching 60
years of age .
The additional tax benefit to the employees joining NPS as per the Income Tax Act,
1961 is perhaps the finest USP of the scheme. A subscriber's contribution to NPS tier I
up to 10% of the salary (Basic +DA) is tax exempt under sec 80 CCD (i) with a ceiling
of Rs.1.00 lacs under section 80 CCE. Besides, the employers' contribution up to 10%
of the salary (Basic +DA) is also tax exempt in the hands of the employee under Section
80 CCD (2) of Income Tax Act. This exemption is over and above the Rs.1.00 lac limit,
thus making NPS the exclusive option for this tax treatment.
Hence, by contributing to the NPS, the employer can provide an additional tax benefit
to the employee by simply reorganizing the salary structure without incurring any
additional cost to the company (CTC).
Corporate can extend NPS to their employees by tying up with any of the approved
PoPs through MOUs. An eligible corporate entity is free to negotiate charges with PoPs
where POP-SP will undertake entire data upload as per All Citizen's model.
The Corporate can register for NPS through following process:

• Submit along with the details of corporate Branch offices to the designated
PoP.
• Designated PoP would ensure necessary due diligence on the status of
corporate as required for Know Your Customer (KYC) verification as per
AML/CFT guidelines issued by Government of India and submit the form
to Central Recordkeeping Agency (CRA) duly certified.

• CRA would register the corporate in the CRA system and allot entity
registration number, which would be reflected in each subscriber registration
form (CS-S1).
Contribution to NPS
A Corporate would have flexibility to provide investment scheme preference (PFM and
Investment choice) either at subscriber level or at the corporate level centrally for all
its underlying subscribers.
Withdrawal

accumulated savings to purchase a life annuity from Pension Fund Regulatory and
80% of amount has to be annuitized and remaining can be withdrawn by the subscriber
the nominee.
Individual
All citizens of India between the age of 18 and 60 years as on the date of submission of
his / her application to Point of Presence (POP) / Point of Presence-Service Provider
(POP-SP) can join NPS.
Any Individual can register as a subscriber in NPS by following procedure:

• Submit duly filled UOS S1 form to open a Permanent Retirement Account
(PRA) (Tier I and/or Tier II) in NPS with other supporting KYC documents to
POP-SP.
• For only Tier II account, an individual with an active Tier I account needs to
approach the associated POP-SP and submit a copy of the PRAN Card along
with UOS-S10 form (Tier II activation form)
• POP-SP will validate the form and provide a receipt number to the subscriber.
Contribution
To contribute in Tier I and Tier II account, a subscriber is required to make his / her
first contribution at the time of applying for registration (minimum contribution Rs.500
for Tier I and Rs.1000 for Tier II) at any POP-SP with NCIS (NPS Contribution
Instruction Slip) form
The NPS subscriber is required to make contributions subject to the following
conditions:
• Minimum amount at the time of Account opening - Rs.500
• Minimum amount per contribution - Rs.500
• Minimum contribution per year - Rs. 6,000
• Minimum number of contributions in a year - one
A subscriber can decide on the frequency of the contributions across the year as per his
/ her convenience. No maximum limit has been mandated.
For Tier II, minimum contribution requirements are:
• Minimum contribution at the time of account opening - Rs.1000
• Minimum amount per contribution - Rs.250
• Minimum number of contributions in a year - one
• Maintain minimum balance of Rs.2000 at the end of each financial year
Withdrawal
In Tier I account, a subscriber can withdraw from NPS on his/ her retirement,
resignation or death. On retirement a subscriber would be required to invest minimum

40% of his / her accumulated savings to purchase a life annuity from any Pension Fund
Regulatory and Development Authority (PFRDA) empanelled and Insurance
Regulatory and Development Authority (IRDA) approved Annuity Service Providers
(ASPs). Around 80% of amount has to be annuitized and remaining can be withdrawn
by the subscriber on resignation. In case of death of the subscriber, entire amount will
be handed over to the nominee.
To withdraw from Tier II account, the subscriber needs to submit UOS-S12 form to the
associated POP-SP. If the request is entered and authorised in CRA system by the
POP/POPSP before 1.30 PM, then it goes for same day's processing, or else it goes for
the next business day. The redemption amount may vary due to the variation of NAV.
Units are redeemed based on the NAV declared at the end of the processing day. On
date of processing with addition of 3 days, the funds are transferred from the Trustee
Bank to subscriber's bank account as registered in the CRA system.
Unorganised Sector Workers - Swavalamban Yojana

A citizen of India between the age of 18 and 60 years as on the date of submission of
his / her application, who belongs to the unorganized sector or is not in a regular
employment of the Central or a state government, or an autonomous body/ public sector
undertaking of the Central or state government, can open NPS -Swavalamban account.
The subscriber of NPS -Swavalamban account should not be covered under social
security scheme like 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.
Procedure to register for Swavalamban Yojana

People belonging to the unorganised sector can register for NPS Lite through following
procedure:

• Contact the Aggregator and submit NPS Lite subscriber registration form with
KYC documents like identity proof and address proof.
• Subscribers will receive a Permanent Retirement Account Number (PRAN)
card through an aggregator.
Contribution
The subscriber of NPS Lite account is required to make contributions at the time of
registration and subsequently through an Aggregator. The contributions made are
subjected to following conditions:
• Minimum contribution amount at the time of Registration - Rs.100

• Though there is no minimum contribution requirement per year, minimum
contribution of Rs.1000/-per year is recommended to avail Swavalamban benefit.
However, it may be remembered the higher contribution amount will yield higher
pension and since Swavalamban benefit is available for contribution up
to Rs.12000/- it may be desirable to save higher amounts in your NPS-Swavalamban
account.
Withdrawal
The normal exit from NPS – Swavalamban account is at the age of 60. However, early
withdrawal is also permitted with certain conditions. On withdrawal from NPS Lite
account on 60 years of age, the subscriber would be required to invest minimum 40%
of accumulated savings (pension wealth) to purchase annuity. At the time of exit, the
effort is to give a monthly pension of Rs.1000/-. If 40% of the amount is not sufficient
to give pension of Rs.1000/- higher percentage or entire pension wealth would be
subject to annuitisation. On withdrawal before 60 yrs, the subscriber would be required
to invest minimum 80 % of accumulated savings to purchase annuity. He can withdraw
rest of the 20% amount.
In case of death of the subscriber, the entire amount will be transferred to the nominee/
legal heirs. The nominee/ legal heir will approach the aggregator with necessary
documents such as Death Certificate, Identity proof of the nominee, etc.

How to invest in NPS Schemes?
If you have an Aadhar Card, PAN Card and bank account, you can open an NPS
account online at enps.nsdl.com or enps.karvy.com. These are the portals of the
Central Recordkeeping Agencies (CRAs) in the NPS. If you prefer to do this offline (in
person) you can go to your nearest NPS Point-of-Presence (PoP) which is typically a
designated branch of your bank.
What is the role of CRAs and PoPs?
Central Record-Keeping Agencies or CRAs issue you a PRAN (Permanent Retirement

Account Number) Card and maintain your NPS account. They also process
withdrawals and exits from the National Pension System. You can make contributions
directly on their websites and put in a request for change of pension fund manager,
asset allocation or KYC details like address. The two NPS CRAs are NSDL and
Karvy.
PoPs or Points of Presence are intermediaries who facilitate account opening, accept
contributions (both physical cheques and online) and update your details on request.
In return they get a commission from your NPS corpus. This is 0.25% of each offline
contribution and 0.1% of each online contribution.
NPS Returns
NPS does not have a fixed interest rate. Instead, your money in the NPS account is
invested in up to 4 asset classes – equities, corporate bonds, government bonds and
alternative assets through various pension funds. These pension funds earn returns
linked to the performance of stocks and bonds. The returns on different NPS funds are
shown below:

NPS SCHEME Returns as on 22-March-2019

Category average returns

NPS Contribution
In NPS Tier 1, the minimum initial contribution is Rs 500. There is also a minimum
annual contribution of Rs 1,000. There is no maximum annual contribution. The
minimum amount per contribution is Rs 500.
In NPS Tier 2, the minimum initial contribution is Rs 1,000. There is no minimum or

maximum annual contribution. The minimum amount per contribution is Rs 250.

NPS Charges
National Pension System is one of the cheapest investment products available with
extremely low charges. Pension Fund Manager fees are capped at 0.01% compared to
2-2.5% for mutual funds. Other charges in the NPS are also extremely low as you will
notice from the table below.
Intermediary Charge head Service Charges*
NSDL Rs
Account Opening charges 40 or Karvy Rs
39.36
CRA (Central
Record- NSDL Rs
Keeping Annual Maintenance cost per account 95 or Karvy Rs
Agency) 57.63
NSDL Rs 3.75 or
Charge per transaction
Karvy Rs 3.36
Initial subscriber registration and contribution

Rs. 125
upload
0.25% of
POP (Point-of-
contribution,
Presence)
Any subsequent transactions
Min. Rs 20
Max. Rs 25,000
0.0032% p.a. for

Custodian Asset Servicing charges Electronic segment
& Physical segment

Pension Fund
Manager Investment Management Fee 0.01% p.a.
charges
NPS Trust Reimbursement of Expenses 0.005% p.a.
For the address change, fund manager changes

Rs 20 per
CRA and other such transactions within the NPS set-
transaction.
up
Rs 50 per annum for

every year
PoP Persistency Charge
completed in the
NPS.
NPS Models
National Pension System has different models. NPS (Central Government) and NPS
(State Government) are open to government employees only. The asset allocation and
pension fund manager selection are decided by the government. However, in a press
conference held on 10th December 2018 Finance Minister Arun Jaitley laid out
certain major changes. The Central Government contribution will be enhanced from
10% to 14% of the monthly salary + dearness allowance. The employee contribution
would be kept unchanged at 10% of the monthly salary + dearness allowance. Central
Government employees would also be able to choose 1 of 4 options: 100% fixed
income, 85% fixed income, 75% fixed income and 50% fixed income, with the balance
in equity. The choice would depend on their individual risk tolerance. They would also
be able to choose any one of the 8 fund managers in the NPS. Central Government
employees would also get a deduction for Tier 2 contributions up to Rs 1.5 lakh per
annum. State Government employees will also enjoy the same benefits once their
respective states adopt the same changes in their State Government models.

NPS (Corporate) is open to the employees of firms who have registered for the NPS.
The asset allocation here is decided by the firm (employer).
NPS (All Citizens) is open to all citizens of India including those employees whose
companies are not registered with NPS corporate, those people who are self-
employed or even unemployed/retired individuals.
You can shift between NPS (Central/State Government), NPS Corporate and NPS (All
Citizens) if you move from one sector to another. To do this, you must fill the Inter
Sector Shifting (ISS) form.
NPS Asset Classes
The National Pension System has four asset classes. Asset Class E invests in equities
or stocks. Asset Class C invests in Corporate Bonds. Asset Class G invests in Central
and State Government Bonds and Asset Class A invests in alternative assets like Real
Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs).
Under National Pension System, you can follow either pick your own asset allocation
or outsource it to the NPS schemes. In Active Choice, you pick your own split between
equities, corporate bonds, government bonds and alternative assets. However, the
allocation to equities cannot be more than 75% of the corpus. In Auto Choice, the
lifecycle fund that you have chosen does this for you (maximum equity allocation is
again 75%). The fund also automatically rebalances your asset allocation as you get
older towards less equity and more debt. You can change your asset allocation up to
two times in a financial year. Asset Class A (Alternative Assets) is only offered in NPS
Active Choice and the upper limit for investing in it is 5% of your corpus.
Please see the table below for asset allocation in each life-cycle fund.

NPS Calculator
NPS Calculator is a unique tool that you can utilise to estimate your future monthly
pension and potential investment corpus created through deposits into the NPS
account till retirement. A NPS calculator typically features the following fields:
• Date of Birth – This is used to calculate your current age and figure out for
how many years you will be making NPS deposits.
• Contribution – This can be annual, bi-annual, quarterly or monthly and
indicates the periodic contribution being made to the National Pension System
Tier 1 account (Tier 2 account does not have tax benefits or withdrawal
limitations).
• Expected rate of return – NPS investments are market-linked hence their
returns cannot be predicted in advance. Thus, the expected rate of return
(expressed as a percentage value) is used to calculate the future corpus value
of your NPS contributions. Higher the value in this field, higher is the final
corpus size.
• Annuity Purchase – This percentage figure indicates the portion of your NPS
future corpus that will be used to purchase annuities that determine your
monthly pension after retirement. Under existing rules, minimum 40% of NPS
corpus is to be mandatorily used for the purchase of annuities. Higher the
portion of NPS future corpus used for annuity purchase, greater will be the
monthly pension that you will get.
• Annuity Rate – This is the expected rate at which annuities are expected to
grow after your retirement. Higher annuity rate will lead to higher pension pay
out. However, the annuity rate is also market-linked hence, cannot be predicted
accurately in advance.
NPS Calculator Results
After input of the above data, the NPS calculator will display the monthly pension
amount that you are likely to receive after your retirement. Additionally, you will also

receive data regarding the principal amount invested, the returns earned as well as a
break-up of the annuity corpus and lump sum pay out. These results obtained from the
NPS calculator are however subject to the following limitations:
• NPS being market linked, the corpus amount is an estimate based on user
input.
• NPS calculator uses the compound interest calculator to provide its results
hence actual growth of corpus will not match the estimated growth of the
corpus.
• The growth of annuity corpus is also market-linked hence the estimate may be
very different from actual pay out at retirement.
NPS Withdrawals
1. You can make up to three partial withdrawals from the NPS during the entire
tenure of the account.
2. The first such withdrawal can be made after 3 years from account opening.
3. The maximum amount that can be withdrawn through partial withdrawals is
25% of your contribution. This ceiling applies to all three withdrawals put
together. For example, you can withdraw 10%, 10% and 5% in three tranches.
4. Partial withdrawals from the NPS are tax free.
In case of an NPS Tier 2 account, there is no lock-in and hence there is no restriction
on withdrawals. However, withdrawals from the NPS Tier 2 account are fully taxable
at slab rate. Government employees can get a tax deduction on their investment in the
NPS Tier 2 account. However, in this case, there is a lock-in of 3 years. They can
withdraw their entire NPS Tier 2 investment thereafter.
You can also go for premature exit after completing 3 years in the NPS. If you choose
this option, you can withdraw only 20% of your accumulated corpus and this
withdrawal will be taxed at your slab rate. The balance 80% must be used to buy an
annuity (regular pension). The annuity will be fully taxable.

The NPS account matures at the age of 60. You can withdraw 60% of your
accumulated corpus after that age. This withdrawal will be tax free.
How much pension will you get in the NPS?
This depends on the performance of your NPS funds. Your contributions invested in
the National Pension System are invested in assets like equity or debt and earn
returns. Your corpus is thus expected to steadily grow over time. When you hit the age
of 60, you can use the accumulated corpus to buy an annuity (monthly pension). The
actual pension you get thus depends on the corpus size and the prevailing annuity
rates. For example, if your corpus is Rs 1 crore and the prevailing annuity rate for a
simple annuity is 8%, you will get an annual payment of Rs 8 lakh. This translates to a
monthly pension of Rs 66,666.
What is an annuity? How does it work?
An annuity is a fixed payment that you get for the rest of your life in return for paying
the annuity provider a lump sum amount. For example, paying the annuity provider
Rs 10 lakh may get you an annuity of Rs 75,000 per year for the rest of your life.
There are many different types of annuities. An annuity simple pays you a sum of
money for the rest of your life and terminates thereafter. If you die early, the annuity
provider (typically an insurance company) may get to keep a higher amount than what
it has paid you.
However, the annuity provider also bears the risk of you living longer than expected
and it having to pay you a lot more than the lump sum you have paid. Another type of
annuity called annuity certain pays a sum of money for a defined period (say 10-15
years) even if you die before this period. The sum of money will be paid to your
nominees. Yet another type is called annuity with return of purchase price. In this type
of annuity, your nominees are paid back the price (lump sum) you have paid to buy
the annuity, upon your death. In general, the more favourable the annuity features, the
lower the annuity rate is.

Currently, there are five Annuity Service Providers (ASPs) which provide annuity
services to NPS subscribers. These are LIC, SBI Life Insurance Co. Ltd., ICICI
Prudential Life Insurance Co. Ltd., HDFC Standard Life Insurance Co. Ltd., and Star
Union Dai-Chi Life Insurance Co. Ltd.
How should I divide my NPS funds between asset classes E, C, G and A?
That depends on your risk appetite. If you are not sure of it, simple select an NPS
lifecycle fund. These funds will automatically set your asset allocation according to
your age and rebalance it every year.
How can I choose a Pension Fund Manager (PFM) in the NPS?
You must analyse previous performance of the different pension fund managers. You
can also change your NPS fund manager once in a financial year.
There are eight fund management companies in the National Pension System.
• ICICI Prudential Pension Fund

• LIC Pension Fund
• Kotak Mahindra Pension Fund
• Reliance Capital Pension Fund
• SBI Pension Fund
• UTI Retirement Solutions Pension Fund
• HDFC Pension Management Company
• Pension fund of Birla Sunlife Insurance
There is also a default fund manager provision under NPS under i.e. SBI Pension
Funds Private Ltd. This remains the default PFM if the subscriber has not chosen any
PFM by himself. The funds of government subscribers in the National Pension System
are managed by the three-public sector pension fund managers – LIC Pension Fund,
UTI Retirement Solutions and SBI Pension Fund. However, this is set to change.
According to the press conference held on 10th December 2018 government

employees will shortly be allowed to choose between all the pension fund managers in
the NPS.
National Pension System Benefits
If the subscriber wants to exit from the scheme, he / she must submit a filled
withdrawal application form along with required documents to the POP-SP. The
POP-SP will forward the form to the CRA (NSDL e-Governance Infrastructure
Limited) after authenticating the documents. The subscriber’s claim will be registered
and CRA will forward the application form. The CRA also assists subscribers by
providing necessary information about required documents. Once the documents are
received and verified, the application will be processed and CRA will settle the
account.
Tax benefit
Presently, the tax treatment for contribution made in Tier I account is Exempted-
Exempted-Taxed (EET) i.e., the amount contributed is entitled for 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).
The appreciation accrued on the contribution and the amount used by the subscriber to
buy the annuity is not taxable. Only the amount withdrawn by the subscriber after the
age of 60 is taxable.
Features of NPS
Some of the Features of the National Pension System (NPS) are:

• It is transparent - NPS is transparent and cost-effective system wherein the
pension contributions are invested in the pension fund schemes and the
employee will be able to know the value of the investment on day to day basis.

• It is simple - All the subscriber must do, is to open an account with his/her
nodal office and get a Permanent Retirement Account Number (PRAN).
• It is portable - Each employee is identified by a unique number and has a
separate PRAN which is portable i.e., will remain same even if an employee
gets transferred to any other office.
• It is regulated - NPS is regulated by Pension Fund Regulatory and
Development Authority, with transparent investment norms & regular
monitoring and performance review of fund managers by NPS Trust.
National Pension System FAQ’s
1) What would be the withdrawal Process if the PRAN of the subscriber is frozen or
inactive at the time of withdrawal?
In case the PRAN of the subscriber is frozen or inactive at the time of withdrawal, the
request will be processed like a regular withdrawal, but a penalty will be deducted
from the account of the subscriber. The penalty is charged by the CRA for reactivating
the account.
2) What are the Minimum and Maximum Contribution Requirements for NPS
Accounts?
Subscribers must make at least one contribution per year to keep their account in
running or active mode. The account may be frozen if certain contribution
requirements are not met. To unfreeze the account, the subscriber must visit the POP-
SP and make the required contribution. The contribution requirements for each type
of account are mentioned here.
For all Citizens Tier I Accounts Tier II Accounts
Min. Contribution at Account Opening Rs. 500 Rs. 1,000

Min. Amount per Contribution Rs. 500 Rs. 250
Min. Total Contribution Annually Rs. 1,000 None
Min. Frequency of Contributions 1 per year 1 per year
3) Can NRIs open an NPS Account?
Yes, but they have to be Indian citizens
4) What is APY?
APY or Atal Pension Yojana is a low-cost retirement savings scheme.
5) Can I invest in both NPS and APY?
Yes, you can invest in both NPS and APY. There is no bar to this.
6) Can I invest in NPS, APY and other retirement vehicles like EPF or PPF?
Absolutely. There is no rule against this.
7) What is nomination and subsequent nomination process?
Subscribers are required to declare the nominations at the time of

the PRAN registration process. However, they can also file a subsequent nomination
update request for subsequent nomination. This would be considered as a service
request and they will be charged Rs. 20 + service tax for each request.
8) Who will receive the investment benefits in the event of death of the subscriber
before the age of 60?

In the event of the death of the subscriber, the nominee will receive the entire
accumulated pension wealth. If the subscriber has not declared a nominee, then it will
go to the legal heir of the subscriber. In both the cases, there would not be any
requirement for purchasing an annuity or a monthly pension plan.
9) Can I withdraw my NPS amount if I lose my job?
No. You can only make partial withdrawals from the NPS account up to 25% of your
contributions. This can only be for specific reasons like children’s marriage or
education. Unemployment is not a valid ground for withdrawal.
10) Can I make partial withdrawals from the NPS?
Yes, you can do this three years after account opening. You can make partial
withdrawals for specified purposes up to 25% of your contributions. Such partial
withdrawals can only be made up to three times in your entire tenure in the NPS. The
withdrawals can be for:
1. Higher education of children

2. Marriage of children
3. For the purchase or construction of a residential house or flat either in your
own name or jointly with your spouse. However, if you already own or jointly
own a house or flat other than ancestral property, this will not be permitted.
4. For the treatment of any of the illnesses mentioned below. The patient can be
the subscriber, his spouse, children or dependent parents.
5. Cancer
6. Kidney Failure
7. Preliminary Pulmonary Arterial Hypertension
8. Multiple Sclerosis
9. Major Organ Transplant
10. Coronary Artery Bypass Graft
11. Aorta Graft Surgery
12. Heart Valve Surgery

13. Stroke
14. Myocardial Infarction
15. Coma
16. Total Blindness
17. Paralysis
18. Accident of serious/life-threatening nature
19. Any other critical illness of a life-threatening nature specified by the PFRDA
from time to time
11) Can you exit the NPS before the age of 60?
The National Pension System has a lock-in for a period of three years from account
opening. Thereafter you can go for ‘premature exit’ from the National Pension System
even before the age of 60. However, you have to mandatorily use 80% of their corpus
to buy an annuity and can only withdraw 20%. This 20% withdrawal and the annuity
you buy are both taxable. An annuity is a fixed payment you get for the rest of your
life. It can be taken monthly and becomes a monthly pension.
12) whom to contact if I have a problem with my nps account?
If your nps account is with Karvy, you can contact Karvy nps customer care either by
phone or email. Alternatively, if your NPS account is with NSDL, you can get in touch
with their customer service department over the phone or via email. Know more
about NPS Customer Care

Recent News on NPS
PFRDA restricts mutual fund investments in NPS accounts
September 12, 2018
A PFRDA circular dated 20th August 2018 restricted NPS fund managers from
investing in mutual funds to just 5% of the total corpus. This move is aimed at
restricting NPS subscribers from paying an additional level of charges to a mutual
fund. When an NPS manager invests in a mutual fund, the NPS subscribers also pay
the expense ratio of the fund.
Some of the 8 pension fund managers, registered in the NPS had adopted the
strategy of investing the entire NPS corpus through mutual funds. They will have to
move towards directly investing NPS money in stocks/bonds after the new circular.
The additional layer of expenses has made a difference to their returns. Kotak
Pension Fund features in the bottom half of Pension Fund Managers in terms of
equity returns over the last 3 and 5 years. On a one-year basis, Kotak Pension Fund
has delivered the lowest return for equities. It has a similar position among NPS
funds, for the government bond plans managed by it as well.
Cabinet raises NPS to 14% for govt staff: news reports
December 7, 2018
The Cabinet on Thursday raised its National Pension Scheme (NPS) contribution for
government employees to 14 percent from 10 percent, according to multiple reports
citing sources.

Currently, the government as well as employees have equal contribution of 10
percent of basic salary to NPS. While the government’s contribution will be higher
after the decision is implemented, employees will continue to contribute 10 percent.
Reports also said that the Cabinet approved tax incentives for employees’
contribution to the extent of 10 percent under 80C of the Income Tax Act.
Another decision was taken by the Cabinet for the benefit of government employees.
Reports say that at retirement, employees can commute (or withdraw) up to 60
percent of the total money accumulated, which is up from the current 40 percent
limit. Employees would also have the option of investing in either fixed income
instruments or equities, according to sources cited in the reports.
If a government employee decides not to withdraw a portion of the accumulated NPS

fund at retirement and instead transfers 100 percent to annuity scheme, then their
pension would be more than 50 percent of his last drawn pay, reports added.
The government has still not given a specific date for notification of the new
decisions, but according to reports the changes may come into effect from April 1,
2019.
December 10, 2018
Union Finance Minister Arun Jaitley on Monday announced that employees would
be able to withdraw up to 60 percent of their pension fund tax-free. This is a hike
from the current limit of 40 percent. Following the new changes, withdrawals made
by employees at retirement will be tax-free. The Cabinet also raised government
contribution in the NPS for Central Government employees to 14 percent from the
current 10 percent.

PFRDA working on minimum assured return scheme for NPS subscribers
February 24, 2019

Pension fund regulator PFRDA is working on a minimum assured return scheme
(MARS) for subscribers of the flagship social security programme -- National
Pension System.
NPS is a contributory retirement savings scheme and seeks to inculcate the habit of
saving for old age among the citizens.
NPS, having an asset under management (AUM) of Rs 2.91 lakh crore, had
subscriber base of 1.21 at the end of January.
The regulator is in the process of designing and developing MARS, according to a
document of the Pension Fund Regulatory and Development Authority (PFRDA).
Some aspects, including what kind of guarantee -- absolute return guarantees or
relative rate of return guarantees (sector and benchmark-based) -- can be
reasonably provided by the pension funds with recommendation of suitable
proposals, need to be examined, said the expression of interest (EOI) floated by it.
EOI has been invited from actuarial firms to design, develop and recommend MARS
under the National Pension System that can be implemented under NPS
architecture. The proposed structure of the scheme would include exit loads or exit
penalty recommendation with respect to MARS (if required), clawback provisions,
and guarantee reset period, among others, for subscribers. The applicant, the EOI
said, can be a government organisation/ public sector unit/partnership firm/ limited
liability partnership/ private limited company in existence for at least 5 years.
The project requires developing the scheme and processes for implementation based
on the actuarial principles, similar products, schemes, and practices in operation
both in India and abroad. Normally, upon entry into the NPS, the subscriber
remains invested till the age of superannuation or 60 years. Upon exit from the
system, the subscriber is entitled to withdraw up to 60 per cent of the accumulations
and the balance 40 per cent is mandatorily required to purchase annuity from an
annuity service provider, who will provide the monthly pension to the subscriber.

Conclusion
In pension plan, you can get a fixed and steady income after retiring (deferred plan)
or immediately after investing (immediate plan), based on how you invest.
Pension plans are entitled to tax exemption specified under Section 80C.
A retirement plan is essentially a product of low liquidity though some companies let
you withdraw even during the accumulation stage. So, you will have funds to fall back
on during emergency without having to rely on bank loans or borrow from other
people.
Surrendering one’s pension plan before maturity is not a smart move even
after paying the required minimum premium. This results in the investor losing every
benefit of the plan including the assured sum and life insurance cover.
NPS is a government promoted savings vehicle aimed to generate old-age/ retirement

corpus by encouraging regular savings.
Though it provides greater tax incentives amounting to ₹200,000, it also comes with a
huge lock-in period (also one of the longest). This makes the investment illiquid.
Moreover, the entire amount is not available at retirement. 40% of the NPS corpus (or
80% of the corpus in case of partial withdrawal from NPS) has to necessarily be
invested in an annuity. Making the investment all the more rigid and inflexible.
However, the investment has very less expense ratio (comparatively) and has a very
low risk.
Investment decision in an NPS or other investment class is ideally a function of an

investor’s risk-return appetite, investment horizon, and investment objective.

Bibliography
1. https://en.wikipedia.org/wiki/Pension
2. https://cleartax.in/s/pension-plans
3. https://www.investopedia.com/terms/p/pensionplan.asp
4. https://www.coverfox.com/life-insurance/articles/types-of-pension-plans/
5. https://economictimes.indiatimes.com/mf/nps-national-pension-scheme
6. https://ccs.in/consolidated-model-pensions-india
7. https://www.india.gov.in/spotlight/national-pension-system-retirement-plan-
all#nps3
8. https://www.paisabazaar.com/saving-schemes/national-pension-system/

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Introduction of pension plan

A pension is a fund into which a sum of money is added during an employee's

A pension created by an employer for the benefit of an employee is commonly referred

N G Acharya & D K Marathe college pg. 1

N G Acharya & D K Marathe college pg. 2

N G Acharya & D K Marathe college pg. 3

Chronological events in pension scheme are dotted below.

1. India Pension Act introduced in 1871.

N G Acharya & D K Marathe college pg. 4

N G Acharya & D K Marathe college pg. 5

N G Acharya & D K Marathe college pg. 6

In a defined-benefit plan, the employer guarantees that the employee receives a

Pension Plan: Factoring in ERISA

Companies that provide retirement plans are referred to as plan sponsors

Pension Plan: Vesting

With defined-contribution plans, your individual contributions are 100% vested as

N G Acharya & D K Marathe college pg. 8

Pension Plan: Can Companies Change Their Pension Plans?

N G Acharya & D K Marathe college pg. 9

Pension Plan vs. Pension Funds

Pension Plan: Advantages and Disadvantages

N G Acharya & D K Marathe college pg. 10

Pension Plan: Monthly Annuity or Lump Sum?

• Annuity: Monthly annuity payments are typically offered as a single life

N G Acharya & D K Marathe college pg. 11

On the downside: No guaranteed lifetime income, as with an annuity. It’s up to you to

If your defined-benefit plan is with a public-sector employer, your lump sum

N G Acharya & D K Marathe college pg. 12

Pension Plan: Other Deciding Factors

N G Acharya & D K Marathe college pg. 13

• The projected return on the client’s portfolio from a lump-sum investment: If

N G Acharya & D K Marathe college pg. 14

Pension Plan: Retirement and Defined-Contribution Plans

N G Acharya & D K Marathe college pg. 15

N G Acharya & D K Marathe college pg. 16

N G Acharya & D K Marathe college pg. 17

N G Acharya & D K Marathe college pg. 18

SL Plan Type In Detail

No taxation (unless you withdraw the corpus)

2 Immediate Annuity Only lumpsum investment allowed

Income Tax exempts tax on the premiums

3 Annuity Certain The pension is disbursed for a specific period

N G Acharya & D K Marathe college pg. 19

6 National Pension Launched and managed by the central government

7 Pension Funds Better returns once it matures

Currently, 6 fund houses in India are authorized to offer pension

8 Guaranteed Period Annuity disbursed for specific terms like 5 to 20 years.

N G Acharya & D K Marathe college pg. 20

In a country’s social security system Pensions play an imperative part. The

Structure of Indian Pension System

Employees' Provident Fund (EPF)

The EPF programme, established in 1952, is a contributory provident fund providing

N G Acharya & D K Marathe college pg. 22

Statistics about EPF:

Workers covered 24 million

Contribution rate 12 per cent employers’ share and 12 per

Total contribution 24 per cent

Diverted as under • Provident Fund - 15.67 per cent

• Pension Fund - 8.33 per cent

Government contribution in pension 1.16 per cent

Employees’ pension scheme(EPS)

N G Acharya & D K Marathe college pg. 23

Employees Deposit Linked Insurance Scheme(EDLI)