A pensioner is an individual who receives a pension. The meaning of pension can be explained as a regular income after retiring from active employment. It is quintessential for the financial well-being of an individual post-employment. The pension plans offer security as well as stability for individuals.
These plans help them to take care of their basic expenses like monthly living expenses, medical bills, healthcare, housing, etc., while ensuring independence from family. In this blog post, we shall discuss the pension plans in India and the guidelines for the pensioners in the country.
A pension is a structural financial arrangement that is designed to provide an individual with a stable, regular source of income (often monthly) upon retirement from their working career. Some individuals enroll in pension schemes as early as their 20s or 30s to secure their post-retirement future.
The pension sector in India is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). This authority was established on 23 August 2003, and comes under the jurisdiction of the Ministry of Finance, Government of India. It ensures the pension funds’ orderly growth as well as regulation.
Below, we have provided you with the various types of pension plans in India. Each plan comes with unique features and goals. :-
The National Pension System is one of the most popular pension schemes in India. It is an initiative of the government of India that aims to provide individuals with a structured means to secure their retirement. It was launched on 1 January 2004.
Here’s how the NPS works. During your working years, you have to make contributions in your NPS account. Once you retire, you receive a lump sum amount. The remaining amount is received by you as monthly pension payments throughout your life.
Atal Pension Yojana is a pension scheme that focuses on providing pension to the unorganized sector workers. It was launched on 9 May 2015. Under the scheme, the subscribers receive a guaranteed minimum pension from the Government of India.
The pension amount can be Rs. 1,000/- or 2,000/- or 3,000/- or 4,000 or 5,000/- per month at the age of 60 years depending on the contributions they made. After the death of the subscriber, the spouse receives the money. In case of death of both, the money goes to the nominee.
Traditional Pension plans are also known as Defined Benefit Pension Plans. In such plans, the pension payout is predetermined. Several factors determine the payout, including the individual’s salary, age and years of employment.
The defined benefit pension plans are sponsored by the employer. The subscribers of such plans receive a guaranteed income after retirement. As a result, they have financial stability and can be at peace of mind.
In these plans, the subscriber contributes to the pension fund over a period of time during their employment. However, only after a later, pre-determined period does the pension start, generally after retirement. For individuals planning to retire early and willing to wait for pension payout, these plans are ideal.
In these retirement saving vehicles, the payout is not guaranteed. The retirement benefit is dependent on the contributions made as well as the investment returns earned.
The subscriber of the plan gets to decide how much contribution they want to make and how to allocate the money among investment options like equity, debt, or government securities. Although these plans can yield higher returns, they are also riskier.
In a pension fund, the subscriber’s contribution is pooled along with contributions of other investors and then invested in various securities like government bonds, corporate bonds, equities and money market instruments.
The income generated from these investments is then used to pay pensions to the fund’s subscribers after retirement.
An annuity certain pension plan provides regular pension payments for a fixed number of years regardless of how long the annuitant lives. If the annuitant passes away before the chosen period ends, the remaining payments continue to the nominee or legal heir. For securing income for a set duration, this plan is ideal.
Once an individual invests a lump-sum amount in an immediate annuity pension plan, the pension payments begin almost right away, typically within a short period after purchase.
This type of plan is especially suitable for people who are nearing retirement or have already retired and want a steady and reliable income stream so they can cover their daily expenses without delay.
According to the pensioners’ portal, here are the guidelines for the central government civil pensioners in India :-
The pension cannot be received by a pensioner in cash. Therefore, it is essential to open an individual savings/current account in your name, preferably joint account with your spouse, if the spouse’s name is notified for family pension in the PPO, in any of the branches of the Authorized Banks. The details of the same must be furnished to your Head of Office so that pension can be credited to your bank account.
In case a pensioner is convicted/sentenced to imprisonment by a Court, their pension will be suspended. The PDA/Head of Office must be informed about the full facts of the case in the event of conviction/imprisonment by a court of law.
Within one year of the retirement, you, as a pensioner, must ensure you obtain prior permission from the competent authority before acceptance of any commercial employment.
The pension becomes time-barred and needs the approval of the competent authority if it is not drawn for more than a year, regardless of the reason. In order to receive approval for the payment of the arrears, the arrear claim must be submitted in the required form to the PDA along with an explanation for the delay, non-reemployment and non-conviction certificates.
The pensioner must ensure they nominate the person to whom they want to authorize Life Time Arrears (LTA). For this purpose, the nomination form should be submitted to the PDA. To change nomination, the change nomination form must be submitted to the PDA to avoid any hardship to the nominee in receiving the LTA amount.
Here are a few reasons why you should consider investing in a pension scheme :-
It provides you financial independence post retirement. You do not have to rely on your family members for basic expenses.
It provides you with a regular source of income even after you are no longer employed.
The pension schemes encourage you to develop a long-term, disciplined savings habit.
With age, the medical expenses tend to rise especially in case of serious illnesses. Even the insurance policies’ premiums become more expensive. The pension helps you to cover such expenses.
If you want to live a stable life after retiring from your job, pension planning is extremely important. The planning requires you to understand the importance of pension schemes, understand the pension guidelines and actively engage in financial strategies. You must consider all the diverse pension plans available if you want to ensure your life is secure post retirement. The most popular pension plans include Defined Benefit Pension Plans, Defined Contribution Pension Plans, Deferred Pension Plans, Immediate Annuity Pension Plans, National Pension Scheme (NPS), Annuity Certain Pension Plans, Atal Pension Yojana and Pension Funds.
Need assistance in filing an ITR as a pensioner? Get in touch with Registrationwala’s tax experts!
Q1. Do pensioners need to pay income tax in India?
A. Yes, they need to pay income tax if their income exceeds the basic exemption limit.
Q2. What are the different types of pension plans?
A. The different types of pension plans include, but are not limited to, National Pension Scheme, Atal Pension Yojana, Pension Funds and Employee Provident Fund.
Q3. Which authority regulates pensions in India?
A. The Pension Fund Regulatory and Development Authority (PFRDA), established in 2003, is the primary statutory authority regulating pensions in India. This authority operates under the Ministry of Finance.
Q4. Which pension plan gives the highest return in India?
A. The National Pension System (NPS) generally yields the highest-long term returns and outperforms traditional pension plans. It delivers between 9-12% returns annually due to exposure to equity.
Q5. Who governs the NPS?
A. The Pension Fund Regulatory and Development Authority governs NPS under PFRDA Act, 2013. It was established on 23 August 2003.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, finance and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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