RETIREMENT PRODUCTS

Retirement Products

• Definition: Retirement products refer to financial instruments designed to help individuals accumulate and distribute wealth during their retirement years.
• Details: These products can be categorized into accumulation-related and distribution-related products.

Accumulation Related Products

• Employees Provident Fund (EPF): A mandatory savings cum retirement scheme for employees of eligible organizations.
• Key features of EPF:
  • Mandatory Contribution: 12% of basic pay plus dearness allowance by employees, matched by employers.
  • Interest Rate: Decided by the Central Board of Trustees, calculated monthly, and transferred annually.
  • Tax Exemption: Interest earned on EPF is exempt from tax within certain limits.
  • Withdrawal: Allowed in cases of retirement, unemployment, or specific circumstances like medical purposes, marriage, education, and purchase/construction of a house.

Key Features of EPF

• Contribution:
  • Employee Contribution: 12% of basic salary and dearness allowance.
  • Employer Contribution: 12% of basic salary and dearness allowance, divided into Employees Provident Fund (3.67%), Employees’ Pension Scheme (8.33%), Employee’s Deposit Linked Insurance Scheme (0.5%), and EPF Admin Charges (0.50%).
• Interest Rate:
  • Decided by the Central Board of Trustees.
  • Calculated monthly and transferred annually.
• Withdrawal:
  • Complete Withdrawal: Allowed in cases of retirement or unemployment for more than two months.
  • Partial Withdrawal: Permitted under specific circumstances like medical purposes, marriage, education, and purchase/construction of a house, subject to certain conditions and limits.

RETIREMENT PRODUCTS (Part 2)

• Definition: Retirement products are financial instruments designed to help individuals save for their retirement.
• Details: These products include Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), and Public Provident Fund (PPF).

Key Features of EPF

• Contribution: Employee contributions to EPF are eligible for deduction under section 80C.
• Interest: Interest earned on employee contributions is exempt from taxation up to a specified limit (Rs. 2.50 lakhs per annum).
• Withdrawal: EPF balance withdrawal is tax-free, with certain exceptions based on the number of years of employment.
• Tax Implications: Employer contributions to EPF are tax-exempt up to a certain limit, and excess contributions are treated as perquisites in the hands of the employee.

Voluntary Provident Fund (VPF)

• Definition: VPF is a voluntary savings product that allows employees to contribute over and above their mandatory EPF contributions.
• Key Features:
  • No employer contribution
  • Investments are predominantly in debt investments, particularly government securities
  • Return on investment is declared annually by the government
  • Taxation: contributions, interest earned, and withdrawals are exempt from tax up to a specified limit

Public Provident Fund (PPF)

• Definition: PPF is a long-term saving product that can be used to accumulate funds for retirement and other goals.
• Key Features:
  • Eligibility: only Indian residents can open a PPF account
  • Lock-in period: 15 years, with premature withdrawals allowed after 5 years subject to certain conditions and limits
  • Minimum and maximum investments: Rs. 500 and Rs. 1.5 lakhs per annum, respectively
  • Taxation: PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy
  • Loan against PPF: available up to a maximum of 25% of the total balance at the end of the 2nd financial year immediately preceding the year in which the loan is applied
  • Interest Rate: notified by the Central Government every quarter
  • Withdrawals: partial withdrawals allowed after 5 financial years, with a maximum amount of 50% of the account balance as at the end of the preceding year or 4th year, immediately preceding the year of withdrawal application.

RETIREMENT PRODUCTS (Part 3)

• Public Provident Fund (PPF): Individuals can close their PPF account prematurely after completing 5 financial years from the end of the year of account opening, subject to certain conditions such as utilizing accumulated savings for treatment of life-threatening diseases or financing higher education.
• Taxation of PPF: PPF falls under the EEE (exempt-exempt-exempt) regime of taxation, where contributions up to Rs 1.5 lakh per annum are eligible for deduction under section 80C of the Income Tax Act, and interest earned and maturity proceeds are exempt from tax.

Key Concepts

• Gratuity: A payment made by an employer to an employee for services rendered during the period of employment, usually paid at the time of retirement.
• Eligibility for Gratuity: An employee is eligible to receive gratuity if they have completed a minimum of 5 years of continuous service with an organization.
• Calculation of Gratuity: The amount of gratuity payable depends on two factors: last drawn salary and number of years of service. The formula for calculating gratuity is: (15 X last drawn salary X tenure of working) divided by 26 for employees covered under the Act.

Taxability of Gratuity

• Government Employees: Gratuity is fully exempt from tax for government employees.
• Private Sector Employees: Gratuity is tax-exempt up to a certain limit, which is the least of the following: statutory limit of Rs 20 lakh, last drawn salary * 15/26 * number of completed years of service, or actual gratuity received.

Superannuation Benefit

• Definition: A benefit provided by employers to augment retirement benefits by contributing to a superannuation fund.
• Types of Superannuation Plans: Employers can offer group superannuation schemes through a trust fund or by investing in a superannuation scheme from a life insurance company.

National Pension System (NPS)

• Definition: A social security initiative by the Central Government, open to employees from public and private sectors, as well as all Indian citizens on a voluntary basis.
• Key Features: NPS is a contributory pension system where subscribers contribute to a fund over their working life and draw the corpus at retirement to buy annuities that provide regular income.
• Models under NPS: The NPS platform offers different models, including the Government Sector model, All Citizens model, and Corporate model.
• Types of NPS Accounts: The two primary account types under the NPS are Tier I and Tier II, with Tier I being the default account and Tier II being a voluntary addition.

RETIREMENT PRODUCTS (Part 4)

• Definition: The National Pension System (NPS) is a retirement product that offers tax benefits and a range of investment options.
• Details: The NPS has two types of accounts: Tier-I and Tier-II. Tier-I is a mandatory account for those who opt for the NPS scheme, while Tier-II is a voluntary account.

Key Features of NPS Accounts

• Tax Deduction: Upto 14% of (Basic + DA) for central and state government employees and 14% for any other employer (under Section 80CCD(2) of IT Act).
• Minimum Contribution: Rs. 500 for Tier-I account, subject to a minimum yearly contribution of Rs. 1000. Rs. 1000 at the time of activation and Rs. 250 for subsequent contributions for Tier-II account.
• Maximum Contribution: No limit for both Tier-I and Tier-II accounts.

Choice of Investments

• Asset Classes: Four asset classes are available: Equity, Corporate Debt, Government Bonds, and Alternative Investments.
• Investment Options: Subscribers can choose from two investment options: Active Choice and Auto Choice.
• Active Choice: Subscribers can choose the ratio in which their contributions will be invested among various asset classes or NPS funds.
• Auto Choice: A life-cycle based approach that starts with an equity-heavy portfolio and systematically reduces the equity exposure as the subscriber approaches retirement.

Life Cycle Funds

• Definition: Life Cycle Funds are a type of investment option under the Auto Choice.
• Details: There are four Life Cycle Funds available, each with a different equity allocation: Life Cycle 25 – Low, Life Cycle 50 – Moderate, Life Cycle 75 – High, and Life Cycle – Aggressive.

Multiple Scheme Framework (MSF)

• Definition: MSF is a framework that allows non-government sector subscribers to subscribe to multiple schemes through PRAN at each Central Recordkeeping Agency (CRA).
• Details: MSF provides subscribers with the option to diversify and efficiently align with their retirement/wealth building goals.

Returns/Interest

• Guaranteed Returns: No scheme of NPS offers guaranteed returns or interest.
• Investment Allocation: The money of subscribers is invested as per the allocation selected.

Option to Change Scheme or Fund Manager

• Frequency: Subscribers can change the pension scheme or fund manager once in a financial year.
• Options: Subscribers can change the investment choice/asset allocation four times in a financial year.

Withdrawal and Exit Rules

• Partial Withdrawals: Subscribers can make partial withdrawals from their NPS accounts, subject to certain conditions.
• Exit Rules: Subscribers can exit their NPS accounts at the time of retirement or after completing a certain vesting period.

RETIREMENT PRODUCTS (Part 5)

• Introduction to NPS Withdrawal: A subscriber can withdraw up to 25% of their own contributions after 3 years for specific purposes like children's wedding, higher studies, or medical treatment.
• Withdrawal Restrictions: Subscribers can make withdrawals up to 4 times before 60 years of age, with a minimum interval of 4 years between withdrawals for Tier I accounts.
• Exit and Withdrawal on Retirement: At 60 years of age, a subscriber can exit NPS by using at least 20% of their accumulated pension wealth to buy an annuity, with the balance withdrawn as a lumpsum or periodic payouts.
• Exit and Withdrawal before Retirement: Before 60 years of age, at least 80% of the accumulated pension wealth must be used to purchase an annuity, with the balance paid out as a lumpsum or systematic payouts.
• Taxation Implications: NPS follows an Exempt, Exempt, partly Exempt – partly Taxable regime, with tax deductions available under Sec 80CCD(1) and Sec 80CCD(2) for contributions.
• Unified Pension Scheme (UPS): An optional scheme introduced by the Central Government, providing an assured payout based on prescribed conditions, with eligibility for existing and newly recruited Central Government employees.
• NPS Vatsalya: A saving cum pension scheme for minor citizens, introduced in Budget 2024, where parents can open an account in their child's name and operate it as a guardian.
• Atal Pension Yojana (APY): A pension scheme for individuals in the unorganized sector, regulated by PFRDA, with guaranteed benefits from the Government of India for citizens between 18-40 years of age.
• Retirement Plans from Mutual Funds and Insurance Companies: Various products are offered by insurance companies and mutual funds for retirement planning.

RETIREMENT PRODUCTS (Part 6)

• Definition: Retirement products are financial instruments designed to provide income and security during an individual's retirement years.
• Details: These products include pension plans, annuity products, and retirement-specific schemes offered by insurance companies and mutual funds.

Key Concepts

• Pension Plans: Deferred products where premiums are paid until a specified age, and the accumulated corpus is used to receive a pension.
• Annuity Products: Offered by insurance companies, these provide a fixed stream of payments for life or a pre-defined period.
• Retirement-Specific Schemes: Hybrid products with a mix of equity and debt investments, offered by mutual funds, often with a lock-in period of at least 5 years or till retirement age.

Investment Adviser's Role

• Understanding Client Needs: An investment adviser must understand their clients' personal needs, encourage goal setting, and plan their lifestyle and finances.
• Creating a Retirement Portfolio: The adviser considers factors like liquidity, security, estimated returns, resistance to inflation, taxes, and social security to create a long-term portfolio.
• Asset Allocation: The portfolio can be invested in equity, debt, gold, or other asset classes, with the allocation decided based on the client's risk appetite.

Distribution-Related Products

• Annuities: Provide a fixed stream of payments for life or a pre-defined period, helping to counter longevity and inflation risks.
• Systematic Withdrawal Plans (SWP): Offered by mutual funds, allowing investors to withdraw a fixed amount or capital gains at specified frequencies.
• Laddering of Bonds or Fixed Deposits: A strategy to create a retirement income by purchasing bonds or fixed deposits with staggered maturity dates.

Annuity Options

• Lifetime without Return of Purchase Price: Annuity is paid for life, but the principal amount is retained by the company.
• Lifetime with Return of Purchase Price: Annuity is paid for life, and the principal amount is returned to the nominee after the investor's death.
• Annuity Guaranteed for Certain Period: Annuity is paid for a defined period, regardless of the policyholder's survival.
• Joint Annuity: Annuity is paid to the spouse for life after the investor's death.

Taxation

• Annuities: The money received by the annuitant is treated as income and taxed accordingly.
• SWP: Redemption through SWP is subject to taxation, with rates depending on the type of fund and holding period.

Retirement Products

• Bond Laddering: A strategy to reduce the risk of locking in a single interest rate by investing in multiple bonds with different maturities.
• Benefits of Bond Laddering:
  • Reduces the risk of interest rate fluctuations
  • Provides predictable income and flexibility to reinvest principal
  • Helps manage cash flow for retirement income needs
• Laddering of Fixed Deposits: A strategy to invest in multiple fixed deposits with different maturities to reduce the impact of interest rate fluctuations and provide liquidity.
• Benefits of Laddering of Fixed Deposits:
  • Reduces the impact of interest rate fluctuations
  • Provides liquidity and flexibility to meet financial requirements
  • Allows diversification of investments across different banks

Senior Citizens’ Savings Scheme

• Eligibility: Available to resident Indians aged 60 years and above, or those who have retired under applicable superannuation or Voluntary Retirement Scheme.
• Deposit Limits: Minimum deposit of Rs. 1000, maximum deposit of Rs. 30 lakhs.
• Maturity: Deposits mature after 5 years, with an option to extend for an additional 3 years.
• Taxability: Investments qualify for income tax deduction up to Rs. 1.5 lakh, interest is fully taxable.
• Interest Rates: Reviewed quarterly by the Ministry of Finance, subject to periodic change.

Pradhan Mantri Vaya Vandana Yojana

• Introduction: A government-backed pension scheme for citizens aged 60 years, operated by LIC of India.
• Benefits:
  • Guaranteed pension for 10 years
  • Return of investment on maturity
  • Loan facility available after 3 years
  • Taxable income
• Eligibility: Available to citizens aged 60 years and above.
• Investment: Minimum investment of Rs. 1,50,000, maximum investment of Rs. 15,00,000.

Post Office Monthly Income Scheme

• Introduction: A government-sponsored savings scheme offering monthly returns in the form of interest payments.
• Eligibility: Available to single adults, joint account holders, guardians on behalf of minors, and minors above 10 years.
• Deposit: Minimum deposit of Rs. 1000, maximum deposit of Rs. 9 lakh in a single account and Rs. 15 lakh in a joint account.
• Interest: Payable on completion of a month from the date of opening, with no additional interest on unclaimed interest.

Retirement Products

• Monthly Income Scheme (MIS): Interest can be drawn through auto credit into a savings account or ECS, and is taxable in the hands of the depositor.
• Pre-mature Closure: No deposit can be withdrawn before 1 year, and deductions apply for early closure (2% before 3 years, 1% before 5 years).
• Maturity: Accounts can be closed after 5 years, and interest is paid up to the preceding month of refund in case of death.

Reverse Mortgage

• Definition: A loan where a property owner receives periodic income from a financial institution, with the property as security.
• Eligibility Criteria:
  • Indian citizen aged 60 or more
  • Married couples can apply jointly, with at least one spouse above 60 and the other above 55
  • Owner of a residential property with clear title and no encumbrances
  • Property should be the primary residence
• Key Features:
  • Loan amount depends on age, property value, and interest rates
  • Maximum monthly payments capped at Rs. 50,000
  • Receipts are exempt from income tax
  • Loan can be prepaid without penalty, and becomes due only when the borrower dies or moves out
  • Borrower remains the property owner and need not service the loan during their lifetime
• Reverse Mortgage Loan Enabled Annuity (RMLEA):
  • An extension of the reverse mortgage scheme, providing a lifetime pay-out to senior citizens
  • Available to owners of properties who are 60 or more years old
  • Loan amount is used to buy an annuity from an insurance company
  • Annuity received is exempt from tax in the hands of the borrower