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What are Best Pension Funds in India: Meaning & Types

Pension funds are one of the financial tools that assist an individual after retirement. It is a form of employee benefit under which regular contribution is made by the employer towards the pension fund of an employee. Investing in pension funds is very vital so that you have an adequate amount of funds to maintain your lifestyle and take care of medical emergencies and other foreseen expenses.

Over the years, you will build up a considerable amount by investing little by little in pension funds. It has two stages:

How does Pension Plan Work?

Pension funds work by investing a small amount of your salary towards pension funds so that you can get a steady flow of income post-retirement.

Types of Pension Funds available in India:

Usually, pension plans are based on different types of investment options, like mentioned below:

For conservative investors, pension plans are sponsored by insurers and investment is solely the debt.

Some pension plans invest both in equity and debt.

Under the National Pension Scheme, Pension funds invest 100% in government securities or 100% in debt securities or a maximum of 75% in equity.

There are different types of pension funds in India:

National Pension Scheme (NPS): National Pension Scheme was introduced by the Government of India in 2004 for those who wish to grow their pension amount. Through this scheme, your savings will be invested in debt and equity instruments according to your preferences. You can withdraw 60% of your funds at the time of your retirement and the rest 40% goes toward an annuity plan. However, you have to invest at least Rs 1000 until 60 years of age.  The returns depend on the type of fund you choose.

Public Provident Fund (PPF): It is a long-term investment option with a tenure of 15 years. It offers the power of compounding especially towards the end of the term. You can invest a maximum of Rs 1.5 Lakhs as a one-time payment or over a period of twelve months. However, PPFs are eligible for tax deductions under section 80C of the Income Tax Act 1961. The interest rate of PPF is decided by the government for each financial quarter based on the performance of government securities as they are market independent.

Deferred Annuity: It’s an insurance contract that generates income for retirement. It has tax benefits where no tax is charged on money invested until you plan to withdraw it. It can be invested through one-time investment or making regular contributions.

What are Tax Implications on Pension Funds?

Pension income is taxable in India. You can receive your pension income in either of two ways:

Advantages of Pension Funds:

Disadvantages of Pension Funds