Retirement Planning: Best Investment Options In India

Retirement planning is a crucial aspect of financial planning. It involves investing your money in a way that ensures regular income and financial stability after retirement. In India, there are several investment options available to help you achieve this. Here are some of the best investment plans for retirement:

- Pension Plans: These plans provide a regular source of income during retirement through periodic payouts. You can withdraw a portion of the amount when you retire, while the rest is received as a pension. ICICI Pru Guaranteed Pension Plan is an example of a pension plan that provides a stable and lifelong pension.

- National Pension Scheme (NPS): NPS is a government-sponsored pension scheme open to employees in the public, private, and unorganised sectors. You can regularly contribute to a pension account during your working life, and your investments will grow over the years. Upon retirement, you can withdraw a part of the funds as a lump sum and receive the rest in instalments.

- Unit Linked Insurance Plans (ULIPs): ULIPs are designed for the long term and offer high returns, making them viable retirement investment options. They also provide the flexibility to choose the funds you want to invest in based on your risk appetite. ICICI Pru Signature is an example of a ULIP that allows you to switch between different funds without additional costs.

- Public Provident Fund (PPF): PPF is a government savings scheme that offers tax-free returns and tax benefits on contributions under Section 80C of the Income Tax Act, 1961. It has a lock-in period of 15 years and a minimum deposit requirement of Rs. 500, making it an attractive option for retirement planning.

- Mutual Funds/Equity: Investing in mutual funds/equity provides a higher rate of return and can ensure financial stability in retirement. However, navigating the fluctuating market can be challenging for new investors.

- Senior Citizen's Saving Scheme (SCSS): SCSS is a government-sponsored investment plan exclusively for senior citizens and early retirees. It offers a high post-tax return of up to 8.20% per annum, paid quarterly. The minimum investment is Rs. 1,000, and the maximum is Rs. 30 lakhs.

- Bank Fixed Deposits (FDs): FDs are a traditional investment option that offers fixed returns. They are a good choice for retirement as they provide the option of monthly interest payouts to create a regular income stream. Senior citizens also receive an additional interest rate benefit.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored pension scheme that provides social security to the working class. Employees working in the public, government, and private sectors can invest in this scheme, as well as those employed in the unorganised sector. Under NPS, subscribers can invest a defined amount through a pension to secure their post-retirement life. Both resident Indians and NRIs are eligible for NPS, with an entry age of between 18 and 70 years old. NPS offers subscribers the choice of an investment portfolio and fund manager, with the lowest administrative and fund management charges. The scheme also features triple tax benefits and ease of account operation and accessibility across the country.

NPS is a defined-contribution pension system regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which operates under the jurisdiction of the Ministry of Finance of the Government of India. The NPS Trust was established by PFRDA to take care of the assets and funds under this scheme, for the best interest of the subscriber. The NPS Trust is the registered owner of all assets under the NPS architecture, which is held for the benefit of the subscribers. The NPS Trust is responsible for monitoring the operational and functional activities of NPS intermediaries, providing directions and advisory to protect the interest of subscribers, ensuring compliance through audits, and reviewing the performance of pension funds.

NPS offers two types of accounts to its subscribers: Tier I and Tier II. Tier I is the primary account, a pension account with restrictions on withdrawals and utilisation of the accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts. Tier II is a voluntary savings account that allows subscribers to deposit and withdraw money as and when they want, providing some liquidity to the scheme.

Upon exit, subscribers reinvest a portion of the accumulated corpus in an annuity plan, which provides a guaranteed lifelong pension. There are fifteen annuity service providers (ASPs) for subscribers to choose from.

Unit Linked Insurance Plans (ULIPs)

• Life Insurance and Investment: ULIPs provide financial protection for your loved ones in the event of your death, while also offering market-linked investment opportunities to grow your wealth.
• Flexibility: ULIPs allow you to choose how you invest your money. You can opt for an aggressive, moderate, or conservative investment approach and switch between different funds as your risk tolerance and market conditions change. This flexibility helps you balance your fund with equity and debt components.
• Tax Benefits: ULIPs offer significant tax advantages. You can avail tax savings on both your investments and maturity/death benefits under various sections of the Income Tax Act, 1961.
• Partial Withdrawals: ULIPs typically have an initial lock-in period of 5 years. After this period, you can make partial withdrawals from your accumulated fund value without incurring additional charges.
• Loyalty Additions: Some ULIP plans offer loyalty additions, where a certain percentage of the fund value is added to your policy earnings at the end of each policy year, boosting your accumulated wealth.
• Systematic Withdrawal Plans: Some ULIPs offer systematic withdrawal plans, allowing you to withdraw money regularly from your policy to meet interim financial needs.
• Whole Life Cover: Certain ULIPs provide the option of whole life cover, ensuring financial protection for your dependents even after your retirement.

When considering ULIPs for retirement planning, it is important to remember that the investment risk in the portfolio is borne by the policyholder. Market fluctuations can affect your returns, so it is essential to carefully consider your risk tolerance and investment goals before investing. Additionally, ULIPs have various charges, such as premium allocation charges, fund management charges, policy administration charges, and mortality charges, which should be considered when evaluating different plans.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a government-backed, long-term savings scheme that offers an attractive rate of interest and returns on the amount invested. It was first introduced in India in 1968 and is an excellent option for those seeking a safe investment with guaranteed returns. Here are the key features of the PPF:

• Tenure: PPF accounts have a minimum tenure of 15 years, which can be extended in blocks of 5 years.
• Investment Limits: The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per financial year. Investments can be made in a lump sum or in up to 12 instalments.
• Opening Balance: The account can be opened with a minimum of Rs. 100 per month, and annual investments above Rs. 1.5 lakh will not earn interest or be eligible for tax savings.
• Deposit Frequency: Deposits must be made at least once a year for 15 years.
• Mode of Deposit: Deposits can be made in cash, cheque, demand draft (DD), or through an online fund transfer.
• Nomination: A nominee can be designated for the account at the time of opening or subsequently.
• Joint Accounts: PPF accounts cannot be held jointly; only one individual can hold the account.
• Risk Factor: PPF accounts offer guaranteed, risk-free returns due to government backing. The returns are fixed, providing a stable investment option.
• Tax Benefit: The interest earned and maturity amount are tax-free under Section 80C of the Income Tax Act, 1961.
• Partial Withdrawal: Partial withdrawals are permitted from the 5th financial year onwards, with certain conditions.
• Interest Rate: The interest rate for 2024 is 7.1% p.a., compounded annually. To receive interest for a particular month, deposits must be made by the 5th of that month.
• Loan Facility: Loans against the PPF balance are available after one year, with certain conditions.
• Eligibility: Any Indian citizen can invest in PPF. One citizen can have only one PPF account, unless the second account is opened on behalf of a minor.
• Account Opening: PPF accounts can be opened with post offices or authorised banks, such as State Bank of India, Punjab National Bank, ICICI, HDFC, and Axis Bank. The required documents include a duly filled account opening application form, KYC documents, residential address proof, a nominee declaration form, and a passport-size photograph.
• Withdrawal: Full withdrawal of the PPF account balance is allowed only upon maturity, i.e., after completing 15 years. Partial withdrawals are permitted from the 6th year onwards, with certain restrictions and regulations.

Mutual Funds

Retirement mutual fund plans usually invest in low-risk investment options, like government securities, to ensure steady returns. They are not affected by asset returns or market movements, making them a fixed benefit. Pension funds usually offer up to 11% interest, depending on the policy and investments, making them better suited for retirement planning than other alternatives.

Retirement mutual funds typically have a five-year lock-in period or until retirement, whichever comes first. The primary goal of such a fund is to provide a stable income after retirement. Furthermore, a retirement mutual fund can assist in the accumulation of a retirement corpus while taking into account rising inflation.

There are several advantages to investing in a pension fund:

• Long-term saving: These plans are long-term savings schemes, regardless of whether an investor opts for monthly payouts or a lump sum disbursal. Retirement funds create an income that can even be invested further.
• Flexibility: An investor can choose to get paid either a lump sum amount or a monthly annuity depending on their financial requirements and plans. One can even opt for a deferred annuity plan to secure a higher corpus for post-retirement.
• Offers insurance: Most pension policies serve as life insurance cover, protecting an insurer from any financial loss in the case of their demise before retirement. It also allows the investor to withdraw a lump sum amount in case they face any medical emergency.
• Protection against inflation: Investing in pension plans is a preferred method of protecting one's asset against inflation. Most retirement plans offer some form of compensation against inflation, and disburse one-third of the accumulated corpus after retirement and utilise the remaining two-thirds as a monthly annuity for the investor.
• Risk-free investment: Mutual fund retirement plans are one of the safest avenues for investment as they have an extremely low-risk profile. Investors also have the option to put their money in government securities for an assured return or invest in debt and equity to earn better returns. The risk is suitably balanced with the prospect of a return and an individual's risk appetite.

Some examples of retirement mutual funds include:

• HDFC Retirement Savings Fund - Equity Plan
• ICICI Prudential Retirement Fund - Pure Equity Plan
• SBI Retirement Benefit Fund - Aggressive Plan
• Franklin India Pension Plan
• Tata Retirement Savings Fund - Progressive Plan
• UTI Retirement Fund
• Bandhan Retirement Fund
• Nippon India Retirement Fund - Wealth Creation Scheme
• Aditya Birla Sun Life Retirement Fund - The 30s Plan

Senior Citizen's Saving Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-backed retirement benefits programme for senior citizens resident in India. Individuals can invest a lump sum in the scheme, either individually or jointly, and receive regular income along with tax benefits. The scheme is available to those over 60 years of age and can be opened in a post office branch or an authorised bank.

Interest and Returns

The SCSS offers a high rate of interest, currently 8.2% per annum, which is payable quarterly. The interest is paid on the first date of April, July, October, and January. The scheme provides the highest post-tax returns among all fixed-income tax products.

Maturity and Tenure

The maturity period of the SCSS is 5 years, however, this can be extended for a further 3 years by submitting an application in the required format within one year of maturity.

Deposits and Withdrawals

The minimum deposit amount is Rs.1,000 and the maximum is Rs.30 lakh. The deposit can be made in a single instalment and in multiples of Rs.1,000. Deposit amounts below Rs.1 lakh can be paid in cash, while amounts above Rs.1 lakh must be paid by cheque. Withdrawals are permitted at any time, however, there is a penalty for premature withdrawals. If the account is closed after one year but before two years, a penalty of 1.5% of the principal amount will be deducted. If the account is closed after two years, a penalty of 1% of the principal amount will be deducted.

Eligibility

The following individuals are eligible to open an SCSS account:

• Individuals above 60 years of age.
• Retired civilian employees above 55 years and below 60 years, provided the investment is made within one month of receiving retirement benefits.
• Retired defence employees above 50 years and below 60 years, provided the investment is made within one month of receiving retirement benefits.

Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to open an SCSS account.

Tax Benefits

Under Section 80C of the Indian Tax Act, 1961, individuals are eligible for tax deductions on investments up to Rs.1.5 lakh. If the total interest in all SCSS accounts exceeds Rs.50,000 per annum, TDS will be deducted.

Frequently asked questions