Among the crucial determinants of your investment plans are the benefits they accrue to you over a period of time and the money they help save in taxes. Section 80C of the Income Tax Act of India enumerates various expenditures and investments exempted from income tax. And not just that, it allows for a maximum deduction of up to Rs 1.5 lakh every financial year from a person's total taxable income.
There's another aspect that you always keep in mind when it comes to your investment plans. Not only do you wish to avail of tax benefits but also look for tax-free income when your plans reach maturity.
So, when it comes to retirement in India, people usually choose from the below listed four plans:
- Employees' Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Pension System (NPS)
- Voluntary Provident Fund (VPF)
Let's try and understand the basics of the plans, the benefits they offer, and help you make a call on the one that's best suited to your individual income and requirement.
Employees' Provident Fund (EPF): Under the Employees' Provident Fund Scheme, both employer and employee contribute 12 per cent of the basic salary plus dearness allowance every month to the PF account. One of the biggest benefits of this scheme is savings on a monthly basis. And since everyone in a regular job has a PF account, you also grow accustomed to receiving your salaries after the deduction. Hence, the savings continue and you don't even have to worry about cutting down your expenses. The interest you receive on your funds and your principal amount are entirely tax-free, making it a win-win scheme.
Public Provident Fund (PPF): Backed by the Government of India, PPF is considered to be the safest tax-free scheme. Any citizen of India can avail of this scheme by opening an account at a post office, a nationalised or any major private bank. The government declares interest for this scheme every quarter of a financial year. Here's something not many know of. You can also raise a loan — from the third year to the sixth year — against the amount you have collected in your PPF account. Even though the account has a locking period of 15 years, an individual can make partial withdrawals under specific circumstances. These withdrawals, however, vary from bank to bank and you must discuss that in advance.
National Pension Scheme (NPS): Regulated and administered by the Pension Fund Regulatory Authority of India (PFRDA), the National Pension Scheme can be availed by any India between the age of 18 and 60 years. The contributions to an NPS account can also be invested in equities, corporate bonds, and government bonds. Account-holders can make partial withdrawals for 3 years after opening the account. The complete funds can be withdrawn only after the age of 60 but if you want to extend the maturity period, it can be extended by another ten years. For specific purposes such as housing requirements, a child's education, or while facing an illness, individuals can withdraw an amount equal to only 25 per cent of the contributions.
Voluntary Provident Fund (VPF): As the name suggests, under this scheme a depositor can voluntarily take a call on the amount s/he wishes to contribute to the scheme. It's mandatory for an employee to make a contribution which is more than 12 per cent made by the employer to EPF. The amount can even be 10 per cent of the basic pay and dearness allowance. It's worth a mention here that nobody has a separate VPF account and it's actually linked to your EPF account. One of the drawbacks of this account is that only salaried people can have an access to this scheme and that it has a locking period of five years. Another important point to remember is that any partial withdrawals, allowed under certain conditions, made within five years will be subject to tax deductions.
While some of the basic features of these retirement plans have been listed here, the key to selecting the best scheme is to always research more.